GENERAL INSURANCE
Insurance policy that protects you against losses and damages other than those covered by life insurance. It is provided based on the nature of the business.
v Types
1) Property Insurance - Property insurance indemnifies property owners against the loss or damage of real/personal property caused by various perils such as lightning, fire etc. By law, insurance coverage cannot be more or less than actual value. Property insurance will cover the following damages caused to the insured:
Fire: Indemnifies insured for loss due to destruction of or damage to property or goods, caused by fire. The insurer is liable to make good the actual amount of loss not exceeding the maximum amount fixed under the policy.
Marine: Covers ocean-going vessels and their cargo from loss or damage because of perils of the sea. 'Perils of the sea' refers only to accidents or causalities of the sea, and does not include ordinary action of winds and waves. Besides, maritime perils include, fire, war perils, pirates, seizures and jettison.
Automobile: Its primary use is to provide protection against physical damage resulting from traffic collisions and against liability that could also arise from it. In case of commercial auto insurance, the legal liability of business firms arising out of the ownership or operation of business vehicles is covered.
Machinery: Covers losses due to accidental breakdown of covered equipment. Examples can be steam boilers, air conditioning and refrigeration equipment.
Theft: Generally covers all acts of stealing. There are three major types of insurance contracts for burglary, robbery, and other theft.
2) Liability Insurance
Protects an individual or business from the risk that they may be sued and held legally liable for something such as malpractice, injury or negligence. It covers both legal costs and any legal payouts for which the insured would be responsible if found legally liable. Intentional damage and contractual liabilities are typically not covered in these types of policies.
Ex: Medical malpractice insurance covers physicians and other health-care providers for liability claims arising out of harm or injury to patients.
3) Other forms – Export credit, employees state insurance, guarantee insurance
4) Reinsurance - The practice of insurers transferring portions of risk portfolios to other parties by some form of agreement in order to reduce the likelihood of having to pay a large obligation resulting from an insurance claim.
v AIM: Risk reduction.
v BENEFITS: Apart from increased underwriting capacity, it helps stabilize profits as well as provides for protection against a catastrophic loss.
v ILLUSTRATION – Insurance firm A has written a $10 million life insurance policy on the life of Mr. X. Firm A is concerned that Mr. X death would have a material impact on their profits from the $10 million claim. So, A buys coverage on the life of Mr. X from firm B ($3 million of coverage) – Refer Appendix I
Case 1 (No Reinsurance) - If X dies in a plane crash, firm A will have to pay his beneficiary $10 million.
Case 2 (Reinsurance )- If X dies in a plane crash, company A will have to pay his beneficiary $10 million, but it can in turn collect on the coverage it obtained from B. The two insurance companies will share the loss, with B bearing $3 million and A $7 million. Here both companies share in the premiums and profits of the coverage as well as the losses.
Firm B – Not the insurer that wrote the original coverage. They are instead standing behind the original insurer. (reinsurer)
Firm A - Seding company or cedant . It has ceded some of its life insurance business to B through the reinsurance arrangement.
There are a wide variety of reinsurance coverages that A can purchase. For example, if it believes Mr X health is fine, but is worried that he might die from an accident, they can purchase reinsurance coverage only for death via an accident. In that arrangement, if instead of a plane crash X dies of a heart attack, A would still have to pay his beneficiary $10 million, but B would not owe anything to A. Naturally, A would pay less premium to B for accidental death reinsurance coverage than for comprehensive life reinsurance coverage.
“Insurance Industry is poised for a great leap in India in the years to come”
India is fast emerging on the world map as a strong economic and a global powerhouse. The country is going through a phase of rapid development and growth. All the vital industries and sectors of the country are registering growth and thus, luring foreign investors with the insurance sector being no exception. Together with banking services, the sector adds about 7 per cent to the country's GDP. Gross premium collection is nearly 2 per cent of GDP and funds available with LIC for investments are 8 per cent of GDP.
Yet, nearly 80 per cent of Indian population is without life insurance cover while health and non-life insurance continue to be below international standards. Moreover this part of the population is also subject to weak social security and pension systems with hardly any old age income security. This itself is a sure indicator that growth potential for the insurance sector is immense.
Market Analysis
With a huge population and large untapped market, insurance happens to be a big opportunity in India. Insurance penetration for the year 2008 stood at 4.0 % for life insurance and 0.6% for non-life insurance. The level of penetration tends to rise as income increases and India, with its huge middle class households, does have immense potential. This in turn has made international players to look for investment opportunities in the Indian market. Moreover, saturation of markets in many developed economies has made the Indian market all the more attractive for global insurance majors.
Changing Mindset
In India, insurance is generally considered as a tax-saving device instead of its other implied long term financial benefits. Indian people are prone to investing in properties and gold followed by bank deposits. They selectively invest in shares also but the percentage is very small. However with the focus of insurance companies now on educating customers on the benefits of insurance this mindset is fast changing.
Insurance – Current Scenario
The Insurance industry in India has been progressing at a rapid pace since opening up of the industry in 2000. The US$ 41-billion Indian insurance industry is the fifth largest life insurance market in the emerging insurance economies globally, growing at 32-34% annually. The momentum in equity investments by insurers picked up from 2004 when private insurance companies began marketing ULIPs (market-linked products) to investors. With collections increasing under such plans, insurance companies have raised their investments in the Indian stock market. Moreover with the increasing popularity of insurance plans that are linked to the stock market, insurance companies are emerging as a major force on the bourses.
The Indian insurance industry boasts of a huge and diverse customer base. Nonetheless, its market penetration remains modest. The industry has long been fettered by low market awareness of insurance products; lack of product differentiation and focus; and insufficient infrastructure to deliver products to market. Competition for market share, among a growing number of vendors, is intense. Insurance companies also have to contend with rising costs and the possibility of further deregulation. Furthermore, the recent global recession and fall in international stock markets has damped demand for insurance products in India. New entrants to the market are being hit by both high start-up costs as well as high operating expenses. This has pushed out typical break-even estimates by a further two to three years to around eight to eleven years. Refer Appendix IV
Potential & Challenges - There is no doubt whatsoever that the Indian insurance industry is poised for a great leap in the years to come, however in order to benefit from the favorable environmental factors the insurance companies will have to overcome both the exogenous as well as endogenous challenges that have long plagued the industry.
Exogenous challenges - These challenges, which affect both product demand and the delivery of products and services, will have a medium- to long-term impact on company revenues and market growth.
1) Slowing demand due to economic recession: India’s financial sector has been protected from the most severe consequences of the global recession. However, it has not been unscathed. Demand for insurance products has been adversely affected by slowing industrial and GDP growth. Customers are less willing or less able to buy insurance products. This has reduced sales in the non-life sector and caused growth in the life sector to slacken. Especially hard-hit by slowing product demand have been private insurance vendors who have enjoyed double digit growth over the past five to six years. The decline in international capital markets has also knocked sales of unit linked insurance products. With such products constituting up to 85 percent of the total product portfolios of some Indian insurance companies, the slump in capital markets has negatively impacted the growth rates of such vendors.
2) Increasing competition as a result of the growing number of vendors: There are about 40 private vendors in the insurance market. The non-life sector in particular has seen a flurry of recent newcomers. While increased competition creates potential for accelerated market growth, it will also put pressure on commissions and premium rates during the short to medium term. The ability of the market to sustain such a large number of vendors is unproven. Product delivery mechanisms need to be expanded quickly to ensure that a critical mass of consumers is promptly brought into the insurance market in order to protect operating margins.
Endogenous challenges - Created by the specific conditions that exist within the insurance industry, these challenges need to be addressed by a combination of government, industry representatives and vendors of products and services.
1) High distribution costs: Over-dependence on agents within the life insurance market and direct sales agents within the non-life sector has resulted in high commissioning rates. Bancassurance is slowly gaining credence as a cost effective distribution medium. However, this advance is being countered by the increasing bargaining power of bancassurance partners. The rapid expansion of companies distribution networks, comprising agents and branch outlets, together with the high incidence of churn among agents, continues to push up expense ratios. Furthermore, investment in distribution networks continues to focus on “bricks and mortar” infrastructure rather than less expensive alternatives. Given the large and heterogeneous nature of the Indian market, a scalable and effective national distribution infrastructure could provide insurance vendors with a critical competitive advantage. A multi-channel delivery mechanism, which uses India’s telecommunications and IT backbone infrastructure, could extend the sales reach of the industry as a whole.
2) Increasing staff salary costs: Branch and back-office operations within the insurance industry remain staffed at levels formerly required for the high growth in policy volumes. The subsequent tapering of industry growth has resulted in inefficient workforce utilization, low productivity and rising costs. Workforce planning across all levels of the industry is essential in order to tap market growth to its full potential.
3) High customer churn: Inadequately trained salespeople within the life and non-life sectors, who tend to focus on sales volumes rather than customer needs, are responsible for a high degree of mis-selling within the insurance industry. This has caused consumer dissatisfaction and resulted in customer churn, brand disloyalty and frequent lapsing of policies. In addition, inadequate understanding of customer behavior, needs and expectations has limited vendors ability to identify such dissatisfaction and implement appropriate proactive interventions.
4) Need for better product definition and dynamic pricing: The deregulated tariff regime within the non-life insurance industry has created the opportunity for vendors to design and market differentiated products that address specific consumer sectors and pricing requirements. Vendors need a varied and dynamic spread of products, appropriately priced, not only to meet the requirements of their customers but also to ensure that their risk-to-return exposure is adequately spread across different product categories.
In order to overcome these challenges and explore the Indian market to its full potential a four pronged strategy that the insurance sector can follow has been identified-
· Managing costs strategically to better manage profitability. Refer Appendix II,III
· Seizing competitive advantage through differentiated customer experience.
· Ensuring seamless customer focus and delivery through multichannel integration.
· Deriving actionable insights through strong analytics backbone
| Firm B (Reinsurer) |
| Firm A (Insurer) |
| MR X |
| Reinsurance |
| Insurance |
Appendix II - Life Insurance cost drivers
Appendix III - Non Life Insurance Cost drivers
| Loss Adjustment Expenses |
| General Administration Costs |
|
Commission Costs |
| Annual Gross Premium |
Appendix IV - Michael Porter’s Five Forces Analysis
v Buyer/Customer Power
· Widening Product Range
· Large Corporate Clients
· Sale of Bancassurance
· Price Sensitive Buyers
· Multiple Distribution Channels
v Suppliers Power
· Limited Actuaries in the Market
· Reinsurance Concentration
· Cession to the National Insurer
· Dependence on IT Providers
v Rivalry among Competitors
· Industry Concentration in Life and Non-life
· Low Penetration of Insurance
· Regulation Restricts Competition
v Barriers to entry
· FDI Ceiling
· Capital Requirements
· Elaborate Distribution Requirements
· ‘Lock-in’ of Buyers
v Threat of Substitutes products
· Government Pension Scheme
· Tax Saving Instruments
· Emerging Substitutes
· Dependence on Children in Rural India
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