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The role of Insurance in savings mobilisation a case for Indian Economy

The role of insurance in savings mobilisation a case for Indian economy.

BY

Prof. Sanjay D Paramar (M.A.,GSET) Prof. Jagdish A Parmar (M.A., GSET)

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The role of Insurance in savings mobilisation a case for Indian Economy

ACKNOWLEDGEMENT
First of all we would like to thank all mighty God. We would like to thank our family members as well as our colleagues who have inspired us to write down this book.

We have immense pleasure to dedicate this book to 1. Dr. D.G.Ganvit 2. Dr. Manoj R Patel 3. Prof. Gaurang Desai who have provided their precious blessing for the publication of book.

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The role of Insurance in savings mobilisation a case for Indian Economy

About authors :-

Mr.Sanjaykumar Durgabhai Paramar


He obtained Post Graduate (M.A.) degree in Economics from SardarPatel University Vallabh vidhyanagar Anand in 200708. He obtained a Gold Medal in Agriculture Economics. He has qualified GSET Examination University in Oct., 2011, from M.S.

Baroda. Now he has been working in Faculty of

business Administration, Dharmsinh Desai University, Nadiad as an Assistant Professor.

Mr.Jagdishbhai Ambalal Parmar


He obtained Post Graduate (M.A.) degree in Economics with Gold Medal from Sardar Patel University Vallabh vidhyanagar Anand in 2007-08. He has qualified GSET Examination in Dec., 2008, from M.S. University Baroda. He worked as an Assistant Professor in Tolani college of Arts and Science from 2011 to 2013. At present he has been working in Govt. Arts and commerce college as an Assistant Professor [GSET Class -2] at Vansda (Gujarat).

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The role of Insurance in savings mobilisation a case for Indian Economy

List of tables
Table No.
1 2 3 4 5 6

Title
Appraisal of Insurance Market Registered insurers in India New policies issued -life insurance New policies issued -non life insurance Premium underwritten (within India) by non life Insurers-segment wise. Premium underwritten by life Insurers

Page No.
40 42 44 45 49 56

List of charts and Figures.


Fig No. 1 2 3 4 Title Percentage contribution of respective segments of private life insurers. Percentage contribution of respective segment of LIC Percentage contribution of respective segment of Life Insurers Trends in life insurance business-Unit linked Insurance Plans. Page No. 48 48 48 58

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The role of Insurance in savings mobilisation a case for Indian Economy

Executive summary
The insurance sector in India was hitherto the monopoly of the State. Though the performance of the public sector insurance companies - LIC and GIC was quite satisfactory, the Indian insurance business, both life and non-life, left much to be desired as compared to international standards. There was low penetration and general lack of efficiency. The per capita premiums were very low when compared to the standards of both industrialised countries and other emerging markets. With the entry of private players into the insurance business, it is expected that competition would increase and overall functioning of the insurance sector would improve. The liberalisation process initiated in the insurance sector is expected to bring about better integration of the financial markets and promote financial development of the country. Insurance, apart from acting as an important financial instrument for risk cover, is also a major instrument for mobilisation of long-term savings. The savings part of insurance, if channelized efficiently into long-term investments, could play a greater role in funding infrastructure projects with long gestation periods. With increasing urbanisation and longer life expectancy, the demand for insurance is expected to increase substantially in the years to come. In the liberalised scenario, the Indian insurance regulator, Insurance Regulatory Development Authority will have to play a crucial role towards meeting the special needs and challenges of the Indian insurance market. The regulator, besides ensuring long-term solvency of insurers, should also promote competition among them. The development of the Indian insurance market into a healthy and vibrant one is expected to further aid in the economic and financial development of the country by acting as a mobiliser of savings and as a factor of production, besides playing the usual role of providing social security.

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The role of Insurance in savings mobilisation a case for Indian Economy

Table of Contents

Chapter
1

Particulars
Introduction
1.1 Insurance and Savings 1.2 Insurance penetration in India as compared to global standards 1.3 role of insurance in Financial Saving and GDP 1.4 Insurance regulation in India

Page no.
1 4 6 8 8

Literature review
2.1 Domestic savings 2.2 Life Insurance and other savings 2.3 Flow of funds for Infrastructure 2.4 Insurance sector in India 2.5 Theoretical aspects of Insurance

11
11 12 16 20 25 36 36 37 40 50 53 54 57 61 63 66

Methodology 3.1 Data analysis and inferences 3.2 Research limitations Findings 4.1 Contribution to Indian economy 4.2 Savings and capital formation 4.3 Insurance companies performance 4.4 Innovations in products 4.5 Reforms in Insurance Industry 4.6 ULIPS (Unit linked Insurance Plans Conclusions and Recommendations Bibliography

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The role of Insurance in savings mobilisation a case for Indian Economy

Chapter 1. Introduction
INTRODUCTION TO INSURANCE
Human have always sought security. This quest for security was and important motivation force in the earliest formation of families, clans, tribes, and other groups. Indeed, groups have been the primary source both emotional and physical security since the beginning of humankind. They ensured a less volatile source of life necessities then that which isolated humans & families could provide & help their less fortunate members in the time of crisis. Humans today continue their quest to achieve security & reduce uncertainty. We still rely on groups for financial stability. The group may be our employer, the government, or an insurance company, but concept is the same. In some ways however, we today are more vulnerable than our ancestors. The physical & economical securities formerly provided by the tribe or extended family diminished with industrialization. Our income dependent, wealth acquiring lifestyle renders us and our families more vulnerable to environmental & societal changes over which we have no control. Humans are exposed to many serious perils, such as property loss from fire or windstorm, and personnel losses from incapacity & death. All though individual cannot predict or completely prevent such occurrences, they can provide for their financial effects. Encyclopedia of finance & banking defines insurance as the elimination of or protection against risk amenable to actual calculation, voidance or reduction of losses occurring through misfortunes such as death, fire, accident, tornado, shipwreck, etc. Insurance is a contact between an insurer and the insured where by the insurer identifies the insured against loss due to specific risks such as from fire, storm and death. Insurance contracts require an agreement, considerations, capacity, legality, compliance with the statute of frauds, and delivery.

Maslow's Need Hierarchy Theory.


Making the person feel "SAFE" other expression of the need for safety occur when individuals are confronted with real emergencies E.g., accidents, war, crime, natural disasters like waves, floods, earthquakes etc. Once Physiological needs are met, another set of motives safety or security needs, become motivates. The primary motivating force here is to ensure a reasonable degree of continuity, order, structure and predictability in once environment. Maslow suggested that the safety needs are most readily observed in infants and young children because of their relative helplessness and dependence on adults. Security needs in the organizational context co-relate to such factors as job security, salary increases, safe working conditions,

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The role of Insurance in savings mobilisation a case for Indian Economy

unionization and lobbying for protective registration. Risk and uncertainty are part of life great adventures accident illness, thefts, natural disaster they are all built into the working of the universe, waiting to happen. Insurance then is man's answer to the vagaries of life. If you cannot beat the manmade and natural calamities, wealth, at least be prepared for them and aftermath. Insurance is contact between two parties one is insurer (insurance company) and the insured (the person or the entity seeking the coverage). Where the insurer agrees to pay the insured for the financial loses arising out of any unforeseen events in return for a regular payment of the premium. These unforeseen events are determined as "risk" and that is why insurance is called is the risk cover. Hence the insurance is essential the means to financially compensate for loses that life throws at people -corporate and otherwise.

Insurance is an integral part of most enterprises, risk management program. Insurance does not prevent losses, it substitutes a small certain loss (premium) for a possible or contingent large loss. The insured is indemnified for the amount of loss, for the insured amount, or for the face of his policy, in return for payment of periodic premiums. The principal kinds of insurance are the following.

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The role of Insurance in savings mobilisation a case for Indian Economy

1. Life - Term, ordinary, endowment, limited payment, group industrial and annuities, with a variety of combinations of the first four basic forms. 2. Fire & Marine - Fire, ocean marine, motor vehicle, inland navigation and transportation, tornado and windstorm, sprinkler leakage, earthquake, riot and civil, commotion, explosion, rain, hale, flood, aircraft, etc. 3. Causality and Surety - Automobile liability, liability other than automobile workers compensation fidelity and surety, burglary and theft, automobile property damage, accident in health, steam boiler, machinery, plate glass, etc. All mutual & legal reserve life insurance companies provides for a participation in dividends by all policyholders. In this way, the cost of insurance to the insured is reduced.

Life Insurance Business of Private Companies


The insurance market was opened to the private sector in August 2000 and the initial batch of new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered private life insurance companies viz., (i) Birla Sun-Life Insurance Company Ltd. (BSLIC), (ii) HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii) ICICI Prudential Life Insurance Company Ltd. (IPLIC), (iv) Max New York Life Insurance Company Ltd. (MNYLIC), (v) SBI Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG Life Insurance Company Ltd. (TALIC). Out of these, only 4 companies viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March 2001.

1.1 Insurance and savings.


The investments of an insurance company are intended to build up reserves and not to book short-term profits. These reserves provide a cushion for long-term contingencies, which can be directed towards investment in socially desirable sectors like infrastructure. The provisions of Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the investment patterns for life insurance. The Malhotra Committee (1994) had recommended that the mandated investment of funds of LIC should be reduced from the then existing level of 75 per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance companies have to invest a minimum of 50 per cent of their total assets in government and

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The role of Insurance in savings mobilisation a case for Indian Economy

other approved securities. They are also required to invest a minimum of 15 per cent in infrastructure and social sectors, leaving the balance 35 per cent free for investment in the capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that major share of its investments were in Central and State Government securities followed by loans to State and Central government and their Corporations and Boards. The role of Insurance in savings mobilisation a case for Indian Economy

Business and Investment of Non-Life Insurance in India


The general insurance companies mainly specialise in insurance business like fire, marine, aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life insurance policies are short duration contracts. Also, general insurance policies, in comparison to life insurance policies do not mobilise savings, but they collect funds from the premiums paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in 2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As regards the growth in the number of policies and net claims payable of GIC and its subsidiaries, no steady pattern is observed. However, the volume of business in terms of number of policies and net claims payable has improved substantially over the years. The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general insurance premium in 1998-99 (latest available). The non-life business transacted in the rural areas mainly relates to insurance of livestock. Major portion of this business transacted relates to livestock cover under the Integrated Rural Development Programme (IRDP) with bank credit linkages, where insurance is mandatory. Other rural businesses covered include agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry farms and other businesses including pisciculture and sericulture.

Non-Life Insurance Business of Private Companies


During 2000-01, there were 4 registered private non-life insurance companies viz., (i) IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv) TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies during 2000-01 was very low.

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The role of Insurance in savings mobilisation a case for Indian Economy

Investments of General Insurance Companies


The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time has prescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) had recommended that the mandated investment of funds of the general insurance companies should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the Government relaxed the investment policies of GIC and its subsidiaries and they were allowed to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the investments of non-life insurance companies cannot be less than 30 per cent in government and other approved securities. They are also required to invest a minimum of 10 per cent in infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while 25 per cent can be invested in unapproved securities including investment in equities. The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows that the important avenues for its investments were in market investment followed by Central Government securities (Table 6). Market investments of GIC and its subsidiaries increased from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01. Whereas the investments in Central Government securities decreased marginally from 21.3 per cent in 1980-81 to 21.0 per cent in 2000-01. The investment pattern of GIC is thus different from that of LIC, whose major investments are in Central and State Government securities.

1.2 Insurance Penetration in India as Compared to Global Standards


Insurance density, measured in terms of premium per capita, was much lower in emerging markets in 2000 as compared with the industrialised countries of the world. Similarly, insurance premium as percentage of GDP i.e., insurance penetration, was lower in the emerging markets as compared to the industrialised countries in 2000. However, South Africa and South Korea, which figure among the emerging markets are exceptions and are among the forerunners in insurance penetration. Of the total world insurance business in terms of insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the emerging markets accounted for 10 per cent of total world business in insurance. However, the growth rate of premium in 2000 in the emerging markets was higher as compared with the

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The role of Insurance in savings mobilisation a case for Indian Economy

industrialised countries, indicating the growing importance of the insurance sector in the former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8 per cent in 2000 Opening up of the insurance sector has been a key component of economic reforms put in place in South and East Asian economies in the 1980s and 1990s. The major insurance markets in South and East Asia are generally open indicating the impact of the reform measures. Since liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a much faster pace than before, suggesting that liberalisation of the insurance sector facilitated growth of insurance in these countries. In India, the share of life insurance premium as a percentage of GDP, i.e., insurance penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001. However, this is much lower as compared to that of the industrialised countries. The life funds as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01 reflecting an impressive performance of LIC in terms of generating premium and investment income in excess of its expenditures and claims. The life insurance density, i.e., life insurance premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01. However, this is much lower in comparison with world standards. This again reveals the vast scope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in 1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the attractiveness of life insurance business. In India, the share of gross and net insurance premiums for non-life insurance as a percentage of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent, respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares quite unfavourably with that of the industrialised countries and other emerging markets in general. The non-life gross and net premiums per capita (non-life insurance density) have both steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs. 100.8, respectively during the same period. However, this is much lower in comparison with world standards. This reveals the vast scope for non-life insurance penetration in India.

1.3 Role of Insurance in Financial Saving and GDP


Insurance is an important financial saving instrument of the households. The saving component of life insurance competes with the savings of the households in other financial instruments

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such as bank deposits, mutual funds and equities. The total life insurance in India comprises three components viz., life insurance, postal and state insurance. The life insurance business is almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the total insurance fund during 1980-81 through 2000-01. The share of insurance, which constitutes a significant part of gross financial savings of the household sector, has gone up from 7.6 per cent in1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 2000-01, this share has remained above 10 per cent, barring the three years from 1992-93 to 1994-95. The average share of insurance in gross financial savings which was 7.6 per cent in the 1980s increased to 10.3 per cent in the 1990s. The share of insurance in GDP has shown a consistently rising trend and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in 2000-01. The average share of insurance as a percentage of GDP increased from 0.8 per cent in the 1980s to 1.2 per cent in the 1990s. The share of insurance in real GDP i.e., insurance as a percentage of real GDP during the period 1981-82 to 2000-01 was below 1 per cent. The insurance sector has been only a marginal contributor to the country's GDP. This is despite the country's vast population and immense potential for growth of insurance. One of the reasons attributable to this could be the lack of effective competition due to the monopoly position enjoyed by the public sector. Opening up of the insurance sector may augur well for the growth in income from this sector.

1.4 Insurance Regulation in India


Insurance regulation in India started with the passage of the Life Insurance Companies Act, 1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced with the Insurance Act, 1938 which provided strict State control over insurance business in the country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act, 1950 was enacted to check malpractices in the insurance business and also to exercise more control over the operations of the insurance companies. With the nationalisation of the life insurance industry in 1956 and the general insurance industry in 1972, the role of the Controller of Insurance diminished over a period of time. On account of the monopoly status of the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of this sector, regulation was perceived to be of less interest due to the inbuilt procedures in place. The phased globalisation of the Indian economy that started in the early 1990s began to have its impact on the monopolistic structure of the Indian insurance industry. Further, the liberalisation

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of insurance markets was among the objectives of the Uruguay round negotiations conducted under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations included trade in services and insurance in the context of financial services (UNCTAD Report, January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra to examine the reforms required in the insurance sector. The Committee in its report submitted in 1994 recommended inter alia the opening up of the insurance sector to players other than State- Owned ones. These recommendations were accepted by the Government and the Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance Business Act, 1972 were passed in the year 2000, paving the way for opening up of the insurance sector. The important functions of the IRDA as per the IRDA Act 1999, include the following: i) Licensing and regulating the insurance sector by acting as an independent and regulatory body. ii) Specifying requisite qualifications, code of conduct and practical training for insurance intermediaries and agents. iii) Protecting the interests of the policyholders in matters concerning assigning of policy, settlement of insurance claim etc. iv) Regulating investment of funds by insurance companies. v) Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers and other organisations connected with the insurance business. vi) Regulating maintenance of margin of solvency of the insurer. vii) Adjudication intermediaries. viii) Supervising the functioning of the Tariff Advisory Committee. ix) Promoting efficiency in the conduct of insurance business. Efforts are underway to bring about internationalisation of regulations in the insurance sector on the lines of the banking sector so as to take care of development and health of the insurance of disputes between insurers and intermediaries or insurance

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The role of Insurance in savings mobilisation a case for Indian Economy

sector. This concern had resulted into the establishment of International Association of Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100 regulators of insurance industries worldwide are members of this Association and India is also one amongst them. The underlying objective of this organisation is to bring about a degree of standardisation in regulatory procedures adopted by different countries. The Advisory Group on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy), stated that Indian insurance regulations are, by and large, in consonance with international standards.

Customer Protection:
Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is empowered to redress customer grievances in respect of insurance contracts on personal lines where the insured amount is less than Rs. 20 lakhs, in accordance with the Ombudsman Scheme. Addresses can be obtained from the offices of LIC and other insurers.

Chapter 2. Literature review


2.1 Types of Domestic Savings
There are basically three types of private domestic saving, each with their own different determinants, namely: voluntary saving; involuntary saving and forced saving. Voluntary saving relates to the voluntary abstinence from consumption by private individuals out of personal disposable income and by companies out of profits. Involuntary saving is saving brought about through involuntary reductions in consumption. All forms of taxation and schemes for compulsory lending to governments (including national insurance contributions) are forms of involuntary saving. Forced saving is saving that comes about as a result of rising prices and the reduction in real consumption that inflation involves if consumers cannot (or do not) defend themselves. Rising prices may reduce real consumption for a number of reasons. Firstly, people may suffer money illusion. Secondly, they may want to keep constant the real value of their money balance holdings, so they accumulate more money and spend less as prices rise (the real balance effect). Thirdly, inflation may redistribute income to those with a higher propensity to save, such as profit earners. Inflation initiated by monetary expansion will certainly redistribute income to the government as the issuer of money. This is the notion of the inflation tax. As Keynes once said '[inflation is] a form of taxation that the public finds hard to evade and even the weakest government can enforce when it can enforce nothing else' (Keynes,

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1923). It is believed, however, that in certain circumstances there is a case for mild demand inflation initiated by government as a stimulus to investment. The empirical evidence across countries (Thirlwall 1974a, 1974b; Sarel, 1996; Bruno and Easterly, 1998) suggests a positive relation between inflation and growth up to 6-8 percent inflation, and only when inflation exceeds 10 percent do the consequences for growth become seriously detrimental. Voluntary saving depends on the capacity to save and the willingness to save. The capacity to save depends on three main determinants: the level of per capita income; the growth of income, and the distribution of income. The willingness to save depends, in turn, on: the rate of interest; the existence of financial institutions; the range and availability of financial assets, and the rate of inflation. One of the most important innovations that Keynes made in his General Theory of Employment, Interest and Money (1936) was to link, for the first time, consumption (and therefore saving) to the level of income through the concept of the consumption (or savings) function. More explicitly, there is the suggestion that the consumption or savings function is non-proportional; that is, that the rich (people or countries) consume proportionately less, and save proportionately more, of their income than the poor. One way of expressing this idea is to start with the savings function: S/P = -a1 + b1 (Y/P) (3) where S/P is the level of savings per head of population (P), and Y/P is per capita income. The negative constant term means that the marginal propensity to save is above the average, so raising the average as Y/P rises. To convert this function so that the savings ratio is the dependent variable, multiply both sides of the equation by P and divide by Y. This gives :S/Y = b1 - a1 (Y/P)-1 (4) where the savings ratio is a non-linear function of per capita income i.e. as Y/P rises, S/Y rises but at a decreasing rate to the asymptote b1. This is broadly the pattern observed across countries (Hussein and Thirlwall, 1999). The savings ratio is lower in poor countries than in rich countries, but does not rise linearly as income increases. It increases at a diminishing rate and then levels off (at approximately 25 percent of national income).

2.2 Life Insurance vs. Other Savings


Life insurance in India made its debut well over 100 years ago. In a country, which is one of the most populated in the world, the prominence of insurance is not as widely understood, as it ought to be.

Protection:

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The role of Insurance in savings mobilisation a case for Indian Economy

Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable.

Aid to Thrift:
Life insurance encourages 'thrift'. It allows long-term savings since payments can be made effortlessly because of the 'easy instalment' facility built into the scheme. (Premium payment for insurance is monthly, quarterly, half yearly or yearly). For example: The Salary Saving Scheme popularly known as SSS provides a convenient method of paying premium each month by deduction from one's salary. In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions.

Liquidity:
In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan.

Tax Relief:
Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force. Assessees can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise.

Money When You Need It:


A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time. Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies. Alternatively, policy money can be made available at the time of one's retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also,

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loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions).

Private Players, Foreign Equity and Profitability


The Union Government had opened up the insurance sector for private participation in 1999, also allowing the private companies to have foreign equity up to 26 per cent. Following the opening up of the insurance sector, 12 private sector companies have entered the life insurance business. Apart from the HDFC, which has foreign equity of 18.6%, all the other private companies have foreign equity of 26 per cent. In general insurance 8 private companies have entered, 6 of which have foreign equity of 26 per cent. Among the private players in general insurance, Reliance and Cholamandalam does not have any foreign equity.

Competition in the Insurance Sector


Even after the liberalization of the insurance sector, the public sector insurance companies have continued to dominate the insurance market, enjoying a bigger per cent of the market share. In fact, the LIC, which is the only public sector life insurer, enjoys a lion's share percentage of the market share in Life insurance. Given the huge market share enjoyed by the public sector companies, the argument, which is often made by advocates of greater liberalization, that the entry of private players would bring down the cost of insurance due to enhanced competition, does not seem to be convincing. The price making capacity of the market leaders in the public sector is likely to remain intact for the time being. The foreign insurance companies do have the reputation of charging less premium compared to the risks involved and promising abnormally high returns, in order to grab greater market share. Such competition, however, although capable of bringing down the 'cost' of insurance for a while, has often led to gigantic frauds and bankruptcies. Moreover, as is the case in other markets, the initial flurry of entries into the Indian insurance market would invariably be followed by a phase of mergers and acquisitions that would lead to cartelisation, precluding the possibility of competition driving down the costs in the medium run. In the long run, other forms of non-price competition like aggressive advertisement wars are likely to lead to increasing costs, eventually harming the interests of the consumers. These phenomena in the insurance market have been observed in several advanced countries. If the public sector companies start imitating the strategies of the foreign insurance companies in

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The role of Insurance in savings mobilisation a case for Indian Economy

order to defend their market shares, it would be at the cost of undermining their important social objectives, which they have been fulfilling so impeccably till date.

Implications for Resource Mobilization


A major role played by the insurance sector is to mobilize national savings and channelize them into investments in different sectors of the economy. However, no significant change seems to have occurred as far as mobilizing savings by the insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data from the RBI show that the trend of the savings in life insurance by the households to GDP ratio, while showing a clear upward trend through the 1990s signifying increasing business for the insurance sector, does not show any structural break after 1999. It can be inferred therefore that the foreign capital which flowed in after the opening up of the insurance sector has not been accompanied by any technological innovation in the insurance business, which would have created greater dynamism in savings mobilization. Ratio of Savings in Life Insurance by Household to GDP

Ratio of Savings in Life Insurance to GDP Ratio of Savings in Life Insurance to GDP
Far from expanding the market for the insurance sector, the business activities of the private companies are limited in urban areas, where a fairly good market network of the public sector insurance companies already exists. The glaring evidence for this is the composition of agents operating in the insurance sector. According to the IRDA Annual Report the number of insurance agents in urban and rural India was in 100:76 ratio in the public sector companies, in 2001-02. For the private insurance companies this ratio was 100:1.4. Due to their urban-biased operational activity, the private insurance companies can neither increase the insurance base of the economy significantly, nor lead to substantial employment generation. Given this scenario, further increase in foreign participation is only going to lead to Intensified competition for the urban insurance markets, rather than leading to a growth in overall savings.

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It was also argued that competition will expand market and the foreign insurers will bring better products. This has simply not happened. The size of the market has remained by and large the same and from this market the private companies are picking up the creamy sections in the metros seriously eroding the ability of public sector to cross subsidize its products in the rural areas.

2.3 Flow of funds for infrastructure


Life insurance is all about mobilizing the savings for long term investment in social and infrastructure sectors. The opening up of insurance market would enable huge flow of funds into infrastructure but the record of private companies on this is dismal. More than fifty percent of the policies they sell are unit-linked insurance where the decision on investment of savings element in insurance is taken by the policyholders. A bigger percentage of policies sold by almost all the life insurance companies are unit-linked policies . Under these schemes, nearly 50 percent of the funds are invested in equities thus limiting the fund availability for infrastructural investments. Raising the FDI cap also does not seem justifiable as far as channelizing savings into investments are concerned. The life insurance sector invested a total of Rs. 31335.89 crores in the infrastructure sector in 2002-03. Out of this the contribution of the LIC was Rs. 30998.16 crores, which was 98.92 per cent of the total investment in infrastructure by the entire life insurance sector. The figures provided by the IRDA Reports further suggest that the share of the public sector life and non-life insurance companies in investment in infrastructure is greater than their market share. Despite the FDI cap being set at 26%, the investment from the insurance sector to the infrastructure sector was predominantly from the public sector companies. Therefore, the argument that raising the FDI cap in the insurance sector would help in mobilizing resources for infrastructure, does not hold. On the other hand, greater foreign control is more likely to lead to a decline in the share of investment of the private insurance companies into the infrastructure sector, given the record of the foreign insurance companies in siphoning resources for speculative financial ventures. It is also worth mentioning that the only insurance company involved in insuring Indian exports is the Export Credit Guarantee Corporation of India, which provides insurance cover to export credit. The ECGC has been in existence since 1957. It is functioning under the United India Insurance Co. No private player with foreign partnership has ventured into this area. Moreover, the LIC and other public sector Page 20

The role of Insurance in savings mobilisation a case for Indian Economy

units are the only ones to undertake overseas operations, as reported by the Annual Reports of the IRDA. Foreign participation has also not helped in marketing Indian insurance products abroad.

List of Private Companies in Life Insurance


India's savings patterns are shifting, with far-reaching implications for the economy and financial system. The downward plunge of the Indian stock market has hurt the fortunes of thousands of investors, big and small. It will also have broader implications for India's financial system and the future of savings and investment patterns. Over the past few years, cautious investors had started to diversify away from bank deposits and cash, moving into equities, mutual funds and insurance products. But the market turmoil is driving them back to the safety of bank deposits, reducing the amount of capital available to other instruments and possibly retarding the growth of the financial-services industry as a whole. India's high savings rate has been a crucial driver of its economic boom, providing productive capital and helping to fuel a virtuous cycle of higher growth, higher income and higher savings. Since the 1990s, the gross domestic savings rate has risen steadily from an average of 23% to an estimated high of 35% in the 2006/07 fiscal year (April-March). The latter rate compares very favorably not only with developed economies (the US and the UK have savings rates of around 14%), but also with other emerging economieswith a few exceptions such as Malaysia (38%) and Chile (35%). Yet India's household sector (including some small businesses) continues to account for the lion's sharesome 70%of savings. The last five years have seen a surge in corporate savings as companies became more competitive and increased their profitability. That has been accompanied by a rise in public-sector savings on the back of increased fiscal prudence. However, the current economic situation is putting pressure on both corporate profitability and the public finances, ensuring that savings in these two sectors are unlikely to grow as rapidly as in the past. Household savings will therefore remain crucial to sustaining a strong savings rate.

Savings trends
As real GDP growth climbed and the economy opened up, many worried that increasingly prosperous Indians would spend more and save less, breaking the cultural habits of decades. Those fears turned out to be unfounded; prosperity has only increased the savings rate. One reason for this is the woeful inadequacy of India's social-security system. Only around 10% of

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The role of Insurance in savings mobilisation a case for Indian Economy

India's working population is covered by a retirement-benefit scheme. With increased urban migration, the joint family system (where several generations live together) is declining, reducing traditional old-age support from families. Health-insurance coverage is very low. Lastly, many Indians remain averse to taking loans. Personal savings remain vital to meet longterm needs such as home buying, children's education, retirement and healthcare. All this suggests that India's large fund of household savings, which stood at Rs9.85trn (US$192bn) in 2006/07, will remain available to fuel domestic growth. Yet much of Indians' physical savings is still locked up in unproductive physical assetssuch as houses, durables and jewellerythat households are only slowly converting into financial assets. As a result, India's government is keen to find new ways to encourage that shift while increasing savings. The government would like to channel household savings into the country's debt, equity and infrastructure-finance markets. This would not only deepen and stabilise the financial markets but also reduce the government's future social-security burden. The government already plays an important role in changing investor preferences. Indian investors are highly tax sensitive; a small tax change can move billions of rupees from one avenue into another. Such tax changes, coupled with solid economic growth and the emergence of new investment channels as a result of private participation in the insurance and mutual-fund industries, are slowly changing the composition of household savings. There have been some particularly interesting changes within the roughly 50% of the household savings pool that goes into financial assets. Bank deposit growth declined markedly in the decade to 2005, after the government began offering tax benefits that gave post office deposits and other small savings instruments much higher tax-adjusted returns than banks deposits. However, bank deposit growth then accelerated significantly, and deposits climbed back up from 36% of household financial assets in 2005/06 to 55% in 2007/08. One reason was that banks faced much greater demand for credit and stepped up their deposit-mobilization efforts, while raising deposit rates. Also, the government extended the tax benefits already available on post office deposits to bank deposits with maturities of over five years. Along with the rise in bank deposits, the funds raised through the capital markets and by mutual funds have simultaneously increased substantially. However, this share of savings changes quickly, responding to the volatility, risk and returns of the markets themselves. Here, too, tax benefits have played an important role. The government has made all dividends

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The role of Insurance in savings mobilisation a case for Indian Economy

including those from mutual funds tax-free in the hands of investors. Investments in equity and in equity-oriented mutual funds are exempt from long-term capital gains; the latter are also exempt from dividend distribution tax.

Private participation
Financial-sector liberalization has been an important driver of these changes. The government permitted private participation in the mutual-fund industry in 1993, unleashing substantial growth and structural change. By end-March 2008, total assets under management stood at Rs5trn, up from Rs3trn a year earlier, and private-sector players held more than 80%. In the insurance industry, private participation was approved in 2000, leading to a rise in penetration and market size. By March 2008 the private insurers had taken a combined market share of 36% and 40% of the life and non-life insurance markets, respectively, and the share of life insurance in household financial assets had climbed to 18%. The increased availability of these options has contributed to a decline in the share of other contractual savings, such as provident and pension funds. However, as the government's pension reforms gain momentum and the insurance industry continues to increase coverage and penetration, those types of savings will likely increase.

Outlook
In the medium term, these trends are likely to continue. The number of Indians in the workingage group of 15-64 years is forecast to rise from 63% of the population in 2006 to 68% in 2026. Public-sector employment, with its social-security guarantees, is declining; private-sector employment, with its higher salaries but lower job security, is increasing rapidly. That can only boost demand for new financial products and the need for Indian investors to remain in charge of their own savingspresenting opportunities for both the government and financial-services providers to channel those savings productively

2.4 Insurance Sector in India


Insurance sector in India is one of the booming sectors of the economy and is growing at the rate of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the country's GDP. Insurance is a federal subject in India and Insurance industry in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General

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The role of Insurance in savings mobilisation a case for Indian Economy

Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Authority (IRDA) Act, 1999 and other related Acts.

Development

The origin of life insurance in India can be traced back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English Widows. In those days a higher premium was charged for Indian lives than the nonIndian lives as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society that started its business in 1870 was the first company to charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life Insurance Companies Act and the Provident Fund Act.

By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and 1930s tainted the image of insurance industry in India. In 1938, the first comprehensive legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that provided strict State Control over insurance business. Insurance sector in India grew at a faster pace after independence. In 1956, Government of India brought together 245 Indian and foreign insurers and provident societies under one nationalised monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till 1972. There were 107 private companies involved in the business of general operations and their operations were restricted to organised trade and industry in large cities. The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from January 1, 1973. The 107 private insurance companies were amalgamated and grouped into four companies: National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC).

In 1993, the first step towards insurance sector reforms was initiated with the formation of Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra.

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The committee was formed to evaluate the Indian insurance industry and recommend its future direction with the objective of complementing the reforms initiated in the financial sector.

Key Recommendations of Malhotra Committee Structure


Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.

Competition
Private Companies with a minimum paid up capital of Rs.1billion should be allowed to enter the industry. No Company should deal in both Life and General Insurance through a single Entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance should be made independent.

Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.

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The role of Insurance in savings mobilisation a case for Indian Economy

GIC and its subsidiaries are not to hold more than 5% in any company. Customer

Service
LIC should pay interest on delays in payments beyond 30 days Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in the insurance industry. Malhotra Committee also proposed setting up an independent regulatory body - The Insurance Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.

Insurance sector in India was liberalized 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. 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 insurance sector has led to rapid growth of the sector. Presently, there are 16 life insurance companies and 15 non-life insurance companies in the market. The potential for growth of insurance industry in India is immense as nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be well below international standards. The role of Insurance in savings mobilisation a case for Indian Economy

Insurance : The Indian Experience


As a part of the financial sector reforms, the insurance sector has been liberalised recently. With this, the stage has been set for major changes in the insurance market in India with regard to innovations in product, pricing and distribution. This will also necessitate effective regulation to meet the new challenges this sector is likely to encounter in the liberalised environment. In this context, the paper attempts to make an overview of the insurance system

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The role of Insurance in savings mobilisation a case for Indian Economy

in India. The paper also attempts to evaluate the insurance penetration achieved in the country as compared to world standards and traces future scope for this sector as a facilitator for economic and financial development of the country. The economic reforms initiated in the country since mid-1991, have been aimed at increasing efficiency by expanding the role of the private sector along with inflow of investment and technology, while allowing a greater role of market forces. Insurance being one of the key components of the financial sector, reforms in the financial sector would encompass insurance sector reforms also. In the liberalised environment, with increased sophistication and innovation, insurance is seen as a key segment of the financial market. Insurance is therefore an area, which holds immense potential, especially for an emerging economy like India. A Committee on Reforms of the Insurance Sector (Chairman: R.N. Malhotra) was appointed by the Government of India in April 1993 to examine the regulation and structure of the insurance industry. Based on the Report submitted by the Committee in January 1994, concrete steps have been taken by the Government in 1999, after much deliberation, towards liberalisation of the insurance sector. The paper traces the evolution of the insurance market in India. Section I of the paper deals with the theoretical aspects of insurance. Section II traces the historical perspectives of insurance in India. Sections III and IV deal with the business and investments of life and non-life insurance in India, respectively. In Section V, an assessment of insurance penetration in India is made in comparison with world standards. Section VI discusses the role of insurance in financial savings of the household sector. Section VII covers regulation of insurance in India and Section VIII gives concluding observations.

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2.5 Theoretical Aspects of Insurance


From the definitional angle, the term insurance can be best understood by referring to the two important schools of thought on the subject viz., (i) transfer school and (ii) pooling school. According to the transfer school, "Insurance is a device for the reduction of uncertainty of one party, called the insured, through the transfer of particular risks to another party, called the insurer, who offers a restoration, at least in part, of economic losses suffered by the insured" (Pfeffer Irving, 1956). On the other hand, according to the 'pooling' school, ".............. the essence of insurance lies in the elimination of the uncertain risk of loss for the individual through the combination of a large number of similarly exposed individuals" (Manes Alfred, 1935). Thus, in the case of an individual, insurance is a transfer mechanism through which he passes on risk to the insurer. Whereas, for the insurer, insurance is a pooling mechanism by which he reduces risk in the context of his business. Insurance markets are generally characterised by asymmetric or imperfect information. In such markets, there is uncertainty about the actual behaviour of the insured. The insured possesses better information about himself or his risk type than the insurer. The high-risk insurees have incentives to hide their true state and present themselves as low risk types. The difficult problem faced by the insurance companies is the exact evaluation of risk and to adjust the premium accordingly at the time of signing of the insurance contract. In other words, the insurer will have to fix up the price and the amount of insurance the customer can buy at that price. Higher premium will attract a pool of more risky insurance applicants and will lead to the problem of 'adverse selection', while the applicants with small risks will drop out. Higher insured values may lead to 'moral hazard' problems, as it will create an incentive for the insuree to take increased risks than he would otherwise take. The problem of moral hazard, though unimportant in the case of life insurance (as no one would try to take his own life in normal circumstances), can be severe in the area of non-life insurance. It is therefore necessary for the insurance companies to strike a correct balance between the premium and the extent of risk covered.

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The role of Insurance in savings mobilisation a case for Indian Economy

The role of Insurance in savings mobilisation a case for Indian Economy An

Historical Perspective
One of the main features of the pre-nationalised insurance sector was the utilisation of the insurance sector as a backup or extension by the well known industrial houses of India. There are mainly two forms of insurance in India viz., life and non-life. Life insurance provides protection to a household against the risk of premature death of its income-earning member. Non-life insurance can be grouped under three heads viz., fire, marine and miscellaneous insurance. Life Insurance Corporation of India carries on life insurance business and the General Insurance Corporation and its four subsidiaries deal with non-life insurance. After liberalisation of the insurance sector in 1999, private players have entered both life and nonlife business in India. The Insurance Regulatory and Development Authority (IRDA) was constituted in April 2000 as an autonomous body to regulate and develop the business of insurance and re-insurance in the country in terms of the Insurance Regulatory and Development Authority Act, 1999.

Life Insurance
The life insurance business was first introduced in India by a British firm in 1818. Initially, higher premiums were charged for insuring Indian lives as against non-Indian lives. The Bombay Mutual Life Assurance Society, an Indian insurer, set up in 1871 was the first to charge same premium for both Indians and non-Indians. The decades of 1920s and 1930s witnessed rapid growth of life insurance in India. In order to regulate the life insurance business, the Indian Life Assurance Companies Act, 1912 was enacted. The enactment of the Insurance Act, 1938 introduced effective State control over the insurance business in the country. After independence, Indian companies came into their own. In 1956, the Life Insurance Corporation of India was formed when the Government of India brought together the insurance business of 2451 Indian and foreign insurers and provident societies, under one nationalised monopoly corporation called Life Insurance Corporation (LIC). Since nationalisation, LIC developed a vast network of branches and expanded its business. LIC also extends pension cover to the insured apart from life cover. Acting on the recommendations of the Committee on Reforms in the Insurance Sector (1994), private players were allowed into the Life insurance business in 2000. During 2000-01, there were 6 registered private companies engaged in the business of life insurance.

General Insurance
The first general insurance company viz., Triton Insurance Company Ltd. was established in Calcutta in 1850. Its shareholders were mainly British. The first Indian company for General Insurance business was the Indian Mercantile Insurance Company Ltd., set up in 1907 in Mumbai. The general insurance business in India was nationalised with effect from January

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1973 by the General Insurance Act, 1972. As a result, 107 insurers (including both Indian and foreign companies) were amalgamated and grouped into four companies viz., the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. General Insurance Corporation (GIC) was incorporated as a company in November 1972 and it commenced business on January 1, 1973. GIC has been acting as the Indian reinsurer2 since then. GIC has also been accepting overseas reinsurance business. For regulation of product pricing of general insurance, a Tariff Advisory Committee (TAC) started functioning since 1968 headed by the Controller of Insurance. After the nationalisation of GIC in 1972, the management of TAC was delegated to GIC. Acting on the recommendations of the Committee on Reforms in the Insurance Sector (1994), private players were allowed into the non-Life insurance business also in 2000. During 2000-01, there were 4 registered private companies engaged in the business of non-life insurance.

Business and Investments of Life Insurance Companies


Since nationalisation of the life insurance business in India in 1956 and non-life business in 1972, rapid strides have been made in the development of the insurance sector. The Life Insurance Corporation has introduced different types of policies to suit different income groups and age groups over the years. These insurance policies include term, whole life, endowment, annuity, individual, group and pension plans. This has afforded reasonable variety of investment schemes to the investors. The number of offices of LIC increased from 889 in 1981-82 to 2048 in 2000-01 (Table 1). The number of policies grew from 3.7 per cent in 198182 to 12.0 percent in 2000-01. This growth, which peaked at 12.8 per cent in 1990-91, could not be maintained in the subsequent years. The growth in the sum assured which was 14.7 in 1981-82, peaked to a high of27.4 per cent in 198990, but eventually declined to 20.3 per cent in 2000-01.The rural new business of LIC as a percentage of its overall new business has grown well during the 1980s and 1990s. The penetration in the rural areas was more pronounced in the 1990s than in the 1980s The share of rural to total new business in terms of number of policies has increased from 32.8 per cent in 1981-82 to 55.5 percent in 2000-01. In terms of sum assured, this share increased from 26.6 per cent in 1981-82 to 47.8 per cent in 2000-01. The Committee on Reforms in the Insurance Sector (Malhotra Committee) had recommended that it should be made mandatory for insurance companies to transact a minimum business in rural areas and they should not be allowed to avoid small policies. With improving rural infrastructure, rising incomes and greater awareness among the rural people regarding the importance of life cover, further growth in rural insurance business can be achieved.

Life Insurance Business of Private Companies

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The role of Insurance in savings mobilisation a case for Indian Economy

The insurance market was opened to the private sector in August 2000 and the initial batch of new registrations was granted on 23rd October, 2000. During 2000-01, there were 6 registered private life insurance companies viz., (i) Birla Sun-Life Insurance Company Ltd. (BSLIC), (ii) HDFC Standard Life Insurance Company Ltd. (HSLIC), (iii) ICICI Prudential Life Insurance Company Ltd. (IPLIC), (iv) Max New York Life Insurance Company Ltd. (MNYLIC), (v) SBI Life Insurance Company Ltd. (SLIC) and (vi) TATA AIG Life Insurance Company Ltd. (TALIC). Out of these, only 4 companies viz., BSLIC, HSLIC, IPLIC and MNYLIC have started doing business by the end of March 2001. The investments of an insurance company are intended to build up reserves and not to book short-term profits. These reserves provide a cushion for long-term contingencies, which can be directed towards investment in socially desirable sectors like infrastructure. The provisions of Section 27 A of the Insurance Act, 1938 as amended from time to time have prescribed the investment patterns for life insurance. The Malhotra Committee (1994) had recommended that the mandated investment of funds of LIC should be reduced from the then existing level of 75 per cent to 50 per cent. Consequent to the liberalisation of the insurance sector, and as per the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the life insurance companies have to invest a minimum of 50 per cent of their total assets in government and other approved securities. They are also required to invest a minimum of 15 per cent in infrastructure and social sectors, leaving the balance 35 per cent free for investment in the capital market. The investment pattern of LIC for the period 1980-81 to 2000-01 shows that major share of its investments were in Central and State Government securities followed by loans to State and Central government and their Corporations and Boards.

Business and Investment of Non-Life Insurance in India


The general insurance companies mainly specialise in insurance business like fire, marine, aviation, theft, crop, accident, health (medi-claim) etc. General insurance policies, unlike life insurance policies are short duration contracts. Also, general insurance policies, in comparison to life insurance policies do not mobilise savings, but they collect funds from the premiums paid. The number of offices of GIC has more than trebled from 1272 in 1980-81 to 4177 in 2000-01 (Table 4). However, after 1992-93, this growth was either negligible or negative. As regards the growth in the number of policies and net claims payable of GIC and its subsidiaries, no steady pattern is observed. However, the volume of business in terms of number of policies and net claims payable has improved substantially over the years. The rural business of GIC and its subsidiaries form only 5.2 per cent of total domestic general insurance premium in 1998-99 (latest available). The non-life business transacted in the rural areas mainly relates to insurance of livestock. Major portion of this business transacted relates to livestock cover under the Integrated Rural Development Programme (IRDP) with bank credit linkages, where insurance is mandatory. Other rural businesses covered include agricultural pumpsets, Janata Gramin Personal Accident, commercial poultry farms and other businesses including pisciculture and sericulture.

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Non-Life Insurance Business of Private Companies


During 2000-01, there were 4 registered private non-life insurance companies viz., (i) IFFCOTokio General Insurance Company Ltd., (ITGIC), (ii) Reliance General Insurance Company Ltd. (RGIC), (iii) Royal Sundaram Alliance Insurance Company Ltd. (RSAIC), (iv) TATA AIG General Insurance Company Ltd. (TAGIC). The business of these companies during 2000-01 was very low.

Investments of General Insurance Companies


The provisions of Section 27 B of the Insurance Act 1938 as amended from time to time has prescribed the investment patterns for non-life insurance. The Malhotra Committee (1994) had recommended that the mandated investment of funds of the general insurance companies should be reduced from the then existing level of 70 per cent to 35 per cent. In April 1995, the Government relaxed the investment policies of GIC and its subsidiaries and they were allowed to invest upto 55 per cent of the annual accretion of their funds in market oriented schemes as against 30 per cent earlier. Consequent to the liberalisation of the insurance sector, and as per the notification of IRDA (Investment) Regulations, 2000 dated August 14, 2000, the investments of non-life insurance companies cannot be less than 30 per cent in government and other approved securities. They are also required to invest a minimum of 10 per cent in infrastructure and social sectors and a minimum of 5 per cent in the area of housing and fire fighting. Of the balance 55 per cent, 30 per cent will be governed by prudential norms, while 25 per cent can be invested in unapproved securities including investment in equities. The investment pattern of GIC and its subsidiaries for the period 1980-81 to 2000-01 shows that the important avenues for its investments were in market investment followed by Central Government securities (Table 6). Market investments of GIC and its subsidiaries increased from 33.7 per cent in 1980-81 to 44.0 per cent in 2000-01. Whereas the investments in Central Government securities decreased marginally from 21.3 per cent in 1980-81 to 21.0 per cent in 2000-01. The investment pattern of GIC is thus different from that of LIC, whose major investments are in Central and State Government securities.

Insurance Penetration in India as Compared to Global Standards


Insurance density, measured in terms of premium per capita, was much lower in emerging markets in 2000 as compared with the industrialised countries of the world. Similarly, insurance premium as percentage of GDP i.e., insurance penetration, was lower in the emerging markets as compared to the industrialised countries in 2000. However, South Africa and South Korea, which figure among the emerging markets are exceptions and are among the forerunners in insurance penetration. Of the total world insurance business in terms of insurance premiums, nine-tenths were contributed by industrialised countries, whereas, the emerging markets accounted for 10 per cent of total world business in insurance. However, the growth rate of premium in 2000 in the emerging markets was higher as compared with the industrialised countries, indicating the growing importance of the insurance sector in the

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The role of Insurance in savings mobilisation a case for Indian Economy

former. India's insurance penetration was only 2.3 per cent, as against the world average of 7.8 per cent in 2000 Opening up of the insurance sector has been a key component of economic reforms put in place in South and East Asian economies in the 1980s and 1990s. The major insurance markets in South and East Asia are generally open indicating the impact of the reform measures. Since liberalisation of the Korean and Taiwanese insurance markets in 1987, these markets grew at a much faster pace than before, suggesting that liberalisation of the insurance sector facilitated growth of insurance in these countries.

In India, the share of life insurance premium as a percentage of GDP, i.e., insurance penetration, has increased steadily from 0.6 per cent in 1980-81 to 1.6 per cent in 200001. However, this is much lower as compared to that of the industrialised countries. The life funds as percentage of GDP increased from 4.6 per cent in 1980-81 to 8.9 per cent in 2000-01 reflecting an impressive performance of LIC in terms of generating premium and investment income in excess of its expenditures and claims. The life insurance density, i.e., life insurance premiums per capita has steadily increased from Rs. 13.1 in 1980-81 to Rs. 334.8 in 2000-01. However, this is much lower in comparison with world standards. This again reveals the vast scope for life insurance penetration in India. The life fund per capita which was Rs. 97.4 in 1980-81 has increased more than eighteen fold to Rs. 1819.5 in 2000-01 reflecting the attractiveness of life insurance business. In India, the share of gross and net insurance premiums for non-life insurance as a percentage of GDP, i.e., non-life insurance penetration, have increased from 0.4 per cent and 0.3 per cent, respectively in 1980-81 to 0.5 per cent and 0.5 per cent in 2000-01. However, this compares quite unfavourably with that of the industrialised countries and other emerging markets in general. The non-life gross and net premiums per capita (non-life insurance density) have both steadily increased from Rs. 7.4 in 1980-81 to Rs. 105.7 in 2000-01 and from Rs. 7.1 to Rs. 100.8, respectively during the same period. However, this is much lower in comparison with world standards. This reveals the vast scope for non-life insurance penetration in India.

Role of Insurance in Financial Saving and GDP


Insurance is an important financial saving instrument of the households. The saving component of life insurance competes with the savings of the households in other financial instruments such as bank deposits, mutual funds and equities. The total life insurance in India comprises three components viz., life insurance, postal and state insurance. The life insurance business is almost in the hands of the LIC. Its share ranged between 85 per cent and 95 per cent of the total insurance fund during 1980-81 through 2000-01. The share of insurance, which constitutes a significant part of gross financial savings of the household sector, has gone up from 7.6 per cent in 1980-81 to 12.8 per cent in 2000-01. During the period 199192 to 200001, this share has remained above 10 per cent, barring the three years from 1992-93 to 199495. The average share of insurance in gross financial savings which was 7.6 per cent in the

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1980s increased to 10.3 per cent in the 1990s. The share of insurance in GDP has shown a consistently rising trend and more than doubled from 0.7 per cent in 1980-81 to 1.6 per cent in 2000-01. The average share of insurance as a percentage of GDP increased from 0.8 per cent in the 1980s to 1.2 per cent in the 1990s. The share of insurance in real GDP i.e., insurance as a percentage of real GDP during the period 1981-82 to 2000-01 was below 1 per cent. The insurance sector has been only a marginal contributor to the country's GDP. This is despite the country's vast population and immense potential for growth of insurance. One of the reasons attributable to this could be the lack of effective competition due to the monopoly position enjoyed by the public sector. Opening up of the insurance sector may augur well for the growth in income from this sector.

Insurance Regulation in India


Insurance regulation in India started with the passage of the Life Insurance Companies Act, 1912 and the Provident Fund Act, 1912. The first comprehensive legislation was introduced with the Insurance Act, 1938 which provided strict State control over insurance business in the country under the supervision of the Controller of Insurance. Subsequently, the Insurance Act, 1950 was enacted to check malpractices in the insurance business and also to exercise more control over the operations of the insurance companies. With the nationalisation of the life insurance industry in 1956 and the general insurance industry in 1972, the role of the Controller of Insurance diminished over a period of time. On account of the monopoly status of the public sector units viz., LIC and GIC in the area of insurance, prior to liberalisation of this sector, regulation was perceived to be of less interest due to the inbuilt procedures in place. The phased globalisation of the Indian economy that started in the early 1990s began to have its impact on the monopolistic structure of the Indian insurance industry. Further, the liberalisation of insurance markets was among the objectives of the Uruguay round negotiations conducted under the auspices of General Agreement on Trade and Tariff (GATT). These negotiations included trade in services and insurance in the context of financial services (UNCTAD Report, January 1993). In 1993, the Government appointed a Committee headed by Shri R.N. Malhotra to examine the reforms required in the insurance sector. The Committee in its report submitted in 1994 recommended inter alia the opening up of the insurance sector to players other than State- Owned ones. These recommendations were accepted by the Government and the Insurance Regulatory and Development Authority (IRDA) Act, 1999, consequent amendments to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and the General Insurance Business Act, 1972 were passed in the year 2000, paving the way for opening up of the insurance sector. The important functions of the IRDA as per the IRDA Act 1999, include the following:

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The role of Insurance in savings mobilisation a case for Indian Economy

i) Licensing and regulating the insurance sector by acting as an independent and regulatory body. ii) Specifying requisite qualifications, code of conduct and practical training for insurance intermediaries and agents. iii) Protecting the interests of the policyholders in matters concerning assigning of policy, settlement of insurance claim etc. iv) Regulating investment of funds by insurance companies. v) Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers and other organisations connected with the insurance business. vi) Regulating maintenance of margin of solvency of the insurer. vii) Adjudication intermediaries. viii) Supervising the functioning of the Tariff Advisory Committee. ix) Promoting efficiency in the conduct of insurance business. Efforts are underway to bring about internationalisation of regulations in the insurance sector on the lines of the banking sector so as to take care of development and health of the insurance sector. This concern had resulted into the establishment of International Association of Insurance Supervisors (IAIS), head quartered at Basle in Switzerland. More than 100 regulators of insurance industries worldwide are members of this Association and India is also one amongst them. The underlying objective of this organisation is to bring about a degree of standardisation in regulatory procedures adopted by different countries. The Advisory Group on Insurance Regulation (Chairman: Shri R. Ramakrishnan) appointed by the Standing Committee on International Financial Standards and Codes (Chairman: Dr. Y.V. Reddy), stated that Indian insurance regulations are, by and large, in consonance with international standards. of disputes between insurers and intermediaries or insurance

Chapter 3. Research methodology


The research relied entirely on the qualitative data because of its macro nature. Data from major insurance companies such as Life Insurance Company of India and General Insurance Company of India was analyzed. The statistics from the annual reports of Insurance Regulatory Development Authority of India the regulator body for insurance business was studied and analyzed. The secondary sources of data were the various websites and insurance manuals. This mainly provided information about the insurance sector and the company profiles. These helped in gaining knowledge about the industry. These sources are listed in references. Other sources of data such as Internet, books, magazines and other relevant publications were studied.

Page35

3.1 DATA ANALYSIS AND INFERENCE:


Tables, pie charts, bar charts and percentage analysis and other statistical methods were used to analyze and present data in a more clear way.

3.2 RESEARCH LIMITATIONS:


1. It was not possible to get all the data especially primary data as the subject is very wide. 2. Data on savings was not readily available. 3. There was difficulty in filtering of secondary data because of the macro nature of the project. 4. There was limited time and resources.

Chapter 4. Findings
Insurance business is divided into four classes: 1) Life Insurance business 2) Fire 3) Marine 4) Miscellaneous Insurance. Life Insurers transact life insurance business; the rest is transacted by General Insurers. The business of Insurance essentially means defraying risks attached to any activity over time (including life) and sharing the risks between various entities, both persons and organisations. Insurance companies are important players in financial markets as they collect and invest large amounts of premium. Insurance products are multipurpose and offer the following benefits: 1. Protection to the investors 2. Accumulate savings 3. Channelize savings into sectors needing huge long term investments. Indian

Insurance Companies
Indian insurance companies play a key role in India's financial sector. With India's population becoming more affluent and globalized, insurance is growing rapidly. This increasing market is creating considerable competition among Indian insurance companies in an industry that 20 years ago was relatively small. To date, India's Insurance Regulatory and Development Authority (IRDA), has granted registration to 12 private life insurance companies and nine general insurance companies. Counting the existing public sector insurance companies, there are currently 13 Indian insurance companies in the life side and 13 Indian insurance companies operating in general insurance. General Insurance Corporation has been approved as the Indian reinsurer for

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The role of Insurance in savings mobilisation a case for Indian Economy

underwriting only reinsurance business. Particulars of the Indian insurance companies including both life insurance companies and general insurance companies are given below: LIFE INSURERS Websites Public Sector Life Insurance Corporation www. licindia. com of India Private Sector Allianz Bajaj Life Insurance www.allianzbajaj.co.in Company Limited Birla Sun-Life Insurance Company Limited HDFC Standard Life Insurance Co. Limited ICICI Prudential Life Insurance Co. Limited ING Vysya Life Insurance Company Limited Max New York Life Insurance Co. Limited MetLife Insurance Company Limited Om Kotak Mahindra Life Insurance Co. Ltd. SBI Life Insurance Company Limited TATA AIG Life Insurance Company Limited AMP Sanmar Assurance Company Limited www. birlasunlife.com www. hdfcinsurance. com www. iciciprulife.com www. ingvysayalife. com www. maxnewyorklife.com www. metlife. com www. omkotakmahnidra. com www.sbilife.co.in www.tata-aig.com www. ampsanmar.com www. avivaindia.com

__________
Dabur CGU Life Insurance Co. Pvt. Limited GENERAL INSURERS Public Sector National Insurance Company Limited New India Assurance Company Limited Oriental Insurance Company Limited United India Insurance Company Limited Private Sector Bajaj Allianz General Insurance Co. Limited ICICI Lombard General Insurance Co. Ltd. IFFCO-Tokio General Insurance Co. Ltd. Reliance General Insurance Co. Limited

www. nationalinsuranceindia. com www.niacl.com www. orientalinsurance.nic. in www.uiic.co.in

www.bajajallianz.co.in www. icicilombard. com www.itgi.co.in www.ril.com

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The role of Insurance in savings mobilisation a case for Indian Economy

Royal Sundaram Alliance Insurance Co. Ltd. TATA AIG General Insurance Co. Limited Cholamandalam General Insurance Co. Ltd. Export Credit Guarantee Corporation HDFC Chubb General Insurance Co. Ltd. REINSURER General Insurance Corporation of India

www. royalsun.com www.tata-aig.com www.cholainsurance.com www. ecgcindia.com

www. gicindia. com

4.1 CONTRIBUTION TO INDIAN ECONOMY


Insurers are increasingly introducing innovative products to meet the specific needs of the prospective policyholders. An evolving insurance sector is of vital importance for economic growth. While encouraging savings habit it also provides a safety net to both enterprises and Individuals. Insurance Companies receive, without much default, a steady cash stream of premium or contributions to pension plans. Various actuary studies and models enable them to predict, relatively accurately, their expected cash outflows. Liabilities of Insurance companies being long-term or contingent in nature, liquidity is excellent and their investments are also long-term in nature. Since they offer more than the return on savings in the shape of life-cover to the investors, the rate of return guaranteed in their insurance policies is relatively low. Consequently, the need to seek high rates of returns on their investments is also low. The risk-return trade off is heavily tilted in favour of risk. As a combined result of all this, investments of insurance companies have been largely in bonds floated by Government of India , PSUs, state governments, local bodies, corporate bodies and mortgages of long term nature. APPRAISAL OF INSURANCE MARKET Table 1

KEY MARKET INDICATORS


Life and non-life market in India (Total Premium) Global insurance market Inflation adjusted growth in total Premium in India: Growth in premium (world) underwritten 2007-08 Geographical restriction for new players Equity restriction US Dollar 4061 billion 13.0 per cent 35.0 per cent in (2006-07) Life: 5.4 per cent Non-life: 0.7 per cent None Foreign promoter can hold up to 26 per cent of the equity Composite registration not available

Registration restriction Rs. 2,29,175 US Dollar 54.375 billion*

The role of Insurance in savings mobilisation a case for Indian Economy

Generates Long term funds for infrastructure and strong positive correlation between development of capital markets and insurance/pension sector For GDP to
grow at 8 to 10%, qualitative improvement in infrastructure is essential. Estimates of funds required for development of infrastructure vary widely. Tenure of funding required for infrastructure normally ranges from 10 to 20 years. The insurance industry also provides crucial financial intermediary services, transferring funds from the insured to capital investment, critical for continued economic expansion and growth, simultaneously generating long-term funds for infrastructure development.

In fact infrastructure investments are ideal for asset-liability matching for life insurance companies given their long term liability profile. According to preliminary estimates published by the Reserve Bank of India, contribution of insurance funds to financial savings was 14.2 per cent in 2005-06, viz., 2.4 per cent of the GDP at current market prices. Development of the insurance sector is thus necessary to support continued economic transformation. Social security and pension reforms too benefit from a mature insurance industry.

The insurance sector in India, which was opened up to private participation in the year 1999, has completed over nine years in a liberalized environment. With an average annual growth of 37 per cent in the first year premium in the life segment and 15.72 per cent growth in the nonlife segment, together with the largest number of life insurance policies in force, the potential of the Indian insurance industry is still large.

Life insurance penetration in India was less than 1 per cent till 1990-91. During the 1990s, it was between 1 and 2 per cent and from 2001 it was over 2 per cent. In 2005 it had increased to 2.53 per cent.

Employment generation
Life insurance industry provides increased employment opportunities. Employees in insurance sector as on 31st March, 2005 was around 2 lakhs. Many agents depend on insurance for their livelihood. Brokers, corporate agents, training establishments provide extra employment opportunities. Many of these openings are in rural sectors. Insurance industry has been undergoing a great transformation during the last decade.

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The role of Insurance in savings mobilisation a case for Indian Economy

There is a great focus within the insurance industry to consolidate to provide better Customer service in order to help these insurance companies in achieving their objectives.

Table 2 Registered insurers in India

Types of business Life insurance General Insurance Re-insurance Total

Public sector 1 6 1 8

Private sector 20 14 0 34

Total 21 20 01 42

Source: Insurance Regulatory and Development Authority annual Report 20072008

The role of Insurance in savings mobilisation a case for Indian Economy

Insurance sector reforms


In 1993 Malhotra committee, headed by former finance secretary and RBI governor R N Malhotra, was formed to evaluate the Indian insurance industry and recommended its future direction. The Malhotra committee was set up with the objective of complimenting the reforms initiated in the financial sector. In 1994 committee submitted the report and some of the recommendation included. 1) Structure a) Government stake in the insurance companies to be brought down to 50%. b) Government should take over the holdings of GIC and its subsidiaries, so that these subsidiaries can act as independent corporations. c) All the insurance companies should be given greater freedom to operate 2) Competitions a) Private companies with a minimum paid up capital of Rs. 1 billion should be allowed to enter the industry and no company should deal in both life and general insurance through a single entity. b) Foreign companies may be allowed to enter the industries collaboration with the domestic companies. c) Postal life insurance should be allowed to operate in the rural market. d) Only one state level life insurance company should be allowed to operate in each state 3) Regulatory body a) The insurance Act should be changed b) An insurance regulatory body should be set up. Life Insurers transact life insurance business; General Insurers transact the rest. No composites are permitted as per law. Insurance is a federal subject in India. The primary legislation that deals with insurance business in India is: Insurance Act, 1938, and Insurance Regulatory & Development Authority Act, 1999.

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The role of Insurance in savings mobilisation a case for Indian Economy

Insurance Products Life


Insurance: Popular Products: Endowment Assurance (Participating) and Money Back (Participating). More than 80% of the life insurance business is from these products. Table 3 New policies issued: Life insurers Insurer 2006-27 2007-2008

LIC

38229292

37612599

Private sector

7922274 (104.64)

13261558 (67.40)

Total

46151566

50874157

Source: Insurance Regulatory and Development Authority annual Report 2007-2008

General Insurance:
Fire and Miscellaneous insurance businesses are predominant. Motor Vehicle insurance is compulsory. Tariff Advisory Committee (TAC) lays down tariff rates for some of the general insurance products. Table 4 Policies issued: Non-life insurers Insurers 2006-2007 2007-2008

Public Sector

339972092 (-19.48) 38547040 (13.47)

Private Sector

12692053 (41.85) 18703219 (47.36)

Total

46664145

57250259

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The role of Insurance in savings mobilisation a case for Indian Economy

Source: Insurance Regulatory and Development Authority annual Report 2007-2008

The Indian economy growth vs Insurance.


According to the revised estimates released by the Central Statistical Organization (CSO), real GDP growth originated for the services sector moderated from 11.2 per cent in 2006-07 to 10.7 per cent in 2007-08 due to deceleration in financing, insurance, real estate and business services and Construction sub-sectors. Financing, insurance, real estate and business services recorded a growth of 11.8 per cent in 2007-08 compared to 13.9 per cent in 2006-07. However, the sector's share in real GDP has marginally increased from 14.3 per cent in 200607 to 14.7 per cent in 200708. Latest estimates on gross domestic product emanating from sub- sector are available for 2006-07. As per the estimates, banking and insurance constituted 6.68 per cent of real GDP in 2006- 07 as against 6.12 per cent in 2005-06. This sub-sector has recorded a growth of 19.71 per cent in 2006-07. While banking showed a growth of 17 per cent, insurance recorded a growth of 34.5 per cent in 2006-07 over 2005-06. The share of insurance sector in real GDP increased to 1.1 per cent in 200607 from 0.9 per cent in 2005-06. The outlook for the emerging economies remains positive, but uncertainties about their resilience to the global shocks have increased. Industrial production and export volumes have slowed down. While equity markets have fallen sharply in tandem with those in advanced economies, bond spreads have widened. The international financial system is gripped by extreme risk aversion in the wake of spectacular failures of among the world's largest financial institutions. With buoyancy in stock markets, while investors are willing to take risks and prepared to bear investment risks by opting for ULIPs, with the financial crises across the globe and melt down in the stock markets, the sentiments of the investors may turn the other way and many would like to invest their surpluses in safe and traditional financial instruments rather than take risks. As such, the preference will be shifted away from ULIPs and life insurers may have to design traditional products with good incentives. As such, the growth in life insurance business in near future may not be as robust as it was so far. Further, as insurance companies are closely monitored by their solvency margins, they have to inject additional capital to maintain the regulatory requirement. Under the present position in the financial markets, it is difficult to raise funds from the capital markets and promoters may find it difficult even to divest their own investments in a bearish stock market.

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The role of Insurance in savings mobilisation a case for Indian Economy

In the recent past, insurance companies have gone aggressively on branch expansion and added technical manpower. The associated costs due to those are high and companies may find it difficult to sustain with high costs and low premiums. With slow down in the economic growth, the personal disposable incomes will be lower thus affecting the savings and investment. The slow down in the industry and lower investments in the private corporate sector leads to lower asset formation. This together with lower merchandise trade affects the non-life insurance market. With slump in the stock markets, the investment income for the non-life insurance companies would also come down thus affecting the profits, because the investment income has been offsetting the underwriting loses of the insurers so far.

Performance in the first quarter of2008-09 (i) Life


insurance: The life insurers underwrote a premium of Rs.14320.20 crore during the first quarter in the current financial year as against Rs.12511.80 crore in the comparable period of last year recording a growth of 14.45 per cent. Of the total premium underwritten, LIC accounted for Rs.7524.56 crore and the private insurers accounted for Rs. 6795.64 crore. The premium underwritten by LIC declined by 12.31 per cent while, that of private insurers increased by 72.88 per cent, over the corresponding period in the previous year. The number of policies written at the industry level declined by 7.78 per cent. While the number of policies written by LIC declined by 23.36 per cent, in the case of private insurers they grew by 44.00 per cent. Of the total premium underwritten, individual business accounted for Rs.10995.90 crore and group business for Rs. 3324.30 crore. In respect of LIC, individual business was Rs.5275.71 crore and group business was Rs.2248.85 crore. In the case of private insurers, they were Rs.5720.19 crore and Rs.1075.45 crore respectively. The market share of LIC was 52.55 per cent in the total premium collection and 63.88 per cent in number of polices underwritten, lower than 68.58 per cent and 76.87 per cent respectively reported in the previous year. Under the group scheme 56.13 lakh lives were covered recording a growth of 8.51 per cent over the previous period. Bar diagrams

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The role of Insurance in savings mobilisation a case for Indian Economy

Of the total lives covered under the group scheme, LIC accounted for 38.96 lakh and private insurers 12.77 lakh. The life insurers covered 12.50 lakh lives in the social sector with a premium of Rs.17.10 crore and underwrote 13.53 lakh policies with a premium of Rs.1275.78 crore in the rural sector. (ii) Non-Life Insurers

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The role of Insurance in savings mobilisation a case for Indian Economy

During the first quarter of current financial year, the non-life insurers underwrote a premium of Rs.8778.18 crore recording a growth of 17.85 per cent over Rs.7448.74 crore underwritten in the same period of last year. The private non-life insures witnessed higher growth of 22.43 per cent by underwriting premium to the tune of Rs.3541.78 crore as against Rs.2892.89 crore underwritten in the same quarter of the last year. The public non-life insurers underwrote a premium of Rs.5236.40 crore, higher by 14.94 per cent in the first quarter of 2007-08. The market shares of public and private insurers were 59.65 and 40.35 per cent respectively. ECGC underwrote credit insurance of Rs.164.70 crore as against Rs.88.09 crore in the previous year resulting in a significant growth of 86.98 per cent.

Table 5
Premium underwritten (within India) by non life insurers-segment-wise Segment Fire Marine Motor 2006-07 4132 (16.59) 1628 (6.54) 10697 (42.95) 3319 (13.29) 5129 (20.63) 24905 (Rs Crores) 2007-2008 3459 1799 (6.47) 12685 (45.59) 4894 (17.59) 4986 (17.92) 27823

Health Others Total

Source: Insurance Regulatory and Development Authority annual Report 200708 Segment-wise, the premium underwritten in the Fire, Marine, Motor, Health and Miscellaneous segments by the non-life insurers were Rs.1208.15 crore, Rs.572.99 crore, Rs.3624.23 crore, Rs.1772.57 crore and Rs.1600.24 crore respectively. The Health segment recorded the highest growth (49.67 per cent) in the first quarter of the current financial year over the corresponding quarter of 2007-08. The Fire segment witnessed negative growth (13.80 per cent) over in the same period.

In terms of number of policies, Fire and Marine, recorded negative growth rates (-5.14 per cent and -4.37 per cent respectively) over the one year period. In the Motor segment, the

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The role of Insurance in savings mobilisation a case for Indian Economy

public insurers witnessed positive growth rate (23.09 per cent) in the premium underwritten despite issuing lesser number of policies. The premium underwritten in the Motor segment in the first quarter of the current financial year was Rs.3624.23, constituting 41.29 per cent in the total premium underwritten. The contribution from the Public and Private life- insurers in the total Motor premium was Rs.2151.19 crore (59.36 per cent) and Rs.1473.04 crore (40.64 per cent) respectively. The premium collection in the Health segment went up to Rs.1772.57 in the first quarter of the current year, constituting for 20.19 per cent in the total premium. The number of policies, issued in this quarter, as a ratio of total number of policies worked out to 12.20 per cent. The shares of public and private non-life insurers in the Health segment remained similar to the Motor segment, which constituted 58.72 per cent (Public) and 41.28 per cent (Private) respectively in the first quarter of the current financial year. In terms of number of policies issued Health segment recorded a growth of 12.95 per cent. This growth was sharper in the public insurers with 20 per cent.

4.2 Saving and Capital Formation


The CSO released estimates for GDP at the economy level and also at sectoral level for 200708. But estimates of saving and capital formation are available with lag of one year; as such, the latest estimates released by CSO relates to 2006- 07. However, the gross financial savings of the household sector, as estimated by Reserve Bank of India (RBI), are available for 200708. As such the review pertains to savings and capital formation for 2006-07 and gross financial assets for 2007-08. Gross domestic savings as a per cent of GDP at current market prices increased from 34.3 per cent in 2005-06 to 34.8 per cent in 2006-07 as a result of increase in the savings of private corporate sector and savings of the public sector. While there has been no change in the saving rate in the form of physical assets for the household sector at 12.5 per cent, a marginal decline in the form of financial savings from 11.8 per cent in 2005-06 to 11.3 per cent in 2006-07 was observed. Thus the household saving rate has declined to 23.8 per cent in 2006-07 from 24.2 per cent in 2005-06. The saving rate of the private corporate sector had increased from 3.4 per cent in 2001-02 to 7.5 per cent in 2005-06 and further to 7.8 per cent in 2006-07. Public sector savings further improved from 2.6 per cent of GDP in 2005-06 to 3.2 per cent in 200607 due to higher savings of non-departmental as well as departmental enterprises. While the gross domestic saving rate at the economy level increased by 5 percentage points in 2006-07, the gross domestic capital formation rate increased by 4 percentage points from 35.5 per cent in 2005-06 to 35.9 per cent in 2006-07. A marginal decline in net capital inflows from 1.2 per cent in 2005-06 to 1.1 per cent in 2006-07 was recorded.

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The role of Insurance in savings mobilisation a case for Indian Economy

Preliminary estimates of household financial savings released by RBI revealed a change in the pattern of the household savings in 2007-08 from that of 2006-07 reflecting the households preferences in a growing economy. As a percentage of GDP, while savings in the form of currency and investments in shares increased in 2007-08, savings in the form of bank deposits has declined. Gross financial savings of the household sector comprised of 11 per cent in the form of currency, 56.5 per cent in the form of deposits. The share of insurance funds in household savings increased from 14.9 per cent in 2006-07 to 17.5 per cent in 2007-08 reflecting households' need for insurance and availability of innovative products customized to different segments of the households.

Savings in the form of life insurance funds increased to 16.9 per cent in 2007-08 from 14.4 per cent in 2006-07, which could be due to the success of ULIPs in 2007-08. Postal insurance has marginally increased from 0.3 per cent in 2006-07 to 0.4 per cent in 2007-08. A similar increase was observed in the investments in Mutual Funds. Their share has increased from 5.2 per cent in 2006-07 to 7.7 per cent in 2007-08. By the end of March 2008, there were eighteen life insurance companies operating in India. Subsequently, Aegon Religare life insurance company limited and Canara HSBC Oriental Bank of Commerce Life Insurance Co. Ltd., DLF Pramerica life insurance company limited were given Certificate of Registration by the Authority. With these two new companies the total number of life insurance companies operating in India rose to 21. Gross domestic savings as per cent of GDP at current market prices increased from 34.3 per cent in 2005-06 to 34.8 per cent in 2006-07 contributed mainly by increase in the savings of private corporate sector and the public sector. The gross domestic capital formation rate at the economy level increased from 35.5 per cent in 2005-06 to 35.9 per cent in 2006-07. The saving preference of the households had slightly shifted away from the bank deposits in 200708 from that of 2006-07. According to the preliminary estimates released by RBI on household financial savings for 2007-08, insurance funds constituted 17.5 per cent of the total gross financial savings of the households in 2007-08. This has resulted in an increase in the share of insurance funds in the total household savings. A similar increase was observed in mutual funds also. The above shift in the preferences towards insurance sector was mainly on account of the households preferring to invest in Unit Linked Insurance Products (ULIPs) of life insurers in the back ground of bullish stock market as the returns of a part of ULIPs depend on the behaviour of the stock market. A similar observation can be made about the investments in mutual funds. It may be noted that during 2007-08, the BSE Sensex has shown abnormally high levels and the gains were across

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The role of Insurance in savings mobilisation a case for Indian Economy

During 2007-08 many policies regarding broadening and deepening of the financial markets, capital markets and bond markets were undertaken by the respective regulators. The Government on its part has helped in this process by allowing changes in the legal framework. The policies undertaken in the financial markets will help the insurance companies in managing their assets in a prudent and profitable way. Insurance companies are now allowed to access the negotiated dealing system - order matching using the constituents' subsidiary general ledger route. This will help the insurance companies in participating in the negotiated dealing system for parking their excess funds. The SEBI has undertaken many initiatives in making the operations of mutual funds more transparent and investor friendly. The SEBI mandates FIIs to provide AAA rated foreign government securities as collaterals for margins against transactions in the derivatives segment.

4.3 Insurance Companies Performance


There are two broad indicators of the performance of the insurance industry, viz., penetration ratio and insurance density. These ratios for India vis-a-vis select emerging market economies indicate that in terms of both the indicators, India's relative international position for life insurance industry is stronger compared to non-life insurance industry. Insurance penetration or premium volume as a ratio of GDP, for the year 2007 stood at 4.00 per cent for life insurance and 0.60 per cent for non-life insurance. The level of penetration, particularly in life insurance, tends to rise as income levels increase. India, with its huge middle class households, has exhibited growth potential for the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance market in India has witnessed dynamic changes including entry of a number of global insurers in both life and non-life segment.

Most of the private insurance companies are joint ventures with recognized foreign players across the globe. Over the last eight years, consumer awareness has improved. Competition has brought more product innovation and better customer servicing. This made a positive impact on the economy in income generation and creating employment opportunities in this sector.

I) Life Insurance
The total capital of the life insurers at end March 2008 stood at Rs.12296.42 crore. The additional capital brought in by the existing private insurers during 2007-08 was Rs.3787.01 crore and the two new entrants, brought in equity of Rs.38 crore making the total additional capital brought in 2007-08 by the private insurers to Rs. 4172.01 crore. Of this, the domestic and the foreign joint venture partners added Rs.3160.12 crore and Rs.1011.88 crore

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The role of Insurance in savings mobilisation a case for Indian Economy

respectively. There has been no infusion of capital in the case of LIC which stood at Rs.5 crore.

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The role of Insurance in savings mobilisation a case for Indian Economy The role of Insurance in savings mobilisation a case for Indian Economy 4.4

Innovations in products
Growth in insurance industry has been spurred by product innovation, vibrant distribution channels coupled with targeted publicity and promotional campaigns by the insurers. Innovations have come not only in the form of benefits attached to the products, but also in the delivery mechanism through various marketing tie-ups both within the realm of financial services and outside. All these efforts have brought life insurance closer to the customer as well as made it more relevant. The insurance companies are increasingly tapping the semiurban and rural areas to take across the message of protection of life through insurance cover. The insurers have also introduced special products aimed at the rural markets.

The design of ULIP products addresses and overcomes several concerns that customers have had in the past like liquidity, flexibility and transparency. ULIPs are structured products and give choices to the policyholder. The Authority prescribed guidelines for Unit Linked products, stipulating minimum risk to be covered, minimum period of premium payment and several other requirements including NAV computation. With ULIP guidelines in place, there has been an enhanced transparency on the charges involved and associated risks. Fund-wise Net Asset Values (NAVs) and portfolio allocations are disclosed on a regular basis. One of the most significant outcomes of the enhanced competition has been the reduction in the rates for pure protection plans. Over the last seven years, the rates have been revised downwards, and are significantly lower than those prevailing prior to opening up of the sector. The life insurance market has become competitive benefiting the policyholders.

Simultaneously, insurance industry has been evolving and improving its underwriting and risk management abilities. The reduction of term rates has facilitated increase in the level of sum assured for policies. This higher level of protection implies that customers are more conscious of the need for risk mitigation, greater security, and about the future of their dependents. However, given the level of sum assured in the developed countries and other emerging economies, there is further scope to tap the need for additional cover even amongst the insured population.

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The role of Insurance in savings mobilisation a case for Indian Economy

Life insurance companies have also been quick to recognize the larger need for structured retirement plans and have leveraged their abilities for long-term fund management towards building this segment. Pension is recognized as a necessity and presents an opportunity for growth in the country, and forms a significant part of portfolio of life insurers. More recently, private life insurers with their expertise in long-term mortality and morbidity introduced annuities. The growth in group insurance business has also been impressive. The superannuation and gratuity business has grown on the strength of professional fund-management and a host of value-added services. Given such scope for innovations, the life insurance sector in India is expected to maintain the growth momentum of new premium in future.

New Policies
New policies underwritten by the industry were 508.74 lakh in 2007-08 as against 461.52 lakh during 2006-07 showing an increase of 10.23 per cent. While the private insurers exhibited a growth of 67.40 per cent, (previous year 104.64 per cent), LIC showed a decline of 1.61 per cent as against a growth of 21.01 per cent in 2006-07 The market shares of private insurers and LIC, in terms of number of policies underwritten, were 26.07 per cent and 73.93 per cent as against 17.17 per cent and 82.83 per cent respectively in 2006-07.

Premium
Life insurance industry recorded a premium income of Rs.201351.41 crore during 2007-08 as against Rs.156075.85 crore in the previous financial year, recording a growth of 29.01 per cent. Regular premium, single premium and renewal premium in 2007-08 were Rs.54888.16 crore (27.26 per cent); Rs.38824.36 crore (19.28 per cent); and Rs.107638.89 crore (53.46 per cent), respectively. It may be recalled that in 200001, when the industry was opened up, the life insurance premium was Rs.34,898.48 crore which comprised of Rs.6966.95 crore (19.96 per cent) of regular premium, Rs.2740.45 crore (7.86 per cent) of single premium and Rs.25191.07 crore (72.18 per cent) of renewal premium.

The first year premium (comprising of single premium and regular premium) amounted to Rs.93712.52 in 2007-08 as against Rs.75649.21 crore in 2006-07 recording a growth of 23.88 per cent as against a growth of 94.96 per cent in 200607. The first year premium growth in

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The role of Insurance in savings mobilisation a case for Indian Economy

2007-08 over a higher growth in 2006-07 has been on account of continued popularity of unit linked products. It is observed that

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The role of Insurance in savings mobilisation a case for Indian Economy

LIC too has shifted its marketing strategy in favour of unit linked products since 2006-07 though LIC's performance has slowed down in 2007- 08. While at the industry level, there has been a growth because of slow down in the premium underwritten by LIC the growth levels in 2007-08 were lower than 2006-07. LIC reported growth of 24.17 per cent in single premium individual policies and decline of 6.48 per cent in non-single premium individual policies. LIC reported a growth of 9.11 per cent in Group Single Premium. As against these, private insurance companies reported growth of 39.45 per cent and 69.93 per cent in individual single and non-single policies respectively

4. 5 TRENDS IN LIFE INSURANCE BUSINESSUNIT LINKED INSURANCE PLANS.


It wasn't too long back when the good old endowment plan was the preferred way to insure oneself against an eventuality and to set aside some savings to meet one's financial objectives. The traditional endowment policies were investing funds mainly in fixed interest Government securities and other safe investments to ensure the safety of capital. Thus the traditional emphasis was always on security of capital rather than yield. However, with the inflationary trend witnessed all over the world, it was observed that savings through life insurance were becoming unattractive and not meeting the aspirations of the policyholders.

The policyholder found that the sum assured guaranteed on maturity had really depreciated in real value because of the depreciation in the value of money. The investor was no longer content with the so called security of capital provided under a policy of life insurance and started showing a preference for higher rate of return on his investments as also for capital appreciation. It was, therefore found necessary for the insurance companies to think of a method whereby the expectation of the policyholders could be satisfied. The object was to provide a hedge against the inflation through a contract of insurance. Decline of assured return endowment plans and opening of the insurance sector saw the advent of ULIPs on the domestic insurance horizon. Today, the Indian life insurance market is riding high on the unit linked insurance plans.

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The role of Insurance in savings mobilisation a case for Indian Economy

ULIPs and its features


Unit linked insurance plans (ULIPs) are insurance plans that combine the benefit of investment with insurance. They give the investor an option to put a part of their premium in various investment portfolios and derive the benefits depending upon the performance of the funds chosen by them. ULIPs were launched at an opportune time when stock markets had just taken off. Being market- linked, they were major beneficiaries of the secular rise in stock markets. ULIPs have gained high acceptance due to the attractive features they offer. These include: 1 . Flexibility

1. Flexibility to choose Sum Assured. 2. Flexibility to choose premium amount. 3. Option to change level of Premium even after the plan has started (Top up facility). 4. Flexibility to change asset allocation by switching between funds. 2. Transparency 1. Changes in the plan & net amount invested are known to the customer. 2. Convenience of tracking one's investment performance on a daily basis.

3.

Liquidity 1. Option to withdraw money after few years (comfort required in case of exigency). 2. Low minimum tenure. 3. Partial / Systematic withdrawal allowed

4.

Fund Options 1. A choice of funds (ranging from equity, debt, cash or a combination). 2. Option to choose fund mix based on desired asset allocation.

Issuance of comprehensive ULIP guidelines in 2005 which mandate minimum risk cover, three year lock-in, usage of simple language, proper disclosures, standard method of computing NAV etc Insurers to make projections of return as per the guidelines of Life Insurance Council.

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The role of Insurance in savings mobilisation a case for Indian Economy

To ensure transparency, IRDA has directed the insurers to list all charges that the policyholder has to bear along with the amount available for investment in each year specific to each policy. IRDA has also stipulated that policyholders would have to sign a document stating that they have understood the terms and conditions of the policy before concluding the sale. The customer can also use 15 days free look period in case he is not satisfied with the terms and conditions of the policy.

To remove complexity in unit linked products IRDA has advised the insurers to phase out some of the actuarially funded ULIPs. Worldwide, Unit linked products have been seen as attractive- in view of the flexibility and investment options they offer to the customers and the capital efficiency to the companies.

After the market crash of 2001, customers started looking for more security and guarantees in the unit linked products. Adding guarantees to unit linked products has been common in Europe, North America and Japan. The unit linked market though new in Asia is growing steadily in countries like Korea, Taiwan and South East Asia. Variable Annuity products are slowly emerging in these markets and from the customer point of view are quite attractive, especially when they provide guarantees on pension savings.

In India, the long-standing debate over the suitability of Unit Linked Insurance Plan (ULIP) and mutual funds can be resolved better with a proper understanding of the need of the investor. Mutual funds are essentially short to medium term products. ULIPs, in contrast, are positioned as long-term products with an element of life cover. It is pertinent to note that exposure of Indian households to capital markets is limited. It is important for an investor to understand his financial goals and horizon of investment in order to make an informed investment decision. The size of life insurance market increased on the strength of growth in the economy and concomitant increase in per capita income. This resulted in favourable growth in total premium for both LIC (17.19 per cent) and private insurers (82.50 per cent) in 2007-08. Private insurers have improved their market share from 18.10 per cent in 2006-07 to 25.61 per cent in 2007-08 in the total premium collected during the year. Segregation of the first year premium underwritten during 2007- 08 indicates that Life, Annuity, Pension and Health contributed 59.54; 2.75; 37.61 and 0.10 per cent to the premium underwritten, as against 67.40; 2.62; 29.94 and 0.04 per cent respectively in the previous year. The shift in favour of pension products is visible for the third consecutive year.

Increase in the renewal premium is a good measure of the quality of business underwritten by the insurers. It reflects increase in persistency ratio and enables insurers to bring down the

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overall cost of doing business. The renewal premium underwritten by the life insurance industry, during 2007-08 grew by 33.83 per cent as against 19.87 per cent in 2006-07. Private insurers and LIC reported growth rates of 102.16 per cent and 25.41 per cent respectively during the year under review.

4.6 Reforms in the Insurance Sector


Insurance business remained within the confines of public sector until the late-1990s. Subsequent to the passage of the Insurance Regulation and Development (IRDA) Act in 1999, several changes were initiated, including allowing newer players/joint ventures to undertake insurance business on risk-sharing/commission basis. Liberalisation of entry norms in insurance segment has brought about a sea change in product composition. It has been argued that while in the past, tax incentive was the major driving force of the insurance industry, particularly life insurance industry, in the emerging situation the normal driving force of an insurance industry are taking important roles (IRDA, 2002).

Driven by competitive forces and also the emerging socio-economic changes including increased wealth, education and awareness about insurance products have resulted in introduction of various novel products in the Indian market. Along with the changing product profile, there have also been salutary improvements in consumer service in recent years, driven largely by the impact of new technology usage, better technical know-how consequent upon foreign collaboration and focused product targeting, dovetailed to specific segments of the populace as well as cross-selling of products through bancassurance. Insurance companies are also taking active steps to venture into innovative distribution channels for their products over and above creating strong agency network.

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The role of Insurance in savings mobilisation a case for Indian Economy

Conclusions and recommendations

An increase in the disposable income of Indians has led to an upswing in the lifestyle of people. A growing need for insurance has also been observed, as more families are still dependent on only one earning member.

Life insurance - term plans, provide the simplest and cheapest form of risk cover, and savings based plans, where one can expect returns after a period. The numbers of savings based plans have recently been on the increase. People are viewing insurance as an investment instrument; like market-based Unit Linked Insurance Plans (ULIP) as equivalent to another Mutual Fund.

However, consumers need to keep in mind that most of these plans are beneficial (both riskcover as well as returns wise) only in the long term, though most insurance agents push them as only a 'three-year' investment. Incidentally, neither ULIPs nor Mutual Funds 'guarantee' returns. An ideal way of insuring would be to buy simple term plans for life risk cover and diversified investment of the rest of the savings in other instruments like mutual funds, public provident funds, and bank deposits.

The Insurance Industry is in the nascent stage but definitely there is a strong interest developing towards it, as the industry has started performing better than ever before. The entry of private sector insurance companies in April 2000 has changed the dimensions of the industry in a very positive way. The aggressive competition among companies has made insurance continuously evolve new options to suit investors needs. The insurance industry will form an integral part of every investor's portfolio. Due to the restructuring of the insurance industry its golden era has started and will last for decades to come. Indian insurance sector is likely to register unprecedented growth of attain a size of Rs. 2000 billion ($51.2 billion) by 2009-10, in which a private sector insurance business will achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by them against 35-40% growth rate of state owned insurance companies. The aforesaid are predictions of many industry analysts on Insurance, saying that in the last couple of years, the insurance sector has grown by Compound Annual Growth Rate of around 175% and the trend will emerge still better because of potential factor. Currently, the insurance sector size is estimated at Rs.500 billion ($12.8 billion). On account of intense marketing strategies adopted by private insurance players, the market share of state owned insurance companies like GIC, LIC and others have come down to 70% in last 4-5 years from over 97%.

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The role of Insurance in savings mobilisation a case for Indian Economy

The private insurance players despite the sector's stiff regulation has been offering rate of return (RoR) to its policy holders which is estimated at about 35% as against 20% of domestic insurance companies. This factor is mainly responsible for hike in private insurance market share which will grow further which is why the analysts estimate that its growth rate could even exceed 140%. Secondly, the state owned insurance companies such as LIC and GIC have limited number of policies to offer to their subscribers while in case of private insurance companies, their policy numbers are many more and the premium amount as well as the maturity period is much competitive as against those of government insurance companies. Interestingly, the private sector insurance players have started exploring the rural markets in which until recently, the state owned companies had the monopoly.

It is projected that in rural markets, the share of private insurance players would increase substantially as these have been able to generate a faith among their rural consumers. Estimating the potential of the Indian insurance market from the perspective of macroeconomic variables such as the ratio of premium to GDP, reveals that India's life insurance premium, as a percentage of GDP is 1.8% against 5.2% in the US, 6.5% in the UK or 8% in South Korea.

The findings further reveal that in the coming years, the corporate segment, as a whole will not be a big growth area for insurance companies. This is because penetration is already good and companies receive good services. In both volumes and profitability therefore, the scope for expansion is modest. The study suggests that insurer's strategy should be to stimulate demand in areas that are currently not served at all. Insurance companies mostly focus on manufacturing sector; however, the services sector is taking a large and growing share of India's GDP. This offers

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The role of Insurance in savings mobilisation a case for Indian Economy The role of Insurance in savings mobilisation a case for Indian Economy immense opportunities for expansion opportunities.

To understand the prospects for insurance companies in rural India, it is very important to understand the requirements of India's villagers, their daily lives, their peculiar needs and their occupational structures. There are farmers, craftsmen, milkmen, weavers, casual laborers, construction workers and shopkeepers and so on. More often than not, they are into more than one profession. The rural market offers tremendous growth opportunities for insurance companies and insurers should develop viable and cost-effective distribution channels; build consumer awareness and confidence. This research found that there are a total 124 million rural households. Nearly 20% of all farmers in rural India own a Kissan Credit cards. The 25 million credit cards used till date offer a huge data base and opportunity for insurance companies. An extensive rural agent network for sale of insurance products could be established. The agent can play a major role in creating awareness, motivating purchase and rendering insurance services. The rural areas of the country have a lot of potential for the insurance sector.

It is estimated that Indian insurance companies can add about Rs. 10 billion ($250 million) to their net worth from nearly 200 million rural folk, provided these come out with innovative schemes at an affordable premium price. Suggesting insurance companies can lure rural investors, even for agriculture, housing, personal, education and auto loans. Till date, rural folk prefer post offices and commercial banks for their saving purpose, but they are looking for other safer savings channels for higher returns on their investments and insurance companies could provide a better option for them. Over 700 million rural people live in India's villages out of which approx. 200 million of the rural populace have reasonable per capita income due to their double income from agriculture and non-agriculture sources. Currently, only 8-10% rural households are covered under life insurance schemes and the remaining 90% can be targeted for new innovative insurance schemes

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