Evolution of Life Insurance Industry in India
Life Insurance Policies and Life Insurance Plans have been around in India for as long as they have been around anywhere else in the world. In 1956, when the government nationalized the insurance sector by combining about 250 Indian life insurance companies to form a single firm, the Life Insurance Corporation (LIC) of India became the sole provider. This nationalization by the centre to channel more resources towards various national development programmes and give insurance market penetration a boost to protect the interests of the policy holders from failures which were the result of mismanagement resulted in the transformation of competitive segment to highly regulated monopoly. The nationalization also led to more effective mobilization of funds to enable capital to be allocated to various development projects.
In 1991, the Government implemented the New Industrial Policy, under which the Indian economy was opened up to foreign investment and sectors such as banking and finance were reformed. With the passage of the IRDA Act the Indian Life insurance industry was liberalized in 2000 with the objective of once again increasing competition in the industry and to tap the vast potential that this rapid growing market has to offer.
First year premium for single as well as regular life insurance policies offered by LIC and private players witnessed dynamic growth during the early 2000s — from less than 200 billion INR in 2002 to nearly 900 billion by 2009. This intense competition has also forced the different life insurance players to improve their underwriting and risk management abilities. This has greatly benefitted policyholders and Life insurance companies have been quick to recognize the larger need for structured retirement plans, and the potential of long-term fund management.
Several unit linked insurance plans (ULIPs) have been introduced by private players and this has helped them to compete with LIC and also create a customer base of individuals who are willing to opt for these plans for purely investment & tax saving purposes. More than half of the premium income of private companies in the life insurance segment is contributed by these unit-linked plans. Traditional policies like term products and endowment based products form a relatively small proportion of the insurance market.
With the growing popularity of term insurance in India, spending on insurance is on a growth trajectory in India. However, the relatively high population growth rate has been slowing down the improvement of insurance density in India.
In 2006, a milestone occurred when India’s insurance penetration nearly doubled to 4.10% before marginally declining to 4.00% in 2007. However, when compared to other countries, the life insurance market in India is still significantly under- penetrated. India remains far behind industrialized nations like UK, Switzerland, France, South Korea and Japan. Saturation of markets in many developed economies has made the Indian market more attractive for global insurance majors and India continues to be an attractive market for most insurance players both domestic and foreign.