Life Insurance sector in India

INTRODUCTION
Life Insurance is a contract between two parties, an insurer and an insured, where the insurer agrees to pay a designated amount upon the death of the insured for a premium.
HISTORY
The history of life insurance industry dates back to year 1818, in which the first Indian Life Insurance company, Oriental Life Insurance Company was started. In 1928, the Government of India enacted the Indian Insurance Companies Act which was later modified in 1938 (Insurance Act, 1938) to protect the interest of the insured and control the activities of the insurer. The Life Insurance of India (LIC) was formed in 1956 by absorbing 245 insurers after the nationalisation of the sector and in year 2000, the sector was opened to private players with foreign investment cap of 26%. The Insurance Regulatory and Development Authority (IRDA), the regulator for the insurance sector was constituted in 1999 by an act known as IRDA Act 1999 following the recommendations of the Malhotra Committee. The objective of IRDA is to ensure the financial security of the market and protect the interests of the policyholders by enhancing customer satisfaction through increased customer choices and lower premiums.
MORTALITY CURVE
Mortality rate is expressed as the number of deaths per 1000 individuals per year for a particular age group. Based on mortality rates, Life Insurance companies decide the number of death claims they are likely to receive in an age group in a year. Insurers use Life Year method, in which lives are observed from one birthday to succeeding birthday, to calculate mortality table.
The figure below shows the mortality curve for year 2006-08.
Mortality Curve

UNDERWRITING OF RISKS
Underwriting is the process of evaluation of risk involved in an insurance proposal and deciding the premium based on the economic, health and social conditions of the customer. In India, the method of underwriting used is the Numerical Rating Method, in which extra premium is charged for extra risk to be covered. The ranges of extra mortality are arrived based on the following factors:
Family Medical History- Longevity of parents and siblings

Personal Medical History- Diseases, accidents and other injuries to the customer

Health- Present ailments of the customer, his height and weight

Occupation- Factors in occupation that enhance risk

Different mortality ratings are assigned to these factors and depending on the total rating, various mortality classes are formed and extra premium is levied for various ranges of extra mortality.
CURRENT SCENARIO
The performance of the insurance industry can be assessed with reference to two parameters, viz, insurance penetration and density. Penetration is defined as ratio of premium underwritten in a year to the GDP whereas density as ratio of premium underwritten in a year to total population.
Over the past two years, the penetration and density in the industry has been sliding owing to adverse economic conditions and increasing regulatory changes as evidenced in the exhibits.

Insurance Penetration (In Per Cent of GDP)

Insurance Density

The profitability of the industry has been increasing as more companies have posted profits over the years as shown below. Profitability of Sector

MAJOR PLAYERS
Based on penetration, the major players in the industry are:
LIC
ICICI-Prudential
HDFC-Standard
SBI-Life
The concentration of the industry can be measured by the Herfindahl-Hirschman Index (HHI). An HHI result of less than 1,000 is considered as a competitive marketplace; a result of 1,000 - 1,800 as a moderately concentrated marketplace; and a result of 1,800 or greater as a highly concentrated marketplace. The HHI value for the industry came out to be 4311.89, much greater than 1800 indicating a highly concentrated marketplace with LIC being the monopoly.
Market share of players in Life Insurance Industry

The below exhibits show the trends in the number of new policies issued, first year premium and total premium for the players in the industry. The decline of first year premium and total premium in 2008 and 2010 is attributed to global crisis and increased regulations.
Number of Individual New Policies Issued (in Lakhs)

First Year Life Insurance Premium (in Cr.)

Total Life Insurance Premium (in Cr)

LIFE INSURANCE PRODUCTS
Some of the different insurance products are:
LIC Jeevan Anand
LIC Amulya Jeevan
ICICI Prudential iProtect Term Plan
Kotak Life’s e-Term Plan
Unit-Linked Insurance Plan (ULIP)
Below is a comparative analysis of three such products for a 25 lakh policy.
Plan
LIC Amulya Jeevan
ICICI iProtect
Kotak e-Term
Annual Premium
7,300
3,350
2,750
Policy
Twice the sum assured paid to nominee in case of accidental death and is obtainable till the age of 70.
Sum assured paid to nominee in case of death but no amount paid if holder survives the policy term.
Online term payments available to increase the life cover. Sum assured paid in lump sum.

ULIP
It is a market linked investment where the policyholders are allocated units at their NAV that is declared on a daily basis. A pool of funds is created and part of the premium is invested in debt and equity. Major players in this field are LIC, SBI Life and Canara.
MAJOR REGULATORY CHANGES
1. IRDA’S LIFE INSURANCE – REINSURANCE REGULATIONS, 2013
In the Life Insurance – Reinsurance Regulations issued in the official gazette in February 2013, the IRDA has mandated life insurance companies to reinsure a percentage of sum assured on each policy with domestic reinsurers. This percentage will be notified by the regulator and will not exceed 30 per cent of the sum assured.
Broadly, the retention limit ranges from INR3 lakhs to INR30 lakhs, based on the age of the insurer / year in which risk is introduced and the type of the product.
The IRDA has also asked insurers to have maximum retention within the country and enter into reinsurance arrangements with only those foreign companies having a minimum credit rating of BBB (with S&P) over the past five years. 2. Investment in private equity& debt funds

IRDA has allowed insurance companies to invest in private equity and debt funds. Insurers are permitted to invest in Category I AIFs which includes infrastructure funds, SME funds, venture capital funds and social venture funds & Category II AIFs (Alternative Investment Funds) which comprises private equity funds and debt funds

IRDA said in Category II, at least 51 per cent of the funds of such AIFs should be invested in infrastructure entities, SME entities, venture capital undertakings or social venture entities. Insurers, however, are not permitted to invest in AIFs that have the nature of funds of funds and leverage funds.

The regulator said the overall exposure to venture funds and AIFs put together should not exceed 3 per cent of the respective fund in the case of a life insurance company and 5 per cent in the case of a general insurance company. Exposure to a single AIF or venture fund should not be more than 10 per cent of the fund size.

3. Amalgamation of life insurance business

The IRDA has released regulations on scheme of amalgamation and transfer of life insurance business. The regulations specify the disclosure and valuation requirements to obtain approval of the regulator for any life insurance mergers or acquisitions.

4. Cap on Commission
IRDA has also capped the maximum commission that can be paid to agents at 15 per cent in the first year, 7.5 per cent in the second year and 5 per cent from the third year onwards

Number of Individual Agents of Life Insurers

Linked Premium of Life Insurers (in Cr)

IRDA has recently made a cap of 3% on the net yield that can be charged from 1st Oct- 2013 onwards. Minimum lock-in period has been revised from 3 to 5 years. Minimum premium paying term has been increased to 5 years. Because of the new regulations, share of ULIPs in the total life insurance has dwindled sharply in the last fiscal. Also agent’s commissions and sundry fees has been curtailed. These factors combined have affected the growth of ULIPs in India.

CHALLENGES

Future Prospects and Recommendations
The Indian life Insurance market is highly polarized even now, with LIC leading by huge margin owing to its special “state owned” status and impecable business model. To fuel the growth of the industry, private players should grow by innovating and adopting a model that is sustainable, considering high operational costs. IRDA should play a critical role in making the market highly efficient, transparent and financially secure in order to change the market structure from being highly monopolistic to competitive.
A few pointers that can play crucial role in future:
1. Technological Prowess (for improving penetration in Urban Market)
2. Distribution Network enhancement (FDI may be the way for Capital for Expansionn and global competitive practices)
3. Greater Financial Inclusion by improving focus on rural and tier-3 cities market (An innovative model with focus on Micro-isurance penetration; Tweaking of Taxation laws may act as catalyst)
Conclusion
Indian Insurance sector has now seen a cycle of high growth followed by period of morderation. In order to ensure that the Industry grows from strength to strength, its necessary to keep the essence of Life Insurance intact. The inevitable realization that Life Inurance market shows the value of a person’s life in that country will have to come at some point of time. We would like to support this argument based on a the findings of a simple linear regression model with the following equation.
No. of Individual New policies issued = a + b*Health Index

R2 of 82.09%, shows that there is a good fit and as more and more people are provided with better health facilities, they are valuing their lives more and hence opting for new policies.