Impact of Fdi in Life Insurance Sector

A Comprehensive come across ON Impact of inappropriate adopt enthronisation in vivification redress Industry Submitted to Gujarat Technological University IN break-danceial derivative FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER OF BUSINESS judicature UNDER THE GUIDANCE OF Prof. Himanshu Chauhan Submitted by Pratik PanchalEnrollment No. 117010592053 Ajay vajaEnrollment No. 117010592077 YEAR 2011-2013 MBA SEMESTER ternary Affiliated to Gujarat Technological University Ahmedabad DECLARATIONWe, Panchal PRatik and Ajay Vaja student of AHMEDABAD INSTITUTE OF TECHNOLOGY hereby, decl atomic number 18 that the Project report on Impact of Foreign Direct Investment on Indian counterbalanceitution constitution form _or_ system of government is our original swear out and has non been published elsewhere. This has been to a displace placetaken for the use of goods and function of partial fulfillment of GUJARAT TECHNOLOGICAL UNIVERSITY requirement for the award of the degree of eclipse of Business Administration. (Signature) Date __/__/2012Pratik Panchal Place Ahmedabad Ajay Vaja Ac intimacyment Perseverance, inspiration and motivation submit follow out played a bully role in the success of tout ensemble in all stake.We ar thankful to our collage for s intimatelyed us the opportunity to wrick with such an eminent section of Indian pecuniary sphere of influence. We be pleasurable to our faculty mentor Prof. Himanshu Chauhan for guiding us without the convey off and for backing us with his constant guidance and encouragement. For their queen-sized help in making our project fruitful. Finally, non to miss any one(a), we thank all the good deal who suck up assumely or substantiatingly helped us a jackpot by means ofout the project epoch period and in completion of our project successfully. Panchal Pratik P. Ajay Vaja MBA- IIIInstitutes Certificate Certified that this Comprehensive Project Report na me Impact of Foreign Direct Investment in vitality amends Industry is the bonafide work of Mr. Pratik Panchal (Enrollment No- 117010592053. )& Ajay Vaja (Enrollment No- 117010592077. ) who carried out the research on a lower floor(a) our supervision. We excessively certify that, that to the best of my knowledge the work reported herein does not form part of any an other(a)(prenominal) project report or dissertation on the root of which a degree or award was conferred on an earlier subroutine on this or any other cig bettedidate.Signature of the Faculty Guide (Prof. Himanshu Chauhan) (Dr. NehaParashar) (Certificate is to be countersigned by the HoD) INDEX CHAPTER NO. NAME PAGE NO. 1. admittance Introduction of heart damages attentionIntroduction of FDIImpact of FDI in INDIA 2. LITERTURE REVIEW 3. RESEARCH methodological analysis a) OBJECTIVES OF THE STUDY b) SCOPE OF THE STUDY C)RESEARCH DESIGN c) RESEARCH SAMPLE d) SOURCES OF selective information e) SAMPLING PLAN f) DATA ANALYSIS g) DATA COLLECTION cultivation 4. REFERENCES sprightliness-time damages carriagespan indemnitywas signly designed to protect the income of families, particularly die harder families in thewealth accumulationphase, in the event of the head of signs death. Today, purport indemnification is used for many reasons, includingwealth preservationandestate valuate planning. emotional state restitution provides you with the opportunity to protect yourself and your family from personal risk exposures a homogeneous(p) re requital of debts after death, providing for a surviving spouse and children, fulfilling other sparing goals (such as putting your kids through college), leaving a charitable legacy, paying(a) for funeral expenses, etc. flavour damages protective brooding is similarly important if you atomic number 18 a railway line owner or a unwrap person in soul elses commerce, where your death (or your partners death) might wreak financial havoc. heart damages policy is a great financial planning tool, plainly should never be estimate of as a savings vehicle. In widely distributed, there ar frequently far better places to hold and grow your bills as you get older. History of flavour sentence amends in India In India, redress policy has a deep-rooted history. It risks mention in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra).The writings talk in boundarys of pooling of resources that could be re-distri clam uped in times of calamities such as fire, floods, epidemics and famine. This was in all likelihood a pre-cursor to modern day redress. Ancient Indian history has continue the earliest traces of policy in the form of marine stack loans and carriers contracts. indemnity in India has evolved e genuinelywhere time heavily drawing from other countries, England in particular. 1818 aphorism the advent of bread and butter damages policy seam in India with the establishment of the Oriental Life policy attach to in Calcutta. This caller however failed in 1834.In 1829, the Madras Equitable had begun transacting tone policy crinkle in the Madras Presidency. 1870 see the enactment of the British redress deed and in the last triad decades of the nineteenth century, the Bombay grappled (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by unknown indemnification policy offices which did good business in India, namely Albert Life Assurance, Royal policy, Liverpool and London Globe indemnification and the Indian offices were up for unenviable competition from the unusual companies.In 1914, the disposal of India started publishing returns of restitution Companies in India. The Indian Life Assurance Companies operate, 1912 was the first statutory measure to regulate manner business. In 1928, the Indian Insurance Companies Act was e nacted to enable the G everyplacenment to dupe statistical information about both spirit and non- bread and butter business transacted in India by Indian and outside(prenominal) general agents including provident restitution societies.In 1938, with a panorama to protecting the interest of the Insurance public, the earlier legislation was consolidated and amend by the Insurance Act, 1938 with comprehensive provisions for effective control oer the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large event of redress companies and the aim of competition was lavishly. There were also allegations of unfair trade practices. The Government of India, thus, decided to nationalize redress business. Birth of Life Insurance of IndiaAn Ordinance was issued on 19thJanuary, 1956 nationalizing the Life Insurance firmament and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 1 6 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly work on the late 90s when the Insurance orbit was reopened to the tete-a-tete firmament. The history of general redress policy dates back to the Industrial Revolution in the west and the consequent harvest of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation.In 1968, the Insurance Act was amended to regulate sit downments and set minimal solvency margins. The Tariff Advisory delegation was also set up accordingly IRDA and Opening of Life Insurance Business in India This millennium has seen insurance come a full circle in a expedition extending to nearly 200 days. The process of re-opening of the empyrean had begun in the early mid-nineties and the last decade and much than has seen it been opened up substantially. In 1993, the Government set up a committee infra the chairmanship of RN Malhotra, sourc e Governor of run batted in, to visualise recommendations for reforms in the insurance ara.The objective was to complement the reforms initiated in the financial area. The committee submitted its report in 1994 wherein, among other things, it recommended that the personal sphere of influence be abideted to place the insurance persistence. They stated that foreign companies are allowed to enter by floating Indian companies, selectably a joint venture with Indian partners. Following the recommendations of the MalhotraCommittee report, in 1999, the Insurance Regulatory and Development part (IRDA) was conventional as an railway carnomous elevator carmobile trunk to regulate and develop the insurance persistence. The IRDA was in bay windoworate as a statutorybody in April, 2000.The key objectives of the IRDA include packaging of competition so as to enhance customer satisfaction through augmentd con junctioner choice and lower bountifulnesss, while ensuring the financia l security of the insurance grocery store. The IRDA opened up the commercialiseplace in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame linguistic rules under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to breastplate of policyholders interests.Today there are 23 feelspan insurance companies operating in the boorish, including LIC a public firmament confederacy and 22 other personal sector animateness insurance companies competing with LIC for Life insurance business from the customers in India. Regulatory Framework for Life Insurance in India The main regulation that regulates the life insurance business is the Life Insurance Corporation Act, 1956. DepositsE precise insurer should, in rate of the insurance business carried on by him in Ind ia, deposit with the Reserve Bank of India (RBI) for and on behalf of the primaeval Government of India the spare-time activity standards, either in silver or in stoogeonic securities estimated at the trade harbor of the securities on the day of deposit, or partly in notes and partly in approved securities * In the racing shell of life insurance business, a sum equivalent to one per cent of his rack upity gross supercede tribute written in India in any financial year commencing after the 31 day of March, 2000, not exceeding rupees hundred jillion..Investments E rattling insurer is conduct to invest and make unnecessary invested cert ain metre of assets as determined under the Insurance Act. The money of the policyholders cannot be invested (directly or indirectly) out of doors India.An insurer gnarled in the business of life insurance is required to invest and discover invested at all times assets, the value of which is not less than the sum of the marrow of its liabilities to holders of life insurance policies in India on trace of full-blown claims and the kernel required to tinct the indebtedness on policies of life insurance maturing for payment in India, reduced by the get along of premiums which withstand move due to the insurer on such policies but leave not been pay and the days of grace for payment of which score not run out and any amount due to the insurer for loans granted on and inside the surrender value of olicies of life insurance maturing for payment in India issued by him or by an insurer whose business he has acquired and in respect of which he has assume liability. Every insurer carrying on the business of life insurance is required to invest and at all times keep invested his controlled fund (other than funds relating to pensions and general annuity business and unit link up life insurance business) in the following manner, free of any encumbrance, charge, hypothecation or lienFor the purposes of calcul ating the coronations, the amount of deposits make with the RBI by the insurer in respect of his life insurance business shall be deemed to be assets invested in Government securities. In computing the assets to be invested by the insurer, any enthronement made with reference to the currency other than the Indian rupee which is in excess of the amount required to meet the liabilities of the insurer in India with reference to that currency to the finis of such excess and any investment made in leveraging of any immovable property outside India or on account of any such property shall not be taken into account.Further, an insurer should not out of his controlled fund invest any sum in the bundles or debentures of any private control caller. Where an insurer has accepted reassurance in respect of any policies of life insurance issued by another(prenominal) insurer and maturing for payment in India or has ceded reassurance to another insurer in respect of any such policies issue d by himself, the assets to be invested by the insurer shall be enlarged by the amount of the liability involved in such acceptance and decreased by the amount of the liability involved in such cession.In case of an insurer in incorporated or domiciled outside India or an insurer incorporated in India whose share smashing to the extent of one-third is owned by, or the members of whose governing body to the extent of one-third consists of members domiciled elsewhere than in India, the assets required to be invested should, (except to the extent of any part which consists of foreign assets held outside India) be held in India by way of a trust for the discharge of the liabilities.Every Insurer shall invest and at all times keep invested his segregated fund of unit twin life insurance business as per pattern of investment offered to and approved by the policy-holders. The insurer is permitted to offer unit conjugated policies only where the units are linked to categories of assets that are both marketable and considerably realizable. However, the total investment in other approved category of investments should at no time exceed twenty five per cent of the funds. List of Life Insurance Companies in India 1. Bajaj Allianz Life Insurance bon ton Limited . Birla Sun Life Insurance Co. Ltd 3. HDFC Standard Life Insurance Co. Ltd 4. ICICI Prudential Life Insurance Co. Ltd 5. ING Vysya Life Insurance Company Ltd. 6. Life Insurance Corporation of India 7. gunk Life Insurance Co. Ltd 8. Met Life India Insurance Company Ltd. 9. Kotak Mahindra Old reciprocal Life Insurance Limited 10. SBI Life Insurance Co. Ltd 11. Tata AIA Life Insurance Company Limited 12. Reliance Life Insurance Company Limited. 13. Aviva Life Insurance Company India Limited 14. Sahara India Life Insurance Co, Ltd. 15. Shriram Life Insurance Co, Ltd. 6. Bharti AXA Life Insurance Company Ltd. 17. Futuregenerali India Life Insurance Company Limited 18. IDBI Federal Life Insurance 19. Canara HSBC Oriental Bank of occupation Life Insurance Company Ltd. 20. AEGON Religare Life Insurance Company Limited. 21. DLF Pramerica Life Insurance Co. Ltd. 22. confidential information Union Dai-ichi Life 23. IndiaFirstLife Insurance Company Limited 24. Edelweiss Tokio Life Insurance Co. Ltd. Types of Life Insurance Life insurance protective cover comes in many forms, and not all policies are created equal, as you go away soon discover.While the death wellbeing amounts whitethorn be the same, the approach, structure, durations, etc. vary tremendously across the types of policies. WHOLE liveliness Whole life insuranceprovides guaranteed insurance security measures for the entire life of the insured, otherwise known as lasting coverage. These policies carry a cash value component that grows tax deferred at a contractually guaranteed amount (usually a low interest rate) until the contract is surrendered. Thepremiumsare usually take for the life of the insured and thedeath benefitis guaranteed for the insureds lifetime.With unharmed life payments, part of your premium is applied toward the insurance portion of your policy, another part of your premium goes toward administrative expenses and the balance of your premium goes toward the investment, or cash, portion of your policy. The interest you garner through the investment portion of your policy is tax-free until you withdraw it (if that is allowed under the terms of your policy). Any withdrawal you make allow typically be tax free up to your basis in the policy. Your basis is the amount of premiums you confirm paid into the policy minus any prior dividends paid or previous withdrawals.Any amounts withdrawn above your basis whitethorn be taxed as ordinary income. As you might expect, given their fixed protection, these policies tend to attain a much mellowed(prenominal) initial premium than other types of life insurance. But, the cash build up in the policy can be used toward premium payments, provid ed cash is available. This is known as a participating building block life policy, which combines the benefits of permanent life insurance protection with a savings component, and provides the policy owner some special payment flexibility. UNIVERSAL life-timeUniversal life insurance, also known as flexible premium or adjustable life, is a variation of whole life insurance. akin whole life, it is also a permanent policy providing cash value benefits based on current interest rates. The feature that distinguishes this policy from its whole life cousin is that the premiums, cash values and level amount of protection can all(prenominal) be adjusted up or down during the contract term as the insureds rents change. Cash values introduce an interest rate that is set periodically by the insurance society and is generally guaranteed not to drop below a certain level.VARIABLE LIFE inconsistent life insuranceis designed to combine the traditional protection and savings features of wh ole life insurance with the harvest-tide potential of investment funds. This type of policy is comprised of dickens distinct components the general account and the tell account. The general account is the reserve or liability account of the insurance provider, and is not allocated to the individual policy. The separate account is comprised of various investment funds at heart the insurance companys portfolio, such as an candor fund, a money market fund, a stand by fund, or some combination of these.Because of this profound investment feature, the value of the cash anddeath benefit may fluctuate, hence the name variable life. VARIABLE UNIVERSAL LIFE Variable universal life insurance combines the features of universal life with variable life and gives the consumer the flexibility of adjusting premiums, death benefits and the selection of investment choices. These policies are technically classify assecuritiesand are therefore subject toSecurities and Exchange Commission(SEC) regulation and the oversight of the state insurance commissioner.Unfortunately, all the investment risk lies with the policy owner as a expiry, the death benefit value may rise or fall depending on the success of the policys underlying investments. However, policies may provide some type of guarantee that at least a minimum death benefit forget be paid tobeneficiaries. experimental condition LIFE One of the most commonly used policies isterm life insurance. limit insurance can help protect your beneficiaries against financial press release resulting from your death it pays the face amount of the policy, but only provides protection for a definite, but limited, amount of time.Term policies do not build cash values and the maximum term period is usually 30 eld. Term policies are useful when there is a limited time needed for protection and when the dollars available for coverage are limited. The premiums for these types of policies are evidentiaryly lower than the be for who le life. They also (initially) provide more insurance protection per dollar spent than any form of permanent policies. Unfortunately, the cost of premiums enlarges as the policy owner gets older and as the end of the specified term nears. Term polices can have some variations, including, but not limited to one-year Renewable and Convertible Term This policy provides protection for one year, but allows the insured to restore the policy for successive periods thereafter, but at higher premiums without having to furnish evidence of insurability. These policies may also be converted into whole life policies without any additionalunderwriting. Level Term This policy has an initial guaranteed premium level for specified periods the longer the guarantee, the greater the cost to the buyer (but usually still far more affordable than permanent policies).These policies may be renewed after the guarantee period, but the premiums do cast up as the insured gets older. Decreasing Term This pol icy has a level premium, but the amount of the death benefit decreases with time. This is often used in conjunction with mortgage debt protection. Many term life insurance policies have major(ip) features that provide additional flexibility for the insured/policyholder. A renewability feature, perhaps the most important feature associated with term policies, guarantees that the insured can renew the policy for a limited number of eld (i. e. term in the midst of 5 and 30 years) based on attained age. Convertibility provisions permit the policy owner to exchange a term contract for permanent coverage within a specific time frame without providing additional evidence of insurability. Food for Thought Many insurance consumers only need to replace their income until theyve reached retirement age, have accumulated a fair amount of wealth, or their qualifieds are old enough to take care of themselves. When evaluating life insurance policies for you and your family, you must carefully consider the purchase of temporary versus permanent coverage.As you have just read, there are many disputes in how policies may be structured and how death benefits are determined. There are also vast differences in their pricing and in the duration of life insurance protection. Many consumers prefer to buy term insurance as a temporary risk protection and then invest the savings (the difference mingled with the cost of term and what theywouldhave paid for permanent coverage) into an choice investment, such as a brokerage account, mutual fund or retirement plan. Section I Industry over clearThe insurance intentness in India has come a long way since the time when businesses were tightly adjust and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance pains in favor of market-driven competition. This shift has brought about maj or changes to the attention. The beginning of a new era of insurance information has seen the entry of international insurers, the proliferation of mod convergences and dispersal channels, as tumesce as the raising of supervisory standards.Evolution of the assiduity The suppuration demand for insurance around the worldcontinues to have a positive degree effect on the insurance assiduityacross all economies. India, being one of the fastest-growingeconomies (even in the current orbicular scotchal slowdown),has exhibited a significant increase in its GDP, and aneven larger increase in its GDP per pennantita and disposableincome. Increasing disposable income, coupled with the highpotential demand for insurance offerings, has opened manydoors for both domestic and foreign insurers. The followingtable concisely depicts the evolution of the insurance sectorin India.Exhibit. 1. 1. Tracing the chronological evolution of the insurance industry Year Event 1818 Oriental Life In surance Co. was established in Calcutta. 1870 The first insurance company, Bombay Mutual Life Insurance Society, was formed. 1907 The Indian moneymaking(a) Insurance Limited was formed. 1912 * Life Insurance Companies Act and the Pension monetary fund Act of 1912 * Beginning of formal insurance regulations 1928 The Indian Insurance Companies Act was passed to collect statistical data on both life and non-life. 1938 The Insurance Act of 1938 was passed there was strict state supervision to control frauds. 1956 * The Central Government took over 245 Indian and foreign life insurers as well as provident societies and nationalized these entities. * The LIC Act of 1956 was passed. 1957 The code of conduct by the oecumenical Insurance Council to ensure fair conduct and ethical business practices was framed. 1972 The General Insurance Business (Nationalization) Act was passed. 1991 Beginning of sparing liberalization 1993 The Malhotra Committee was set up to complement the refor ms initiated in the financial sector. 1994 Detariffication of aviation, liability, personal accidents and wellness and marine cargo products 1999 The Insurance Regulatory and Development Authority (IRDA) handbill was passed in the Parliament. 2000 * IRDA was incorporated as the statutory body to regulate and depict private sector insurance companies. * General Insurance Corporation (GIC), on with its quatern subsidiaries, i. e. , National Insurance Company Ltd. , Oriental Insurance Company Ltd. , impudent India Assurance Company Ltd. and United India Assurance Company Ltd. , was made Indias national reinsurer. 2005 Detariffication of marine hull 2006 Relaxation of foreign rightfulness norms, thus facilitating the entry of new players 2007 Detariffication of all non-life insurance products except the auto third-party liability segment In India, the Ministry of Finance is responsible for enacting and implementing legislations for the insurance sector with the Insurance Regulato ry and Development Authority (IRDA) entitled with the regulative and developmental role. The establishment also owns the majority share in some major companies in both life and non-life insurance segments.Both the life and non-life insurance sectors in India, which were nationalized in the 1950s and 1960s, respectively, were liberalized in the 1990s. Since the formation of IRDA and the opening up of the insurance sector to private players in 2000, the Indian insurance sector has regarded fast growth. Current scenario A growing middle-class segment, rising income, increase insurance awareness, rising investments and infrastructure spending, have laid a strong origin to extend insurance service in India. The total premium of the insurance industry has change magnitude at a CAGR of 24. % between FY03 and FY09 to reach INR2, 523. 9 billion in FY09. The opening up of the insurance sector for private participation/global players during the 1990s has resulted in stiff competition am ong the players, with each offering better flavour products. This has certainly offered consumers the choice to buy a product that best fits his or her requirements. The number of players during the decade has change magnitude from four and eight in life and non-life insurance, respectively, in 2000 to 23 in life and 24 in non-life insurance (including 1 in reinsurance) industry as in August 2010.Most of the private players in the Indian insurance industry are a joint venture between a governing Indian company and a foreign insurer. Life insurance industry overview The life insurance sector grew at an impressive CAGR of25. 8% between FY03 and FY09, and the number of policies issued increased at a CAGR of 12. 3% during the same period. As of August 2010, there were 23 players in the sector(1 public and 22 private). The Life Insurance Corporation ofIndia (LIC) is the only public sector player, and held nigh 65% of the market share in FY10 (based on first-year premiums).To address the need for highly customized products andensure prompt service, a large number of private sector players have entered the market. Innovative products, combative trade and effective scattering have enabled fledgling private insurance companies to sign up Indian customers more rapidly than judge. secluded sector players are evaluate to play an more and more important role in the growth of the insurance sector in the near future tense. In a fragmented industry, new players are gnawing forward the market share of larger players.The existing smaller players have aggressive plans for ne dickensrk working out as their foreign partners are keen to bang-upize on the enormous potential that is latent in the Indian life insurance market. ICICI Prudential, Bajaj Allianz and SBI Life collectively account for approximately 50% of the market share in the private life insurance segment. To tap this opportunity, banks have also started entering alliances with insurance companies to dev elop/underwrite insurance products kind of than merely distribute them. Non-life insurance industry overview among FY03 and FY10, the non-life insurance sector grew at a CAGR of 17. 05%.Intense competition that followed the de-tariffication and pricing deregulation (which was started during FY07) decelerated the growth momentum. As of August 2010, the sector had a total of 24 players (6 public insurers, 17 private insurers and 1 re-insurer). The non-life insurance sector offers products such as auto insurance, health insurance, fire insurance and marine insurance. In FY10, the non-life insurance industry had the following product mix. Private sector players have now pivoted their condense on auto and health insurance. out of the total non-life insurancepremiums during FY10, auto insurance accounted for 43. % of the market share. The health insurance segment hasposted the highest growth, with its share in the total non-life insurance portfolio increasing from 12. 8% in FY07 to 20 . 8% in FY10. These twain sectors are highly promising, and are evaluate to increase their share complicated in the coming years. With the sector poised for immense growth, more players, including monocline players, are judge to emerge in the near future. The last two years has seen the emergence of companies specializing in health insurance such as Star Health & Allied Insurance and Apollo DKV.In the last decade, it was observed that most players have experienced growth by formulating aggressive growth strategies and capitalizing on their dissemination network to target the retail segment. Although the players in the private and public sector largely offer similar products in the non-life insurance segment, private sector players outscore their public sector counterparts in their quality of service. Growth drivers Indias cordial demographics help strengthen market sagacity The life insurance coverage in India is very low, and many of those insured are underinsured.There is immense potential as the working population (2560 years) is expected to increase from 675. 8 billion to 795. 5 million in the nigh 20 years (20062026). The projected per capita GDP is expected to increase from INR18, 280 in FY01 to INR100, 680 in FY26, which is indicative of rising disposable incomes. The demand for insurance products is expected to increase in light of the increase in purchasing power. Health insurance attracts insurance companies The Indian health insurance industry was valued at INR51. 2 billion as of FY10. During the period FY0310, the growth of the industry was record at a CAGR of 32. 9%. The share of health insurance was 20. 8% of the total non-life insurance premiums in FY10. Health insurance premiums are expected to increase to INR300 billion by 2015. Private sector insurers are more aggressive in this segment. Favorable demographics, fast progression of medical engine room as well as the increasing demand for better healthcare has facilitated growth i n the health insurance sector. Life insurance companies are expected to target in the first place the young population so that they can amortize the risk over the policy term. Rising cogitate on the agricultural marketSince more than two-thirds of Indias population lives in country-style areas, micro insurance is seen as the most suitable aid to reach the poor and socially disadvantaged sections of society. Poor insurance literacy and awareness, high transaction cost and unforesightful understanding of client needs and expectations has restricted the demand for micro-insurance products. However, the market remain significantly underserved, creating a vast opportunity to reach a large number of customers with good value insurance, whether from the base of existing insurers or through retail distribution networks.In FY09, individuals move overd new business premium worth INR365. 7 million under 2. 15 million policies, and the group insurance business amounted to INR2, 059. 5 mi llion under 126 million lives. LIC contributed most of the business procured in this portfolio by garnering INR311. 9 million of individual premium from 1. 54 million lives and INR1,726. 9 million of group premium under 11. 1 million lives. LIC was the first player to offer specialized products with lower premium costs for the rural population. Other private players have also started emphasising onthe rural market to strengthen their reach.Government tax incentive Currently, insurance products enjoy EEE benefits, giving insurance products an advantage over mutual funds. Investors are motivated to purchase insurance products to avail the nearly 30% effective tax benefit on select investments (including life insurance premiums) made every financial year. Life insurance is already the most popular financial product among Indians because of the tax benefits and income protection it offers in a country where there is very little social security. This drives more and more people to come within the insurance ambit. Emerging trendsExploring multiple distribution channels for insurance products To increase market sharpness, insurance companies need to expand their distribution network. In the fresh past, the industry has witnessed the emergence of alternate distribution channels, which include banc assurance, direct change agents, brokers, online distribution, corporate agents such as non-banking financial companies (NBFCs) and tie-ups of parabanking companies with local corporate agencies (e. g. NGOs) in remote areas. Agencies have been the most important and effective channel of distribution hitherto.The industry is viewing the movement of intermediaries from mere agents to advisors. Product invention With customers inquire for higher levels of customization, product innovation is one of the best strategies for companies to increase their market share. This also creates greater efficiency as companies can maintain lower unit costs, offer mitigated services and distributors can increase flexibility to pay higher commissions and generate higher sales. The pension sector, due to its inadequate penetration (only 10% of the working population is covered) offers tremendous potential for insurance companies to be more innovative.Consolidation in future The past few years have witnessed the entry of many companies in the domestic insurance industry, attracted by the significant potential of insurance sector. However, increasing competition in easily accessible urban areas, the FDI limit of 26% and the recent downturn in legality markets have tincted the growth prospects of some small private insurance companies. Such players may have to rethink about their future growth plans. Hence, consolidation with large and established players may prove to be a better solution for such small insurers.Larger companies would also prefer to take over or merge with other companies with established networks and block spending money in marketing and promotion. Therefore, consolidation will result in fewer but stronger players in the country as well as generate healthy competition. Mounting focus on EV over profitability Many companies are achieving profitability by haughty expenses releasing funds for future appropriations as well as through a strong renewal premium build up. As a few larger insurers continue to expand, most are focused on cost rationalization and the alignment of business manakins to ground level realities.This will better equip insurers to realize reported embedded value (EV) and generate value from future new business. In the short term, companies are apt(predicate) to face challenges to achieve the desired levels of profitability. As companies are also planning to get listed and raise funds, the higher profitability will help companies to get a better valuation of shares. However, in the long term, companies would need to focus on increasing EV, as almost 70% of a companys EV is influenced by renewal business and profitability is not as much of an indicator for valuation.Hence, players are now focusing on increasing their EV than profitability figures. Rising capital requirements Since insurance is a capital-intensive industry, capital requirements are likely to increase in the coming period. The capital requirement in the life insurance business is a consumption of the three factors (1) sum at risk (2) policyholders assets (3) new business dribble and expense overruns. With new guidelines in place, capital requirements across the sector are likely to go up due to Higher sum sensible operate higher sum at risk Greater parcelling to policyholders assets due to lower chargesBack loading of charges is resulting in high new business strain, and expense overruns due to low productivity of the newly set distribution network (and inability to recover corresponding costs upfront) For non-life insurance companies, the growing demand for health insurance products as well as take insurance produc ts is likely to boost the capital requirement. With the capital market choose up and valuations on the rise, insurance companies are exploring various ways of increasing their capital base to invest in product innovation, introducing new distribution channels, educating customers, developing the brand, etc.This is due to the following reasons A major portion of the costs in insurance companies is fixed (though it should be variable or semi-variable in nature). Hence, the reduction in sales will not result in the lowering of operational expenses, thus adversely shaming margins. As such, reduced margins would impact profitability, and insurers would need to invest additional funds. The sustained bearishness in capital markets could further pressurize the investment margins and increase the capital strain, especially in the case of capital/return guarantee product.Besides, companies are likely to witness a slowdown in new business growth. Companies may also opt for product restructur ing to lower their costs and optimally practice capital. According to IRDA Regulations 2000, all insurance companies are required to maintain a solvency ratio of 1. 5 at all times. But this solvency margin is not sustainable. With the growing market risks, the level of required capital will be linked to the risks native in the underlying business. India is likely to start implementing Solvency II norms in the next three to four years.The transition from Solvency I norms to Solvency II norms by 2012 is expected to increase the demand for actuaries and risk vigilance professionals. The regulator has also asked insurance companies to get their risk management systems and processes audited every three years by an external auditor. Many insurance companies have started aligning themselves with the new norms and hiring professionals to meet the deadline. Contribution of the insurance sector to the parsimony Insurance has had a very positive impact on Indias economic development.The se ctor is in stages increasing its contribution to the countrys GDP. In addition, insurance is driving the infrastructure sector by increasing investments each year. Further, insurance has boosted the involution scenario in India by providing direct as well as indirect employment opportunities. Due to the healthy performance of the Indian providence, the share of life insurance premiums in the gross domestic savings (GDS) of the households sector has increased. The increased contribution of the insurance industry from the household GDS has been ploughed back into the economy, generating higher growth.The following factors showcase how the contribution of the insurance industry has strengthened economic growth Contribution of insurance to FDI The importance of FDI in the development of a capital deficient country such as India cannot be undermined. This is where the high-growth sectors of an economy play an important role by attracting substantial foreign investments. Currently, the total FDI in the insurance sector, which was INR50. 3 billion at the end of FY09, is estimated to increase to approximately INR51 billion in FY10.It is difficult to estimate, but an equal amount of additional foreign investment, can roughly flow into the sector if the regime increases the FDI limit from 26% to 49%. The insurance sector, by virtue of attracting long-run funds, is best placed to channelize long-term funds toward the productive sectors of the economy. Therefore, the growth in their premium collections is expected to translate into higher investments in other key sectors of the economy. Therefore, the liberalization of FDI norms for insurance would not only benefit the sector, but several other criticalsectors of the economy.Section IIIndustry at cross-roadsof development Insurance industry significantly untapped latent potential Indias insurance industry has witnessed rapid growth during the last decade. Consequently, many foreign companies have expressed their inte rest in investing in domestic insurance companies, despite the Government of Indias regulation, which mandates that the foreign shareproperty limit is fixed at 26% for the life as well as non-life insurance sectors. The countrys strong economic growth in recent years has helped increase penetration levels substantially. Premium income, as a percentage of GDP, increased from 3. % in FY03 to 7. 6% in FY09. However, the penetration of insurance in India still continues to be low, as compared to other demonstrable and developing economies. The Indian life insurance sector has witnessed exponential growth, driven by innovation in product offerings and distribution owing to market entrants since the opening up of the sector in 2000. Currently, it is the fifth-largest life insurance market in Asia. The rapid expansion in the life sector coincided with a period of rising household savings and a growing middle class, backed with strong economic growth. Innovative product design (e. . launc h of ULIPs) and aggressive distribution strategies (e. g. development of banc assurance) by private sector players have significantly contributed to strong premium growth. The following diagram shows the increasing premium per capita during the same period. The global economy has slowly started recovering from the economic recession. Lagging employment, coupled with declining aggregate wages, a weakened residential and commercial real estate market, tight conviction and a behavioral shift on the part of consumers from consumption to savings are factors contributing to a delayed recovery.Although the global insurance industry has not been impacted by the financial crisis as much as the banks, it still has its set of issues. The leading five issues on the global insurance watch list are * Managing risk The most significant fretting for insurance companies is risk in all its forms. Increasingly, insurance companies are adopting an enterprise-wide view of managing risksemploying a fra mework to address them across the organization. * Promoting compliance The cost of regulatory compliance and the attendant reputational risk of non-compliance are on the rise. Growing globally The expansion into new markets is expected to help drive profits, as developed economies witness slower growth in the demand for insurance. * Lack of innovation around products and delivery Theuse of technology and emphasis on innovation will helpprovide better service and delivery. Institutions can alsostrengthen their ties with customers and differentiatethemselves from competition. * Adapting to demographic shifts The demographicchanges in North the States, Europe, lacquer and other areasis starting to shift assets from equities to annuities as wellas other fixed-income products.According to Swiss Re, among the key Asian markets, India is likely to have the fastest-growing life insurance market, with life premium poised to grow at a CAGR of 15% for the next decade, some faster than the 14% expected for China. The growing consumer class, rising insurance awareness and greater infrastructure spending have made India and China the two most promising markets in Asia. Europe and the Americas represent relatively farm insurance markets. Though Indias penetration appears higher, it is not excessive, given the high level of investments in insurance policies underwritten.Nonetheless, besides India, Taiwan is the other Asian market that shares similar characteristics. Taiwan has the highest insurance penetration in Asia, largely driven by the immense popularity of ULIPs. The progress of the Indian insurance industry over the last decade has been the most crucial period in the establishment of this industry post the formation of IRDA in 2000. The initial four to five years witnessed the entry of many private players, each seek to acquire market share.The latter part of this phase witnessed a heightened focus on the expanding product range, developing innovative products and b uilding a naughty distribution channel. The last one to two years have been very critical as the industry is trying to sustain its growth in light of the new regulationsbeing formulated. The Indian insurance industry is at a threshold from where it can witness the next growth wave, if presented with a favorable policy framework and an enabling distribution environment. The industry is poised to witness the emergence of new leaders who would carve a niche for themselves by using nstruments such as alternative channels of distribution, cost management and product innovation, among others. At this cross section, the role of the regulator is very significant. IRDA is in the finalization stage of most of the regulations pertaining to the industry. The regulator has introduced certain regulations to help improve disclosures, profitability, capital, consumer protection, etc. Promoting health insurance * IRDA has allowed insurance companies to offer Health gain Life Combi Product, a polic y that would provide life cover along with health insurance to subscribers. downstairs the guidelines issued by the IRDA, life and non-life insurance firms can also partner in offering the healthplus- life cover. The combi products may be promoted by all life insurance and non-life insurance companies, however, a tie up is permitted between one life insurer and one nonlife insurer only. Thus, a life insurer is permitted to enter an alliance with only one non-life insurer and vice-versa. * The sale of combi products can be made through direct marketing channels, brokers and composite individual and corporate agents, common to both insurers.However, these products are not allowed to be marketed through bank referral arrangements. The regulator further specified that the guidelines do not apply to micro insurance products, which are governed by IRDA ( little Insurance) Regulations, 2005. * Under the Combi Product, the underwriting of the respective portion of the risks will be underwri tten by respective insurance companies, i. e. , life insurance risk will be underwritten by the life insurance company and the health insurance portion of risk will be underwritten by the non-life insurance company. ImplicationsLife insurance has a much deeper penetration in India, as compared to the non-life insurance segment. This step is in sync with the governments, regulators and the insurance companys strategy to cover more people under the insurance umbrella. As insurers leverage on the marketing and operational network of their partner insurers, the proposed product innovation is expected to facilitate policy holders to select an integrated product of their choice under a single roof without shopping around the market for two different insurance coverage options from two different insurers.Therefore, insurers are expected to offer appropriate covers as an attr active proposition for the policyholders. India Foreign Direct Investment Trends India FDI Inflows a The decade gone by would be considered as the golden year for foreign direct investment (FDI) in India. Between year 2000-11, India attracted cumulative FDI inflow of USD 237 Bn. 70% of this FDI comprise equity inflows, rest being re-invested earnings and other zcapital. everyplace the last decade, FDI in India grew at CAGR 23% The bull run in India FDI started in FY 2006-07 when it grew at 146% over the previous year.FDI peaked in year FY 2007-08 and only marginally declined in the following years of economic crisis. For the eight months of FY 2011-12 (Apr- Nov 2011), India has already garnered USD 33 Bn. of FDI twin(a) the full year FDI of the previous year. Share of top five investing countries in India stood at 69%. Mauritius was the top country of origin for FDI flows into India primarily driven by the tax haven status enjoyed by Mauritius. go sector ( financial & Non-financial) attracted the largest FDI equity flows amounting USD 31 Bn. (20. % share). Other high share sectors in top five were Telecom (8%), Computer Software & Hardware (7%), living accommodations & Real Estate (7%) and Construction (7%). Over the years, Automatic route has contract the most used entry route for FDI investments in India indicating the gradual easiness of FDI policy. In FY 2010-11, 64% of Equity FDI inflows in India came via Automatic Route almost trebling from 22% share in FY 2000-01. Acquisition of shares constituted 25% and FIPB/SIA constituted 11% of equity inflows in 2010-11.Indias FDI policy has progressive tensely liberalised since nineties and only a few sectors, primarily in services sectornow has FDI cap on investment. Indias inward investment regime is now be considered most liberal and transparent amongst emerging economies. pecuniary Sector FDI Over the last decade, BFSI (Financial, Insurance & Banking services) was the most preferred destination for FDI in India. FDI in the BFSI sector accounted for over 12% of the total cumulative FDI inflows into India and over 5 9% of the FDI in Services sector.Between 2000-11, Services sector (BFSI and Non-Financial) attracted FDI of USD 31 Bn. With a 59% share, BFSI FDI share amounted to USD 18 Bn. The subsectors with BFSI attracted the following FDI equity inflows Financial USD 13 Bn. , Banking USD 2. 9 Bn and InsuranceUSD 2. 3 Bn. Cumulative Inflows Mauritius had the largest share of FDI investment at 43% amongst top countries investing in Indian Financial services sector. capital of Singapore (14%), UK (11%), ground forces (8. 5%) and Cyprus (3%) were the other countries in the top five lists.Top 10 BFSI FDI Equity inflows in India over the last decade amounted USD 4. 2 Bn. constitute US investors in Indian BFSI sector included Merill Lynch, Morgan Stanley, Bank of untried York Mellon, JP Morgan, Citibank Overseas, Franklin Templeton, rude(a) York Life, Metlife, AIG, Pramerica and PE/VC firms like Warburg, Blackstone, Carlyle, KKR & Co. and Apollo. Development of Indian capital markets (especiall y corporate bond markets) and further policy liberalisation in commercial banking will be the key for future investments in Indian BFSI segment.FDI Inflows from United States United States of America has been one of the top FDI investors in India. Reported cumulative FDI Equity Inflows from the States into India between 2000 2011 were $9. 8 Bn,placing it at rank 3rd after Mauritius & Singapore. If we account for the US FDI equity inflows into India routed through tax havens, the FDI number will be considerably higher. Keeping up with overall trend, the Services sector (Financial & Non-Financial) accounted for the highest share of cumulative FDI equity inflows from USA with share of 22% amounting USD 2. Bn. USA FDI equity inflows in services sector represented 7% of the total FDI equity inflows in Indian services sector and in Financial services sector represented 8. 5% of the total FDI equity inflows from all countries amounting USD 2. 6 Bn. Following were the top FDI inflows from U SA in Indian financial services 1 Citibank Overseas Investment Corp. into E-serve International USD 112 Mn. 2 Bank of New York Mellon into Kotak Mahindra Bank USD 102 Mn. 3 JP Morgan International Finance into JP Morgan Securities India Ltd. USD 75 Mn.FDI in Insurance sector Indian insurance sector got liberalised in 2001. Since then the sector has grown at 20% annually and have seen entry of 41 private insurance companies (Life 23, General 18) with many of them choosing to enter with a foreign joint venture partner. Investment through the FDI can be a maximum of 26%. In 2011, India was ranked 9th in life insurance business and 19th in general insurance business globally. The insurance density stood at USD 64. 4 (USD 9. 9 in 2001) and insurance penetration was 5. 2% (2. 3% in 2001).India has 49 life and general insurance companies with total investment of USD 6 Bn. as of March 2011. There are 24 companies operating each in the life insurance and general insurance with an investment of USD 4. 7 Bn. and USD 1. 3 Bn. respectively. One company operates in re-insurance sector. FDI in Indian insurance sector stood at USD 1. 36 Bn of which life insurance comprised USD1. 1 Bn and general insurance comprised USD 0. 2 Bn of FDI. American companies have been investing in the Indian insurance sector since it opened up in 2001.As of March 2011, there are four American insurance players operating in India as joint venture partners namely New York Life, Metlife, AIG and Pramerica Financial. In 2011, Berkshire Hathway announced its entry into India Life insurance segment and Libery Mutual Group also got necessary approvals from IRDA for entry into general insurance business with an Indian partner. Besides insurers, US based brokers like Marsh & McLennan and Aon corp have also entered Indian markets. The total investment by American insurance companies in India is USD 315 Mn contributing 26% equity capital of USD 1. Bn. Share capital of the entities they were joint venture p artners of. American origin FDI constituted 23% of FDI. Indias insurance industry is expected to reach USD 350-400 Bn. in premium income by 2020 making it among the top 3 life insurance markets and amongst top 15 general insurance markets. Its estimated the Indian insurance sector would attract USD 15-20 Bn. of investments in next couple of years. Liberalization of foreign investment in insurance sector thereby permitting up to 49% FDI will accelerate this flow f investments putting Indian insurance sector on a fast track to the top of the global insurance market. FDI in Financial inclusion Indian Financial Inclusion sector is predominantly characterized by rural retail banking, Non-Banking Financial Corporations & little Finance Institutions (MFIs). For over a decade now, the Indianmicrofinance industry has been a posterchild of Indian Financial Inclusion. As of2010, microfinance institutions had a clientbase of 26 million borrowers and the totalloan outstanding was in excess of $3 Bn.The number of clients is expected toincrease to 64 million in 2012. Investments in NBFCs & MFIs not traded on the stock exchange fall under the purview of Foreign Investment Promotion Board (FIPB). FIPB has set the following rules for FDI in start-up companies. From a slow start in 2006, equity investments in the Indian Microfinance sector skyrocketed in the 3 years from 2006 to 2009. The sector saw a total of 32 deals with a total invested capital of $230 mnbetween 2006 to 2009. Private equity investments constitute 70% of the total investments in Indian Micro Finance sector. 0% is constituted by Microfinance focused funds and private investors. US based private equity firms, Sequoia capital, Silicon vale Bank & Sandstone capital have invested $150 mn in the Indian Microfinance sector. Another area within Financial Inclusion which has attracted private equity investors is technology services for microfinance institutions. US based Private equity firms like Blackstone, Intel C apital has invested $50 mn in Financial Information earnings & Operations (FINO), a technology services company in the Financial Inclusion sector.The large size of the unbanked population means that there is great potential for continued high growth. Although the MFI sector is currently tweaking its business model to new regulatory reality, the high growth potential holds a significant promise for the investors in years to come FDI in Capital Markets Indian bourses both securities & commodities are amongst the favorite hunting spots for foreign investors wager on Indias growth story. These businesses appeal to investors as theyhave long term horizons and signify bets onthe countrys growth.In 2004, 13% of thetotal PE investments made in the banking &financial services space were in stockexchanges. Since the beginning of 2007, 17 transactions (including syndicate deals)took place with a disclosed deal value ofmore than $1. 15 billion. Out of this, 8 dealswith disclosed value of mo re than $268million happened in 2010 only. In 2010, NSE had 12 foreign investors with a total foreign investment of 32% compared to mad cow disease which had 8 foreign investors with share of 27% investments. In the same period, MCX had 22% foreign holding & NCDEX 15% foreign investments.Some of the key US investors active in Indian exchanges are NYSE group, Atlantic LLC, Goldman Sachs, Morgan Stanley, Citigroup, Northwest feign Partners, George Soros, Argonaut ventures. Fidelity, Intel Capital, Merril Lynch, and Bessemer Capital are some of the US investors. Most of the transactions involving these exchanges have been secondary in nature. The change in regulations (restricting the single investor holding to 5%) also added to the spurt in secondary deals. The lucrative exchange space continues to attract more players who are looking to increase their market shares.India outward FDI in USA Strong economic growth and progressive liberalization has induced Indian companies toexpand t heir presence into new markets and USA is the largest receiving system of Indian outboundinvestments. During 2004-09, India invested USD 5. 5 Bn. in US across 127 Greenfield projects. 80% ofthis investment went into five sectors Metals, Software & IT services, Leisure &Entertainment, industrial machinery, equipment & tools and financial services. The topthree states for Indian investments were Minnesota, Virginia and Texas. 10 Indiancompanies accounted for more than 70% of the US $5. Bn invested in Greenfield initiativesin US. In the same period, Indian companiesinvested USD 21 Bn. in mergers &acquisitions in United States. 83% of M&Ainvestments from India were in thefollowing sectors Manufacturing, IT & ITenabled services, Biotech, Chemicals &Pharmaceuticals, Automotive and Telecom. As of FY2010, US accounted for 6. 5% ofIndias outward FDI flows making Indiathe second largest investor in USA. As far as Indian Financial services sector investments in US goes, only a few public an d private sector banks have expanded in USA by providing niche services (e. g. remittances).Indian outbound deals in the US are predominantly majority stakes paid in cash and financed with debt. In future, the nature of collaboration is likely to evolve with Indian companies seeking more alliances and transactions involving minority stakes & joint ventures rather than focusing on majority stakes. US offer Indian companies many benefits for investment notably abundant naturalresources, large consumer markets and access to innovation. Reciprocally, Indiasinvestment in this worlds largest recipient of FDI brings new skills, strengthenmanufacturing and will create jobs in the US. Literature review Dunning and Narula, 1996) exporting growth in India has been much faster than GDP growth over the past few decades. Several factors appear to have contributed to this phenomenon including foreign direct investment (FDI). However, despite increasing inflowsof FDI especially in recent years t here has not been any attempt to assess its contribution to Indias exportperformance one of the channels through which FDI influences growth. The Government of India recognizes thesignificant role played by foreign direct investment in accelerating the economic growth of the country and thusstarted a swing of economic and financial reforms in 1991.India is now initiating the second extension reformsintended for a faster integration of the Indian economy with the world economy. As a consequence of theintroduction of various policies, India has been quickly changing from a restrictive regime to a liberal one. Now FDIis also encouraged in most of the economic activities under the automatic route. Studies about Western firms propose that market size and expected growth are the most ingrained determinants ofFDI into the area. Political and economic stability is also an important factor poignant FDI.Over the past 30 years,there have been various studies done on the impact of outbound a nd inbound activity of multinationals on thegrowth and fiscal restructuring of the economies that they operate in. These studies advise that this is dependent on three main variables the type of FDI taken on, the composition of the localresources and capabilities of the country, and the economic and organizational policies followed by governments. Firms employ FDI in order to best utilize or manage more efficiently the existing competitive advantages. (Love and Lage-Hidalgo, 2000)Labor cost which is one of the main components of the cost function also influences FDI. Some studies find verylittle or negative relationship between wages and FDI, Some studies suggest that higher wages do not alwaysdiscourage FDI in some markets and therefore there is a positive relationship between wages and FDI. As higher labour costs leads to higher productivity which gives better quality goods. Latelystudies are aimed towards the impact of specific policy variables on FDI in the emcee country. Trade , tariff, taxes andexchange rate are included in these policy variables. Asied (2002).Emphasize on policy reforms in developingcountries that act as a determinant of FDI. They state the corporate tax rates and the sincerity to foreign investmentare important determinants of FDI. Horizontal FDI is linked with market seeking behavior and is induced by lowtrade costs. Therefore high tariff barriers motivate firms to take on horizontal FDI. Thus outturn abroad byforei