GAINS AND ISSUES OF INDIAN INSURANCE SECTOR AFTER LIBERALIZATION BY

1. GAINS AND ISSUES OF INDIAN INSURANCE SECTOR AFTER LIBERALIZATION BY Sriram Taranikanti, Executive Director INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY 7thSeptember, 2012

2. FRAMEWORK OF PRESENTATION • Evolution of Indian Insurance Market • Regulatory Architecture • India Insurance Industry Status • Gains of liberalization • Issues in liberalization • Regulatory Measures 2

3. EVOLUTION OF INDIAN INSURANCE MARKET

4. Free Market Regulated Market Regulated Market Nationalised Market -Level playing field -Consumer Protection -Public Private Partnership - No Regulations - Plagued by fraud NEED FOR REGULATORY INTERVENTION IRDA Act, 1999 Insurance Act, 1938 -contribution to development of market -untapped market potential high -absence of consumer choice -poor customer service • - Urban centric • Planned Economy • -Optimum utilization of resources LIC Act, 1956 GIBNA, 1972

5. EVOLUTION OF INSURANCE IN INDIA Life Insurance Companies Act of 1912 Provident Fund Act of 1912 Insurance Act of 1938 and amendments Nationalization of Life Insurance - 1955 Life Insurance Act of 1956 Social Controls on General Insurance - 1968 General Insurance Business Nationalization Act of 1972

6. Reform process initiated in 1991 • Abolition of Licensing, Permits & Quotas in Industrial Sector • Financial Sector Reforms • Banking Sector Reforms • Freeing of interest rates by the Central Bank • Rationalization of priority sector lendings & lowering of directed credit • Capital Market Sector Reforms • Abolition of Controller of Capital Issues and Establishment of Securities and Exchange Board of India in 1992 • Issuance of regulations for mutual funds, portfolio managers, registrars, merchant bankers, depository and participants, etc • Insurance Sector Reforms ECONOMIC REFORMS PROCESS

7. INSURANCE SECTOR REFORMS Committee on Reforms in Insurance sector – 1994 Setting-up of Interim Insurance Regulatory Authority – May 1996 IRDA Act Passed – December 1999 Statutory Authority (IRDA) established – 19th April 2000 First set of Regulations notified – 19th July, 2000 First set of Certificate of Registration (Licenses) granted – 23rd October 2000 31 number of Regulations issued by IRDA

8. REGULATORY ARCHITECTURE 8

9. COMPOSITION OF AUTHORITY • IRDA Act states that the Authority shall consist of the following members • Chairperson • not more than five whole-time members • not more than four part-time members • Presently the Authority has a complement of following members • Chairman • Three full-time members (Life, Non life, Finance & Investment) • Four part-time members • Organised in 14 departments • 208 positions of which 150 are filled

10. INDIA INSURANCE INDUSTRY 10

11. Road travelled

12. FOREIGN DIRECT INVESTMENTAs on 31-3-2012 (in US$ mns)

13. LIFE INSURANCE

14. 1st YEAR PREMIUM - LIC & PVT. SECTOR (LIFE INSURERS) in US$ million Figures in bracket represent CAGR 14

15. TOTAL PREMIUM – LIFE INSURERS in US $ millions

16. AV GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION in US$ millions

17. LIFE INSURANCE - TRENDS • Growth of Life Insurance industry has been exceptional as compared to other segments of the financial sector in India for (2004-12) • Life Insurance penetration has increased from 1.77% in 2000 to 4.40% in 2010 and density from USD 7.60 in 2000 to USD 55.70 in 2010 • The equity capital in life insurance industry stands at US$ 4.98 bns • Life insurance industry is a significant investor in capital market • Insurance Industry continues to mop retail household savings, which in turn contribute to Capital Market

18. GENERAL INSURANCE

19. GROSS WRITTEN PREMIUM – GENERAL INSURERS in US$ millions Note: Figures in brackets represents CAGR 19

20. AV GROWTH OF TOTAL PREM – PRE & POST LIBERALIZATION in US$ millions

21. GENERAL INSURANCE - TRENDS • Sustained Underwriting Losses – comfort of cross subsidy between business segments no more available • Unsustainable dependence on Investment Incomes • High fixed Cost – a matter of concern due to high and increasing expenses & commissions • Strain on Profitability Position • Deficit in 3rd Party Motor Pool. Creation of declined risk pool.

22. GAINS AND ISSUES OF LIBERALIZATION

23. TRENDS IN LIFE INSURANCE

25. TREND IN NON-LIFE INSURANCE

27. GAINS OF LIBERALIZATION Flow of Foreign Direct Investment in India Growth of insurance business Competition for benefit of consumer Multiple distribution channels for wider reach Variety of new innovative products to meet customer needs Significant improvements in policyholder servicing Wider rural reach and financial inclusion Increasing use of technology to increase efficiency and productivity Significant flow of funds to infrastructure sector Imparting of new management skills and capabilities

28. ISSUES IN LIBERALIZATION Market misconduct and mi-selling adversely affecting image of the industry Margins under pressure due to excessive competition amongst market players Loss making motor third party premium rates ULIPs/ Non Standard Product Issues Challenges in distribution of insurance products in a cost-effective manner Clamour for profitable geographies Availability of reliable and accurate data Capacity building and need for skill upgradation Supervisory challenges in Regulation Challenges in group wide supervision

29. REGULATORY MEASURES

30. REGULATORY MEASURES • Increasing the Insurance awareness among the customers • Financial Literacy measures • New guidelines for better product design • Close supervision on underwriting design • Bancassurance Regulations • Fraud Analytics/Establishment of Insurance Information Bureau (IIB) • Automation of regulatory processes • Rural and Social Sector Regulations • Supervision of Financial Conglomerates • Exposure to supervisory staff and periodic meetings with insures/ stakeholders • Off-site and on-site supervision

31. THANK YOU