Globalisation & Liberalisation

GLOBALISATION AND LIFE INSURANCE
Dr. H. Sadhak
Director, Management Development Center Life Insurance Corporation of India

A. Globalisation & Liberalisation
Globalisation, according to Penguin Dictionary of Economics, “Stresses the geographical dispersion of industrial and service activities (for example research and development, sourcing of inputs, production, distribution) and the cross boarder networking of companies (for example through joint ventures and the sharing of assets”. According to Herman E Daly, Globalisation serves the vision of a single, cosmopolitan, integrated global economy. This definition focuses on the cross border movement of goods, services and resources (financial and human) impacting on the domestic and global assets and employment. Globalisation, thus focuses on an integrated economic world in which the economy is a single market characterised by trade and investment flows, cross border economic activities in production, investment financing, movement of capital, technology, labour, internationalisation of consumption, capital, and services. Economic liberalisation is the gateway of globalisation and financial liberation plays the most crucial role in integration of one country’s economy on the global economic network. However, very often the term liberalisation and globalisation are used simultaneously. Important instruments of liberalisation are regulation of financial market to allow foreign capital, foreign investment, to and fro flow of capital etc. reduction of tariff and non-tariff barriers of trade, simplifications of customs measures etc. For successful global integration a country must move to economic liberalization by dismantling entry barriers and Licensing system, reduction in physical restrictions on imports, reduction in control on capital and current account, reforming financial system and opening up financial market to private (domestic and foreign) players, removing controls on foreign capital (FD and portfolio) flow to the country etc. Globalisation however, is not a new phenomena of the current world activities. Economic historians have traced two strong waves of globalization. The first wave of globalization spread over 1870 – 1914 while the second wave of globalization began roughly in 1960 and continuing. The current wave of globalization is much faster and deeper. Globalization today is fundamentally a new economic phenomenon, and a process to set up a new economic order globally increased integration and interdependence of production, consumption and services. The present wave of

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globalisation has significantly influenced improved specialisation in resource allocation, productivity enhancement and specialisation and greater innovation, adaptability and utilisation of technology which has necessitated the need for cross border economic activity for all the countries. Resource mobility has not only reduced the cost of production and distribution but also boosted competition across the border.

Drivers of Globalisation
The present wave of globalisation has been significantly influenced by advances in information and computer technology, increased flow of trade and capital. improved specialisation in resource allocation, productivity enhancement and specialisation and greater innovation, adaptability and utilisation of technology which has necessitated the need for cross border economic activity for all the countries. These have not only reduced the cost of production and distribution but also boosted competition across the border. Therefore important drivers of globalisation are expansion of International Trade, Internationalisation of Financial Market and Migration, Baldwin and Martin (1999) observed key aspects of globalization namely Trade, investment, migration and Factor prices , Capital flows and Markets, and Industrialization and Income Convergence and Divergence. Both waves of globalization were driven by radical reduction in technical and policy barriers to international transactions….but the uniqueness in recent globalization is heavily shaped by the dramatic reduction in communications cost, what is sometimes referred to as ‘the death of distance’.

Financial Globalisation
Advancement in information technology, innovation in financial products, and increase in trade and services provided boost to the cross border flow of capital. Capital Mobility is considered as an indicator of financial integration. Other indicator being gross stocks of foreign assets and liabilities. We shall discuss this in detail the section Financial Globalisation The process of Globalisation is strongly supported by Financial Globalisation. There is an inextricable relation between increased international trade in goods and services and the increased flow of international capital. It is because increased trade is followed by increase in payments, banking service, hedging etc. Stock markets, as we have noted in the beginning, has replaced the role of Banking to a great extent as a financier to corporate and development funds. Stock markets, in a globally integrated financial market facilitate risk sharing, improve efficiency of resource allocation, impact savings decisions and provide liquidity thus supporting faster economic growth. Globally integrated stock markets facilitates economic growth in several ways namely :

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• • • •

Improve much needed liquidity in the market Provide prudent resource allocation prospects Create an environment for flow of savings thus reducing uncertainty of capital in the market Reduce risks through global diversification

Liberalised and internationally integrated stock markets thus boost economic growth.

Benefits of Financial Globalisation
Liberalisation and globalisation produces immense benefits to the countries integrated. Liberalisation creates conducive climate for faster economic growth, allows upgradation of technology, provides scale economy, expansion of markets domestically and internationally. Economic integration through liberalisation can also expand job opportunities in domestic market and through migration of labour in general. Financial Globalisation produces higher economic growth through direct and indirect impact on economy . Liberalisation and globalisation produce immense benefits to the countries integrated. Liberalisation creates conducive climate for faster economic growth, allows upgradation of technology, provides scale economy, expansion of markets domestically and internationally. Economic integration through liberalisation can also expand job opportunities in domestic market and through migration of labour in general. However, liberalisation of financial markets provides growth generating opportunities including the following. By encouraging FDI, developing economies can import much needed technology, which would further generate spillovers for local firms. Saggi (2002) mentioned three types of potential channels of spillovers, namely Demonstration Effect, (local firms adopting multinational introduced technologies), labour turnover switchover of trained labours to local firms (enabling technology diffusion) and vertical linkages (multinationals supplying technology to suppliers of intermediate goods). Global Financial integration augment much required domestic saving and boost up capital investment in investment starved countries. It also provides avenues for better allocation of capital and minimizes risk. Further, capital flow is accompanied by transfer of technology and finally assists in promoting healthy capital market. Indirect influences of globalisation include promotion of globalization and integration of domestic economies which is followed by improving the macro economic policy frame work and setting up economic institutions and better governance system. Financial Liberalisation has forced many countries to open up financial markets and relaxed the rules of intermediation allowing financial services institutions like investment

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banks, asset management companies, Mutual Funds, Pension Funds etc., to operate in newly liberalised markets. The forces of change unleashed by financial globalization, reflected in disintermediation of banking system, increase in cross border financial activity increased competition in savings market convergence in financial services industry.

B. Globalisation of Insurance Market
Insurance is an integral part of national economy and a strong pillar of financial market. Therefore, waves of globalisation have also deeply influenced the insurance market worldwide. Financial Market Globalisation has also been strongly supported by Globalisation of Insurance. With the increase in Trade, Direct Investment and Portfolio Investment, there has been an ever growing demand for Insurance services particularly in the emerging markets. Globalisation of Insurance market, as a part of the overall process of liberalization in emerging and other countries enabled the foreign insurance companies to enter in those countries and benefited both. The driving forces of insurance market globalization has been identified by Swiss Re (Sigma No.4/2000) as the ‘push factors’ and ‘Pull Factors’. The Push factors are the motives behind the movement of foreign insurance companies while the pull factors are the motives behind allowing the foreign companies to operate in local market, I) Push factors : Insurance Companies move out to emerging markets due to Increasing Global Trade , Growing Direct Investment , Potential Future Growth in Emerging Markets , Saturation in industrialized countries and Strong growth in emerging countries and expected Efficiency Gains through Diversification , Economics of scale etc ii) Pull Factors : The important pull factors in emerging markets - Emerging Markets have Strong Economic growth and Trade, and there are substantial requirements of capital in Emerging Markets to cover major risks. There are several benefits to the countries allowing foreign insurance companies to operate in their countries which can be broadly classified into Economy related, and Insurance marked related

Economy related benefits to the local country :
Foreign insurance companies along with local companies add further momentum to mobilization of savings. Institutional net work in the savings market increases, which also influence the savings behaviour of household and corporate savings. Resources and capital allocation in the Domestic Market increases with the increased sophistication brought by the foreign insurance companies It also improves the financial stability in the host country, as well as facilitates improvement in production and Trade.

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Insurance market related benefits :
Capital structure of entire insurance industry improves because foreign companies brings fresh capital with them. Market efficiency improves due to information dissemination, global operating knowledge and increased competition. Management efficiency increases because foreign companies bring with them global experience and management innovation. Range of available products increases because foreign companies bring with them a wide range of products and product development expertise. Customers’ service improves. Increased competition, technology led service, and cost competition finally benefits the consumers. Globalisation also improves Regulatory and Governance system. It also improves market conduct and Ethical Business Standard. Jennifer Rankin (2003) mentions the following factors driving the insurance companies’ cross border activity. Many countries are moving away from protectionism and state control and taking more market driven approach especially in the insurance and financial services and opening up their markets to foreign companies. The process of Insurance globalisation significantly influenced by the GATTS/WTO. A major break through was achieved in 1997 with an agreement of Liberalisation of financial services following which 102 countries committed to remove entry barriers and liberalise their markets. The GATTS agreement offers legal security and protection to global insurance players. With the removal of entry barriers in emerging and less developed countries there has been an increased flow of funds from developed countries to the emerging and less developed countries. According to Swiss Re (Sigma No.4/2000) “In recent years there has been a strong increase in the demand for insurance in the emerging markets. The average annual growth rate in the emerging markets has since 1990 been twice as high as industrial countries in both life and non-life insurance. There is already an indication of slow growth and saturation of insurance market in industrially developed countries. During 2003, Global Life business witnessed a decline of -0.8%. However, emerging market life business grew by 6.6% as against -1.7% decline in industrialised countries. In non life business, while industrialised countries achieved 5.7% growth in real premium income, emerging markets registered 8.5% growth rate in 2003. However, total premium income of emerging market in 2003, was US $ 314128 million which represented 10.68% global premium income, whereas share of industrialised countries with US $ 2626542 million representing 89.32% of global premium. This is an indication of huge potential emerging market. Globalisation of Financial as well as Life Insurance Market is an inevitable phenomena. In the years to come the globalisation of Insurance Market is going to speedup further. The impact of globalisation will also be felt more in emerging markets which have exhibited better potential for growth in insurance market. Data provided in Table No. 1 and Table No. 2 shows that countries which have extensively opened up the Insurance

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Market to the Private and Foreign Companies have achieved relatively better growth in insurance density and penetration. It has also been noted in India that growth of Insurance Market was faster in the post liberalisation period than that in pre-liberalisation period. However, One of the constraints of Insurance Globalisation is a small number of global players as noted by UNEP (2002). The private insurance industry is largely a national industry rather than a global one. The number of truly global insurance players is in the range of 20 to 30 only. Another 70 companies operate significantly in more than one continent through branches. Only 1.2% of global insurance premium comes from across border business.

C. Impact of Liberalisation on Economic growth
Research of Borensztein and others (1998) shows that FDI contributes more domestic growth than domestic investment. And also FDI is more productive than domestic investment. Liberalisation of capital markets attracts foreign investment which influences the price of equity thereby reducing the cost of capital. Research of Bekaert and Harvey (2000) indicated that post liberalised regulatory reforms bring down the cost of capital and also help to increase inflow of capital. Financial liberalisation also imparts structural formats of capital markets, improves the disclosures, transparency and corporate governance which creates growth prospects in a liberalised country. It has been noted that the average per capita income is higher in the countries with more open economic policies and better global linkages, than in the countries with less openness in financial sector. Globalisation has helped promote convergence of per capita incomes. Per capita incomes have grown faster in globalizing developing countries (those lowering trade barriers) than in rich countries – 5 per cent versus 2.2 per cent in 1990s…….non globalizing Developing countries have lagged behind. (Finance and Development, March 2002., P8). O’Rourke (2002) has observed that “the trend of rising inequality over the past 200 years, primarily between countries, now appears to have been reversed, and the experience of the 19th century suggests that increased globalisation will accelerate this decline. Prasad et al (2003) has noted that ‘International Financial Integration can help to promote domestic financial sector development, which in turn can help to moderate macro economic volatility. However, thus far these benefits of financial integration appear to have accrued primarily to industrialised countries.

D.

Growth of Life Insurance in India

Indian Life Insurance Industry, since nationalization, has registered a significant growth and gradually increased its share in household financial savings. As noted in table 4, the Share of Insurance Funds has increased from 8.7% in 1993-94 to 14.9% in 2003-04, while the share of life insurance funds increased from 8% to 14.5% during the same

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period and in terms of GDP it has increased from 1.1% to 2.2%. This is a significant achievement of Life Insurance Industry which till recently represented by LIC of India. Growth in Life Fund is considered to be an important indicator of growth of Life Insurance Industry and as can be seen from the Table 4, LIC has performed exceedingly well. LIC, after nationalization of 256 Life Insurance Companies, started with a Life Fund of Rs.410.40 crore, which in course of time increased rapidly and stood at Rs.3,21,754 crore in 2004. Similarly, the total assets of LIC has increased from Rs.463 crore in 1958 to Rs.3,67,360 crore in 2004. High growth of Life Fund and Assets of LIC was possible due to significant growth in New Business, which got a boost during the Post Liberalisation period. First time in 1999, LIC sold more than one crore (1.48 core) policies in a single year, however, growth became faster during the post liberalized period and in 2002 it crossed the 2 crore mark by selling 2.25 crore policy, which increased further to 2.42 crore in 2003. In 2004, New Business (SA) had gone up Rs 2,02,898.14 crore under 2,69,63,504 policies. Total in force policies serviced by LIC by the end of 2004, stood at 15.39 crore under Sum Assured of Rs.9,25,033.33 crore. Liberalisation of Indian Insurance market has provided further push of the Insurance Industry. By the end of March, 2004, there were 13 Life Insurance companies including LIC in the market, which has not only generated competition but also provided a wide range of product choice to the customers. An overall view of Indian Life Insurance market can be obtained through data released by IRDA, shown in the Table 6 and Table 7. Accordingly total no. of policies underwritten in 2004 increased by, 12.78% from 2,53,82,690 in 2002-03 to 2,86,26,915 in 2003-04, while the premium under these policies increased by 51.80%, from Rs.12,32,483.37 lakhs to 18,71,016.02 lakhs during the same period. So far LIC is concerned, there is a fall in market share in New Business. In No. of Policies the market share declined from 96.70% to 94.21% while in premium income the market share of LIC declined from 92.03% to 87.04% during the same period. These indicate that Indian Life Insurance in general has expanded since liberalization on the one hand and market has been increasingly becoming competitive.

E. India in the International Context
Though the share of Life Fund in household Financial Assets has gone up during the last decade and Indian Life Insurance Industry registered better growth rate compared with global growth rate yet total premium volume and global market share remained quite low. Total premium volume of Life Insurance Industry in the World at 9% growth rate increased from US $ 15,34,061 in 2002 to US $ 16,72,514 in 2003, whereas in India

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growth rate was much higher at 18% and Total Premium volume increased from US $ 11515 to US $ 13590 during the same period. Insurance Density (premium per capita) and Insurance Penetration (premium in percentage of GDP) which are important growth indicators are quite low in India. In the year 2003, Life Insurance Density in India was only US $ 12.9 as against the World Density of US $ 267.1. Similarly, Life Insurance Penetration in India was only 2.2% as against World Penetration level of 4.59%. It has been observed that many of the smaller countries like Bahamas, Honking & South Africa etc achieved better growth rate in Life Insurance Density and penetration. Bahamas, a country with 0.3 million population and US $56 billion GDP registered a Density of US $ 699.5 and Penetration of 4.38%. Further Australia and Switzerland have achieved high level of Density and Penetration. Insurance Density in Switzerland was US $ 3431.8 which was highest in the world. It was even better than USA (US $1657.5) with highest level of GDP in the World followed by Japan (US$ 3002.9) and UK (US $ 2617.7). Similarly Life Insurance penetration in Australia at 12.96% was the highest in the World followed by UK (8.62%), Japan (8.28%) and Taiwan (8.28%).

F. Managing in the face of Globalisation
India has been successfully able to come out of Hindu Growth Rate, thanks to the Vision & Mission of the present leadership who has embarked upon Liberalisation and new growth strategy, providing regenerated momentum to world economy clearing the pat of flow of savings and capital to Indian Market. The primary challenge before Indian Life and Non-life Insurance Industry is to improve penetration level within a five years time frame at least up to world level, if not to the level of countries with equal growth rate. Now, it is the responsibility of Indian Insurance companies to mobilise funds from the savings market through their marketing initiatives and performance.. Challenges are many and therefore concerted efforts are required to increase the coverage and penetration level through a wide range of actions in the areas of strategic Business Planning, Product innovation, Management accountability, efficiency in Investment Management, Technology management, HR management, Service Quality Management, improvement in disclosures and Corporate Governance. Continuous innovation in financial services has been creating ever growing demand for new skills to suit the organisational requirements. New knowledge in technology led market place has made obsolete the yesterday’s expertise. There is no room for precedent oriented decision making or purely perception based management. Today’s hard reality demands quantitative decisions based on hard facts and research findings – and that can be delivered by a few, the talented. Thus, the organisation needs to recruit and manage to retain. Talent Management is, therefore, going to be a critical task and

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challenge for the insurance companies. Talent management will require focussing on the structured requirement and long term policy of recruitment and retention. Organisational culture should enable prospective employee as an employment brand where self actualisation is a naturally generated phenomena. Continuous cultural change promotes creativity , connectivity and continuity. However, the most crucial aspect seems to be the quality of Management which is not only actively alive to the explicit and implicit changes in the market, and customers’ expectation but also capable to implement new thoughts, new ideas and new strategies through a band of committed creative Managers. In this format of dynamic management practices the critical factors are Management Contribution and Accountability. Life Insurance Industry has moved from staff monopoly to competitive market place, where Management must be Market Driving instead of Marketing Driven.

Reference:
Bekaert G, C.R.Harvey (2000) ‘Foreign Speculator and Emerging Equity Markets’ Journal of Finance 55. Saggi Kamal (2002) ‘Trade, Foreign Direct Investment, and International Technology Transfer’ : A Survey in World Bank Research Observer Vol.17 No.2 Fall 2002. Borensztein L, J.D.Gregomio and J.W.Lee (1998) ‘How does foreign Direct Investment Affect Economic Growth ?’ Journal of International Economics 45. Demirgiic Kunt, Asli and Ross Levine (1996) ‘Stock Markets Corporate Finance, and Economic Growth : An Overview’ The Workd Economic Review, Vol.10, May 1996, Number 2. Jennifer C Rankin ‘Should you go global ? http://www.loma.org/res-10-03-global.asp Prasad, Eswar, Kenneth Rogoff, Shang – Jin Wel, M Ayhan Kose (2003). ‘Effects of Financial Globalisation on Developing Countries – some Empirical Evidence’ in Economic and Political Weekly, October 11-17, 2003. O.Rourke, Kevintt (2002) ‘Globalisation and Inequality’: Historical Trends’ in Annual World Bank Conference on Development Economics 2001/2002, World Bank 2002.

Table 1: EMERGING INSURANCE MARKET : SOME FACTS
ASIA PopuGDP Premium % Market Density Penetration

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lation Asia South Korea 47.9 China 1292.6 Taiwan 22.5 India 1049.7 Honking 6.9 Singapore 4.3 Malaysia 24.6 Thailand 63.2 Indonesia 214.4 Philippines 79.8 Vietnam 81.4 Latin America Brazil 176.3 Mexico 102.5 Chile 15.7 Argentina 38.3 Venezuela 25.5 Colombia 44.3 Eastern Europe Russia 143.5 Poland 38.6 Czech 10.2 republic Hungary 9.9 Slovenia 2.0 Slovakia 5.4 Africa South 43.5 Africa Morocco 30.1 Egypt 67.5 Middle east Turkey 67.9 Iran 66.6 Uae 3.0 Saudi 22.8 Arabia Lebanon 4.5 Kuwait 2.2

USD 52.9 1366 292 595 162 92 102 142 209 80 39 492 620 72 129 85 78 441 207 85 84 28 32 158 44 80 242 135 80 215 19 38 41998 32442 23739 13590 10117 5561 3455 3222 1373 702 331 6306 4230 2171 928 65 548 4887 2312 1424 981 344 465 20728 361 179 570 127 188 39 139 80

Change -1.2 31.6 15.2 17.5 20.0 14.1 12.9 17.5 10.4 11.3 115.7 16.6 3.2 8.3 -1.2 7.0 7.4 27.3 9.3 18.9 11.0 13/8 12.0 4.1 7.9 11.5 5.4 17.5 4.1 30.2 11.7 23.1

Share 2.51 1.94 1.42 0.81 0.60 0.33 0.21 0.19 0.08 0.04 0.02 0.38 0.25 0.13 0.06 0.01 0.02 0.29 0.14 0.09 0.06 0.02 0.03 1.24 0.02 0.02 0.03 0.01 0.01 NA 0.01 N.A. 873.6 25.1 1050.1 12.9 1483.9 1300.2 139.8 52.0 6.4 8.6 4.1 35.8 41.3 138.3 24.2 2.5 12.4 33.9 59.9 139.4 99.1 173.6 85.8 476.5 12.0 2.7 8.4 1.7 72.5 1.7 31.0 36.9 6.77 2.30 8.28 2.26 6.38 6.09 3.29 2.25 0.66 0.87 0.87 1.28 0.70 2.61 0.72 0.09 0.70 1.12 1.12 1.72 1.20 1.25 1.38 12.96 2.05 0.22 0.24 0.09 0.26 0.02 0.78 0.23

Note : population in million in 2003 ; GDP – in us $ billion 2003 ; premium in us$ million 2003Change – annual change ( in%) 1998-2003 inflation adjusted. Source : Swiss Re
Table 2 : State and foreign ownership, tariffs and entry barriers
Market share of state owned Market share of foreign owned

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2003 Asia South Korea China

insurers (>50% state owned) Life Nonlife 23% 57% 4% 72%

insurers (>50% foreign-owned) Life Non-life

Entry barriers for foreign insurers

10% 2%

1% 1%

Taiwan India Hong Kong Singapore Malaysia

11% 92% 0% 0% 0%

0% 86% 0% 0% 0%

33% 0% 87% 58% 71%

12% 0% 74% 53% 25%

Thailand Indonesia Philippines Vietnam Latin America Brazil Mexico

0% 10% 0% 44%

16% 10% 0% 94%

41% 48% 61% 56%

7% 25% 29% 6%

None Joint ventures required for entry of foreign life insurers; no restrictions for non-life insurers None Only joint venture with a 26% foreign participation cap is allowed None None Existing foreign investors may hold 51%, new entries by foreign shareholders into local incorporated companies are limited to 30% Foreign ownership limited to a maximum of 25% Foreign ownership limited to a maximum of 80% None Foreign ownership is limited to a maximum of 70% None No branch offices allowed; 100% foreign ownership allowed for NAFTA members (limited to 49% for non-NAFTA members) No branch offices allowed None No branch offices allowed No branch offices allowed Ceiling of 25% of foreign capital in combined charter capital of Russian insurance companies. EU regulation-freedom of establishment/ services directives EU regulation-freedom of establishment/freedom of services directives EU regulation-freedom of establishment/ services directives EU regulation-freedom of establishment services directives EU regulation-freedom of establishment / services directives No branch offices allowed

3% 0%

1% 0%

32% 75%

43% 58%

Chile Argentina Venezuela Colombia Eastern Europe Russia

0% 0% 0% 1% Na

0% 0% 0% 12% Na

62% 53% 39% 38% Na

63% 35% 50% 46% Na

Poland Czech Republic Hungary Slovenia Slovakia Africa South Africa

46% 0%

53% 6%

52% 81%

41% 89%

0% 74% 0%

0% 55% 0%

85% 17% 97%

89% 2% 96%

0%

1%

0%

14%

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Morocco

0%

0%

52%

28%

Egypt Middle East Turkey Iran United Arab Emirates Saudi Arabia Lebanon Kuwait

69%

75%

11%

10%

No branch allowed, foreign ownership limited to a maximum of 80% No branch offices allowed

0% 100% 0%

0% 100 % 0%