1. Overview

The Insurance industry is one of the fastest growing in India at Rs. 500 billion and it is estimated that the industry will reach the  Rs 2000 billion mark by 2011 due to very low level of penetration till now (for life insurance it is 4.3% and for general insurance it is 0.6%). The insurance sector can be divided into two broad categories namely life insurance and general insurance.

1.1           Life Insurance

Besides the public sector behemoth LIC, which is the biggest life insurer in India, there are several private players in the life insurance market like Birla Sun Life, Allianz Bajaj, ICICI Prudential, ING Vysya, Tata AIG. Besides the traditional policies like whole life/ term policy, endowment and money back , the insurance companies are coming out with new products like mortgage life and unit link products to attract more customers. In case of whole life/ term policy, the policy money and the bonus is payable to the nominee only on the death of the policy holder within the policy duration (for term policy) or for whole life. But there is no survival benefit to the policy holder under this scheme. In case of endowment policy, the policy amount with bonus is payable to the nominee in case of death of the policy holder within the specified policy duration and in case the policy holder survives, he receives the money after the maturity period. Sometimes the endowment policy pays or waive off the premium in case of critical illness. A Money back policy is very much like an endowment policy with the difference that instead of one-time payment of survival benefit after the maturity period, payments for periodic survival benefits are made during the term of the policy. In case of a unit linked policy, the premium paid by the policy holder is divided into two parts: one part is used to provide for the life assurance cover, while the balance is used to buy units of a fund comprising of bonds / and equity. In case of maturity or surrender, the policy-holder will get the proceeds accordingly to the value of the unit at that time after some deductions (in case of surrender). The only public life insurance company LIC accounts for around 75% market share of the total life insurance market whereas the remaining 25% is distributed among the private players among which ICICI Prudential, SBI Life, HDFC Standard, Birla Sunlife are the major ones. As of 2009 there were 21 private players in the life insurance market.

1.2           General Insurance

India is the fifth largest general insurance market in India with an annual premium of USD 6.3 billion. There are 21 general insurance companies in the market (13 multiline private companies, 4 multiline public companies, 2 health private companies, 2 speciality public companies). The market is growing at a rate of around 20% CAGR. Motor insurance is the largest segment in this market contributing 44% of the general insurance premium followed by health insurance which contributes 20% of the premium. Fire (11%) and marine (6.5%) are two others important segments in the general insurance market. Mandatory third party insurance requirement is one of the major driving factors for the growth of motor insurance. Besides this, the insurance companies provide own damage insurance under motor insurance. Health insurance is the fastest growing area in the general insurance sector due to an aging population, increasing healthcare costs, increasing awareness and the health cover taken by companies for its employees.

2. Regulation

Insurance being a sensitive financial market, the Insurance Regulatory and Development Authority Act was passed in 1999 to set up the IRDA to monitor the insurance industry.

With the setting up of the authority, the Indian insurance market was thrown open to foreign direct investment through joint venture with an Indian company with a cap of 26% on the total equity. To ensure stability, transparency and financial strength, new entrants in the insurance business have to undergo rigorous scrutiny and their business conduct is also closely monitored.

According to IRDA regulations, in case of life insurance, at least 25% of the money has to be invested in government securities by the insurers, at least 50% money should be invested in government securities and other approved securities, at least 15% of the money needs to be invested on social and infrastructure sector while investment on un-approved securities cannot exceed 15%.

In case of general insurance, at least 30% of the money should be invested in general government securities, state government securities and other guaranteed securities, 10% of the money should be invested in infrastructure and social sector and the investment in un-approved securities cannot exceed 25%.

Besides, there is a requirement of minimum capital for an insurance company to ensure that they have enough funds to meet all claims. The minimum capital requirement for direct non-life insurance business and life insurance business is Rs 1 billion. A general insurer needs to maintain a solvency ratio (available solvency margin/ required solvency margin) of 1.5 times, based on net premium earned and net claims incurred in various segments.