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Global service at Indian price: the new private insurance motto

NetScribes/Radha Ganesan

It's time for some real action in the insurance sector. With the Insurance Regulatory and Development Authority (IRDA) allowing the entry of three private players into the sector, there is all-round enthusiasm that increased competition will bring international products and better services into the domestic insurance industry.

"Many useful and internationally-accepted products like catastrophe covers and first loss covers will be launched here," T Ramanan, member of the insurance advisory committee of the IRDA, advisor (insurance) of Tata Sons and chairman of the Indian Institute of Insurance and Risk Management, told NetScribes. "Due to competition, premia will find their market levels and very soon firms will also compete on pricing." That translates into huge gains for the customer.

Insurance experts feel that while the battle for market share will begin on the quality (of service and products) front, it will eventually move on to the price front. That's not good news for public sector giants like General Insurance Corporation (GIC) or Life Insurance Corporation of India (LIC), who will now have to improve their services and products to retain business.

Analysts say that in addition to a wider range of products, Indian consumers will also get global service standards (most of the private sector companies are in the form of alliances with foreign majors), with customised products and innovative marketing strategies becoming part of the insurance game.

While IRDA will continue with the regulated tariff structure to check volatility in premium rates, it's seen as only a matter of time before market forces take over. "For the sake of order in the new market, the tariff structure will remain. But market forces will begin deciding rates as soon as that order comes into the market," says a top-level government source.

But the real benefits will flow to the economy as a whole. Since life insurance companies are long-term players that raise funds for periods of 10-25 years, these funds would automatically find their way into infrastructure funding. "Almost 85 per cent of the funds will flow into the priority sectors and the government bond markets, leaving the remaining 15 per cent for the companies to use as they wish," says a source at HDFC, which has got the nod to set up a life insurance company in alliance with Standard Life Assurance.

There will also be a direct impact on domestic interest rates as insurance companies can contribute towards government borrowing, thus reducing the pressure on banks to support every auction. Moreover, even if a part of the 15 per cent disposable funds of insurance companies comes into the stock markets - LIC now invests around Rs 20 billion in equities - it would go a long way in lifting the morale of a bearish equity market.

Adds Ramanan: "Pension and life insurance firms will channelise more long-term funds into infrastructure and this, in turn, will help India find greater global acceptance due to better risk coverage."

The insurance sector in West and East Asia are much larger than that in India. In Korea, for example, insurance premium accounts for almost 8 per cent of the GDP, whereas in India, it accounts for a mere 1.3 per cent. LIC has only 20 per cent of the total population under coverage and that gives the new entrants huge scope to expand the market.

A report by the Confederation of Indian Industries predicts that life premium will account for 18 per cent of the Gross Domestic Savings by 2010, compared to 6 per cent now. On the other hand, the non-life premium market is expected to increase to $ 5 billion by 2005 from its current $ 1.9 billion, according to IRDA estimates. Compare these figures to China's projected non-life premium of $23-26 billion by 2003 and one will realise that India has a long way to go.

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