1273537 Gunbir Singh Saini, F1, Q22 – In FY12, the life insurance industry witnessed a decline in the first year premium collected which dropped from INR1, 258 billion in FY11 to INR1, 142 billion, a drop of approximately 10%.

Question 2-

v Introduction

Life Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% and recently Cabinet approved a proposal to increase it to 49%. Life Insurance in India was nationalized by incorporating Life Insurance Corporation (LIC) in 1956. All private life insurance companies at that time were taken over by LIC. In 1993, the Government of India appointed RN Malhotra Committee to lay down a road map for privatization of the life insurance sector. While the committee submitted its report in 1994, it took another six years before the enabling legislation was passed in the year 2000, legislation amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development Authority Act of 2000. The same year the newly appointed insurance regulator - Insurance Regulatory and Development Authority IRDA—started issuing licenses to private life insurers.

v Discussion

In FY12, the life insurance industry witnessed a decline in the first year premium collected which dropped from INR1, 258 billion in FY11 to INR1, 142 billion, a drop of approximately 10%. This was owing to the following challenges that the industry faced in:-

Ø Products Strategy and design

At a time when the highest NAV guaranteed ULIP were selling aggressively in the market, the IRDA banned the product in order to keep a tab on life insurers resorting to riskier fund management to conform to their commitment of guaranteed returns. Not only did these products attract an increased premium, but they also offer little protection to policyholders.

Ø Cost

The Insurance Act, 1938, prescribes a ceiling on management expenses, which include administration expenses such as commissions, fund management fees, custodial fees, and expenses on marketing and advertising. The percentage varies from insurer to insurer and primarily depends on the new business premium garnered in a year and the age of the company. According to a recent amendment, this rule is applicable to only those companies that have been The limit on expenses is set to protect the long-term interest of the policy holders and ensure that reckless expenditure by insurance companies might not hurt their companies have accumulated losses running into millions of rupees.

Ø Taxation

The insurance industry is facing challenges with respect to taxation on both the demand and supply side. On one hand, the service tax charged to insurance companies has been increased to 12% from the existing 10% rate on life insurance policies where entire premium is not toward risk covered maintained at 1.5% for subsequent years’ policies at a time when mutual funds are exempt from such tax.

Ø Distribution

The main distribution channels in life insurance are the traditional individual agency channel, corporate agency (banks and others), broking channel and direct selling (which includes online selling). From an industry perspective, it is an agency-dominated business with 90% of the total premium being sourced from the agency channel. This trend is primarily a result of LIC’s agency dominated (at 98% of business) business model. Private sector insurers have a more balanced channel distribution, with agencies contributing 47%, banks contributing 33%, corporate agents 9%, brokers 5% and direct sales 6%.

Ø Compensation

The trend in operating expense ratio of life companies shows a marginal overall decrease. However, the actual cost for LIC has increased by 35% to INR122.45 billion in FY10 from INR90.64 billion in FY09; private companies have managed to slightly reduce costs. Overall the industry’s total expense ratio has also decreased, which when looked at with the growth in premium indicates better cost management and improved productivity.

Ø Prospects and challenges of various channels

Life insurance, being a high involvement product, agency is the strongest channel for most product segments. Individual agents have been the dominant channel in acquiring business; however, their share has fallen from around 88% in FY2005 to 79% in FY11. The IRDA issued stringent licensing guidelines and new persistence norms in order to protect policyholders interests’ in November 2010. This led to high turnover of individual agents and reduction of corporate agents of life insurers who suffered huge financial drain as a lot of money was spent on prospecting, appointing and training of these agents.

Ø Customer servicing

Customer service assumes primary importance in any industry, and insurance is not different. The regulator believes that in order that there is perceptible improvement in customer service, and therefore customer satisfaction. Insurers should identify areas, which are most vulnerable to frequent critical comments, analyze the reasons for such under performance. If the Indian insurance industry is to make rapid strides of progress efficient service delivery to the policyholder in its truest sense is the need of the hour.

Ø Governance and regulatory issues

There are a number of regulatory changes and their likely implications on the growth of the life insurance industry.