1- 48 pages (july issue) repaginated · jour jour journal, july 2004nal, july 2004 2 vantage point...

Volume II, No. 8

JULY 2004

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Editorial Board:C.S.RaoP.A. BalasubramanianS.V. MonyK.N. BhandariA.P. KurianNick TaketAshvin ParekhNimish ParekhHasmukh ShahA.K. Venkat SubramaniamProf. R.Vaidyanathan

Editor:K. Nitya Kalyani

Hindi Correspondent:Sanjeev Kumar Jain

Design concept & Production:Imageads Services Private Limited

Printed by P. Narendra andpublished by C.S.Rao on behalf ofInsurance Regulatory and Development Authority.

Editor: K. Nitya Kalyani

Printed at Pragati Offset Pvt. Ltd.17, Red Hills, Hyderabad 500 004and published fromParisrama Bhavanam, III Floor5-9-58/B, Basheer BaghHyderabad 500 004Phone: 5582 0964, 5578 9768Fax: 91-040-5582 3334e-mail: [email protected]

© 2004 Insurance Regulatory and Development Authority.Please reproduce with due permission.Unless explicitly stated the information and views published inthis Journal may not be construed as those of the InsuranceRegulatory and Development Authority.

1�� Jour Jour Jour Jour Journal, July 2004nal, July 2004nal, July 2004nal, July 2004nal, July 2004

C.S.RAO

This issue of IRDA Journal looks at the state ofpensions in the country today and thetransformation taking place in this sector to servethe changing needs of the working population. Theshrinkage in the size of the family, the gradualerosion of the concept of joint family, increase inmobility induced by career options available tochildren, improvements in medical science leadingto increase in longevity have all contributed to theneed for a more meticulous planning for old agebecoming inevitable.

Though life insurance business includesprovision of annuities, this line of business has notgained momentum yet due to a variety ofcircumstances. The predominance of non-contributory, defined pension scheme applicable togovernment servants, both Central and State, whichwas later extended to some of the public sectorundertakings coupled with Employees ProvidentFund scheme for the workers in the organised sector

From the Publisher

had made the development of an independentpension market somewhat difficult. Added to this,the lower tax benefits for pension investmentrelative to that for other kinds of investment (inhousing property or life insurance policies or evenmutual funds for example), is one important reasonfor the relative neglect of annuities.

The insurance companies were also not able todemonstrate the benefit of monthly pensions asvoluntary retirement savings had a liberalwithdrawal regime, which by its very naturetruncates the pension payout. Hybrid annuityproducts that include a return of capital also havethe same effect on the quantum of the annuity.Hence, retirement solutions that lock up the capitalare imperative for the new breed of investors to geta product that delivers its full social and protectivevalue. And making that product attractive in termsof pricing and value propositions is the job of thelife insurance industry.

�� Jour Jour Jour Jour Journal, July 2004nal, July 2004nal, July 2004nal, July 2004nal, July 20042

Vantage Point - K. Nitya Kalyani 4

Preparing the Ground - T.K. Banerjee 17

Perks of the Job - Arpan Thanawala and Renuka Sane 20

Debate Revisited - Dr. Puneet Chitkara 22

In your Hands - Dinesh Chandra Khansili 23

End to End - H.O.Sonig 25

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Datamining - “The Secret Weapon - M. Arunachalam 36

Statistics - Life Insurance 40

Statistics - Non-Life Insurance 42

Briefs 44

Round up 48

What & Why?- New Pension Scheme

Inside

S.P. Subhedar

U.K. Sinha

Past to Future- A Look at Pensions in India

5The Road to Detariffing ODRecommendations of the S.V. Mony Committee

8

14

Inside

ISSUE FOCUS


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he Future BeckonsTThe Issue Focus this month is on Pensions. The topic has found a new level of attention following the reformsinitiated by the Government last year and we at the Journal wanted to keep you informed about the past, thepresent, and the potential future of the pensions sector considering that life insurance companies are solelyentrusted with writing annuities and that they could be interested in participating in other segments of thebusiness, like funds accumulation and management if and when the policy allows them to.

We bring you a state of the sector report from Mr. U. K. Sinha, Joint Secretary, Ministry of Finance, whohas been working with Pension reforms for over a year now and perspectives on the sector, as it has beenthrough the years and as it is envisaged to be, from life insurance industry veterans like actuaryMr. S. P. Subhedar, former Member, IRDA, Mr. H. O. Sonig, and the current Member (Life), IRDA, Mr. T. K.Bannerjee.

Also bringing in interesting inputs on occupational pensions are actuary Mr. Arpan Thanawalla andresearcher Ms. Renuka Sane. Dr. Puneet Chitkara, Senior Researcher, India Pension Research Foundationand Mr. Dinesh Khansili, Deputy Director (Actuary), IRDA bring you primers on pensions, with the formertelling us the differences between and the virtues of Defined Benefit and Defined Contribution systems andthe latter about the different kinds of annuities and what you get when you make choices.

We continue with Mr. M. Arunachalam’s extensive and well thought out article on Technology and theIndian Insurer and hold back Keeping Count, the series on accounting gimmicks once more, this time becauseof a shortage of space!

The news section – In The Air – features extracts from the report of the S. V. Mony Committee which wasconstituted by the IRDA to create a road map to detariffing Own Damage insurance. The full report is on theIRDA website (www.irdaindia.org) for download and comments.

With apologies to consumers we hold back the considerable material we have got for the End User section,again due to a shortage of space. We promise to make up for it though – our entire issue next month is goingto be on the customer. On the state of customer grievances redressal in the industry to be specific.

We have requests to announce our editorial calendar a little more in advance so that readers who want tocontribute to sections of their interest can have enough time to do so. That’s a good idea and we shall do thatfrom now on. The issue after the one on customer grievances redressal, which is the August issue, will be onrisk management. That is, tracking what insurance companies and other stakeholders in the industry do tomanage their own risks.

We are planning special issues on exempted insurers, on the myriad problems and concerns of insuranceagents and one evaluating what is happening with infrastructure and social sector investments that theinsurers were expected to make in what was envisaged as a win-win situation for a country liberalising itsinsurance industry and thirsty for long term funds for infrastructure as well.

Please do write in or email us if you wish to write on any of these topics or have suggestions for them.

K. Nitya Kalyani


� ��

“The Customer is...K. Nitya Kalyani

… sometimes demanding,sometimes cranky, sometimesrighteously angry, but always right. He“is the reason we exist,” goes the sayingby Mahatma Gandhi that we have seenin posters around the country incommercial establishments.

The setting of the poster maysometimes be heartening andsometimes ironical. But it is a simpleand uplifting truth.

There is a neat synergy between abusiness and its customer which meansthat usually their dealings are on abalance, each getting what he wants outof a business transaction, or able tonegotiate a fair deal.

In the financial services industries,there is a basic asymmetry ofinformation that is built in to thestructure of the product and thetransaction that alters this balance. Abank lends money on the basis ofinformation and even trust, but shouldthe loan turn bad, there are fewpractical and elegant ways to extricateits capital from the situation.

Investments and savings are madeby customers on the basis of promises,and returns and the safety of capitalitself could come into question with theinvestor dealing with a difficult

situation with insufficient informationand the means to deal with it.

In insurance the customer issimilarly hampered. For, as we all know,the product is delivered only on acontingency and when the customer isalready disadvantaged, but has paid forit in advance.

Here the asymmetry of informationand power works differently at twodifferent points. At the point of sale, itis the customer who holds the reins in

terms of what he wishes to cover, whathe discloses and how truthfully. Butwhen it comes to paying claims, thesimple fact that payment may bewithheld – even temporarily – meansthat the insurance company has theclear upper hand.

Typically such a service provider hasunhappy customers with whom it is ill-

equipped or uninclined to deal by thenature of its structure and the realitiesof its strong and almost unchallengablefinancial position. Add monopoly, orvirtual monopoly, and a public sectornature of the industry and it onlymagnifies the situation.

It is in this context that the well-meaning grievances redressalmechanisms have been mandated andput in place by the industry and itsregulator, and the Government throughthe judicial system.

Grievances officers, ombudsmen, LokAdalats, consumer fora …. are allcomponents of that system which seeksto maintain some balance and providea voice to the individual customer vslarge business.

The system seems to have provedgood in parts. Which parts and howmuch, and what it has achieved for theindustry and its customers is what wetry to examine in our next issue.

We will also bring you some insightsfrom the cases that have come to thesegrievances redressal fora and thelessons that they carry for us.

If you have a suggestion orexperiences you want to write about, youare most welcome!

There is a neat synergybetween a business and its

customer which meansthat usually their dealings

are on a balance.


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Bonus only out of Surplus says IRDA

The centralised rating regime forOD insurance should be replacedby individual companies’ ownrating systems with safeguardsand internal and regulatorycompliance.

Key underwriting factors as areadopted by insurance companiesworldwide need to be adopted byinsurance companies here forarriving at their individual ratingsystems. From over 30 ratingfactors, the Group has identifiedthe following as critical whileleaving the weightage to thecompanies.

I Vehicle Related· Make and model· Engine power· Age of the vehicle· Licensed carrying capacity

/ GVW as applicable· Safety features· Repair and replacement

costsII Driver/Owner Related

· Age· Driving experience

· Driving record· Health and habits

III Use Related· Annual mileage run· Geographical location· Personal, commercial

private, commercial for hire· Type of goods transported

The Group has also given thefollowing indicative, not exhaustive, list

of other rating factors which play a rolein underwriting risk:

· Theft-proneness of the vehicle or itsparts

· Frequency and nature of accidents· Named driver· Occupation of owner· Traffic conviction record· Special driving education, safety

training· Membership of automobile

association

The Group has recommended thatcompanies use the Risk Factor RatingSystem (RFRS) to create and rate new

products and also that the file and usesystem be followed to ensurecommitment to discipline in theirpractices.

Under an RFRS the premium iscalculated as a product of base premiumand relativity factors loaded for differentrisk categories. The premium ratingstructure generally used in the UK,Singapore, Australia, Canada, England,Germany and Japan is based on thenumber of risk factors.

As a starting point to this RFRS, theGroup recommends the use of the existingtariff as guide rates on which the loadingor discount can be calculated by theindividual insurer who should includethese details in their ‘file and use’documents.

The companies, it has recommended,should also be given a free hand indetermining the best means to safeguardthe existing accumulated ‘No-claim Bonus’of the insureds, adding that it is hopefulthat insurers will offer new products toprotect the No Claim Bonus for a price asexisting in some of the other markets inthe world.

The Road to Detariffing OD��

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The Group hasrecommended that

companies use the RiskFactor Rating System

(RFRS) to create and ratenew products.


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Similarly, the decision to imposedeductibles is also best left with theindividual insurer, the Group has said.

The scales of depreciation which arepart of the OD tariff, and hence will nolonger apply, should also be left to theindividual insurer, the Group has said,suggesting that in order to avoidinconsistencies the values of the vehiclesshould be fixed by a body comprising ofrepresentatives of insurance companies(the General Insurance Council), TACand the Federation of Indian AutomobileAssociations, and made known througha publication, on the lines of the Glass’sGuide of the UK.

The Group has recommended somesafeguards for implementation by theinsurers:

i) The basic rates, details ofunderwriting factors adopted for useand their weightage, dispensationrelating to application of band forvariance in rates, deductibles, noclaim bonus scales etc will have to beapproved by the Actuary and Board ofDirectors or their delegatedcommittee, before submission to theIRDA under the ‘file and use’ system.

ii) These and the practices in thecompany should be subject to regularmonitoring by the Internal Auditsystem and this function should bereflected in their terms of reference.

iii)A Compliance Report will have tobe placed before the Board at leastonce a year.

iv) Submission of agreed statisticalreturns to a designated authorityshould be made a compliance issue atthe level of the Board, and non-compliance should attract punishment.About statistics, the lack of which

has compounded the problems of theindustry in the matter of Motorinsurance the Group had this to say:

“Taking into account the vitalsignificance of statistics on the portfolioand the problems faced by the industryin the absence of such statistics theGroup recommends that submission ofinformation in an agreed format to adesignated organisation be mademandatory on the part of the insurerand a compliance issue vis-à-vis the

Board and Regulator.In the interests of customer service,

it has recommended that a copy of theproposal and the quotation of thepremium rates be made a part of thepolicy documentation.

In the context of a free market rateregime for OD, IRDA should ensure thatinsurers do not offer stand-alone ODcover without attendant third partyprotection or refuse pure third partyinsurance cover, the Group has said.It has recommended that the IRDA:1. Strengthen their administrative

machinery to handle the ‘file and use’format in the new paradigm toscrutinise underwriting parameters,

weightages, loading and discounts,assumptions of expenses, claims cost,profitability of the product and theportfolio in an agreed time frame.

2. Set up a separate dedicated Cell orDivision to continually monitor theperformance of the Motor portfoliospecifically, with adequate staffconsisting of senior professionals,actuary, statistician and ITprofessionals.It has also recommended that theIRDA take urgent steps to set up aninstitution in collaboration withinsurance companies and automobilemanufacturers to process industry’sstatistics and undertake R & Dactivities relating to the Motorportfolio, more particularly in thearea of design, reparability and‘repair friendliness’ of the vehicle.It also says that the IRDA (or theCouncil) should facilitate a smoothtransition from an administeredpricing regime to a disciplined free

market regime by undertakingsystematic awareness campaignsbefore and after a change isimplemented. The Council shouldalso act as a self-regulating body forthe industry, with the Regulatorcontrolling by exception.

The Group has urged the IRDA to� actively pursue with the Ministry

concerned to amend the MV Act toaddress the features relating tounlimited liability, concessionalcourt fees, jurisdiction and statutorytime limitation

� pursue with the Ministry concernedand/or state governments to ensurethat all vehicles on the road are dulyinsured as per the MV Act

� initiate a project to set up a MotorThird Party insurance Pool asrecommended by the JusticeRangarajan Committee. This will bea mechanism by which all insurersin a market share the premium andclaims and net outcome isdistributed annually among the poolmembers

� participants so that commonexperience is shared by all on a basisto be agreed

� initiate steps to move towards a freemarket regime for the whole Motorinsurance portfolio and

� in the context of initiating the abovestep, move towards a free marketregime in respect of all other businessunder the tariff regimeThe Group submitted its report to

the Chairman, IRDA in April 2004. TheMembers of the Committee, which wasmandated to suggest a road maptowards detariffing Motor Own Damageinsurance, were:

Mr. H. S. Wadhwa, CMD, NationalInsurance Company, Mr. Micky Brigg,CEO, Royal Sundaram AllianceInsurance Company, Mr. M. K. Tandon,Retired CMD, National InsuranceCompany, Mr. S. K. Mishra, Director(RT), Ministry of Road Transport andHighways, Mr. Jagdish Khattar, CEO,Maruti Udyog, Mr. D. Varadarajan,Advocate, Legal Adviser to IRDA andMr. P. K. Swain, AGM, TAC, Convener– Secretary.

The basic rates will haveto be approved by theActuary and Board of

Directors beforesubmission to the IRDAunder the ‘file and use’

system


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�� The licence of Mass Insurance Broker Pvt. Ltd., registered with IRDA as Insurance

Broker, has been suspended by the IRDA for non-compliance with regulatory mandatespertaining to submission of financial and other returns.

Regulation 26 of IRDA (Insurance Brokers) Regulations, 2002 mandates that everyinsurance broker shall before October 31 and April 30 each year furnish to theAuthority a half-yearly un-audited financial statement containing details ofperformance, financial position, etc., along with a declaration confirming the fulfilmentof requirements of capital in accordance with the provisions of regulation 10 anddeposit requirements in accordance with the provisions of regulation 22.

Mass Insurance Broker did not submit these returns after reminders and a lapse ofconsiderable time and also did not respond to a Show-Cause Notice of the Authorityasking it to show cause why its license to act as Direct Insurance Broker should notsuspended, for failing to comply with Regulation 26 of IRDA (Insurance Brokers)Regulations, 2002 and for not responding to the directions of the Authority.

The broker neither acknowledged receipt of the notice nor did he reply to it norsubmitted its financial returns. Therefore, in exercise of the powers conferred upon theAuthority by Regulation 34 of IRDA (Insurance Brokers) Regulations, 2002, the IRDAsuspended the broker with effect from June 8, 2004 and the broker will not be entitledto payment of any remuneration for the insurance broking activities carried out fromthat date onwards.

IRDA DIRECTS PRODUCT RECALLThe IRDA has directed United India Insurance Company Limited to withdraw

the Uni Industry Care Insurance Policy and discontinue the marketing of thesame by its offices, agents and insurance brokers with immediate effect.

The rates being quoted in the market for the comprehensive insurancepolicy covering industrial units against fire, flood and other hazards andintroduced in the market a few weeks ago, did not conform to the tariff.

The policy had been cleared by the IRDA with some modifications thatrequired the company to adjust the premium rates for different covers to bringit on par with the fire tariff rates, but it was found that this change was notmade. This led to a directive to withdraw the policy. IRDA clarifies that policiesalready sold will remain valid.

INSPECTION REPORT OF NIS SPARTAIRDA has instructed NIS Sparta, an accredited training institute for imparting

IRDA mandated training for agents and prospective agents, to close some centresand convert others to company owned ‘mother’ training centres from the currentfranchisee owned ones.

The move comes in the wake of an enquiry and the company’s submissionsduring May and June this year following inspection by IRDA in April that revealedlack of necessary infrastructure.

According to the instructions, NIS Sparta is required to close down thetraining centres at Agra, Bhiwani, Haridwar, Kanpur, Lucknow and Meerut.

Forty three other centres have to be converted into mother centres in 40days and 13 more in 60 days. The approval of all other training centres exceptthe above and the seven mother centres in Mumbai, Bangalore, Chennai,Kolkata (two) and Delhi (Two) stand withdrawn.

The company has been asked to report back confirming the conversion ofthe franchisee centres into mother centres and that it has no other franchisedcentres. It has also been required to furnish operational details about the trainingit is offering at its centres on a regular basis.


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Past to FutureS.P. Subhedar

The majority ofthe Indianpopulation is toopreoccupied withits struggle forsurvival duringworking life toafford the luxury of

thinking about post retirement life. Inthis context, questions like “Will I haveenough to live on when I retire?” or “WillI get proper healthcare during my oldage?” which are of concern to the peoplein developed countries or to the elitesection of the population in India are ofleast significance to this majority of theIndian population.

However, looking to the increasinglongevity of the general population, wecannot allow the concern about postretirement life to remain an elitephenomenon. As per the results of the2001 Census, the expectation of life atbirth has increased from 57.7 years formale and 58.7 years for female in 1991to 62.3 and 65.3 respectively . Theexpectation of life at 60 has alsocorrespondingly gone up from 14.5 yearsin 1991 to 17 years in 2001.

Even though ever since 1889, whenOtto von Bismarck, Prussia’sChancellor, introduced the first statepension, people have been increasinglylooking to the state to provide old ageincome, healthcare and protectionagainst poverty, it is increasingly beingrecognised that the state cannot providea complete solution to this problem. Themagnitude of the problem has forced thegovernments the world over to moveaway from the concept of a social welfaresystem of intergenerational transfersto self-financed social welfare systems.

In India, the issue is of a much highermagnitude. The role the Government canplay in the self-financed welfare systemis to create an institutionalinfrastructure to enable and encouragepeople to undertake the task of creatingassets for old age income. It is in this

context that the recent Government ofIndia initiatives to encourage thedevelopment of a structure for privately-managed pensions in India is soimportant.

The Government initiativeThe Old Age Social and Income

Security (OASIS) project of the Ministryof Social Justice and Empowerment wascommissioned in this background forexamination of policy questionsconnected with old age income security.The basic mandate of the project was tomake concrete recommendations to theGovernment of India for initiatives thatwould facilitate people to self-financetheir old age income.

The constitution of the OASIS

Committee was one of the majorinitiatives of the OASIS project. Thecommittee submitted two reports to theGovernment of India, the first one inFebruary 1999 and the second inJanuary 2000. The first report coveredexisting mechanisms for social security– provident funds, pension schemes andPublic Provident Fund and the secondreport covered other issues, including anew voluntary pension system,individual choice of diverse funds,pension fund managers and regulatoryauthority.

In its first report, the Committee hasenunciated the basic philosophy of thepension reforms initiative that

“Economic security during old ageshould necessarily result fromsustained preparation through life-longcontributions. The Government shouldencourage fully funded old age incomesecurity system that puts emphasis onthe value of thrift and self help. TheGovernment should step in only in caseof those who do not have sufficientincomes to save for old age.” The twosignificant achievements of the OASISCommittee reports are that :

� these reports, for the first time,generated public debate onreforming India’s pension system ;and

� created awareness about self-financing of old age income.

The recommendations of the OASISCommittee for introduction of DefinedContribution Fully Funded IndividualRetirement Account Pension withuniversal access has been accepted bythe Government of India and theGovernment has also set up an interimPension Fund Regulatory andDevelopment Authority (PFRDA) by anexecutive order and has evolved a planfor the phased introduction of a DCindividual retirement account pensionscheme.

Environmental factorsBefore we go into the current coveragefor old age income and the scope forfuture coverage, it would be useful todwell on the various environmentalfactors that have influenced the coveragein India.

Of the world population of 6.3 bn,India has 1.027 bn, i.e. about 16.3 percent. However, the elderly population inIndia is about 12.5 per cent of the worldelderly population. This indicates thatthe Indian population is relativelyyounger because of high birth rate andhigh death rate; the rate of birth per1,000 population being 25.8 and rate ofdeath per 1,000 population being 8.5as per 2001 census. There are 70 mnpeople over 60 in India and just about

- A Look at Pensions in India

The main driving forcebehind the formulation of

the proposed DCindividual retirement

account pension schemeappears to be the need to

arrest the growingunfunded liability of thegovernment employees’

pension.

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10 per cent of then have their own incomeand the others have to rely on transfers,mainly from their children.

There are a number ofenvironmental factors that haveinfluenced the majority of Indians in notgetting concerned about providing forold age income. The first is the jointfamily system which supported theelderly persons in the family. With thedisintegration of this system,particularly in the urban area, this ischanging. Another reason is that theIndian economy is essentially anagricultural economy and about 74 percent of the population is engaged inagricultural pursuits and individualsengaged in agriculture pursuits do notretire at a specified age.

The other reason is inadequatedisposable income. A major part of thepopulation in India suffers from thisinadequacy and, to my mind, this doesnot allow them to think in terms ofproviding for old age income. All thesefactors contributed to the low concern inIndia about provision for old age income.In this context, pensions in India haveessentially remained confined to thesalaried section of the population in theform of occupational retirement benefits.An excerpt from the World Bank reporttitled “India The Challenge of Old AgeIncome Security” supporting this isreproduced herein:

“ …….As in other poor countries, lowcoverage is a function of a largeagricultural population as well as aninformal sector that evades all taxes andsocial insurance contributions.Participation in voluntary savingsschemes is even more limited. This is notsurprising given that the main incentivefor contributing to such a program is areduction in income tax payments, abenefit relevant to 2-3 per cent of workersthat actually pay income taxes.

This is not to say that the rate ofprivate savings in India is low. Rather,the point is that most of this savingsoccurs in the top half of the income

distribution and is concentrated in bankdeposits and other short term savingsinstruments. The reluctance to engagein medium or long term savings is partlya reflection of low incomes of majorityof Indian households. With a relativelysmall group saving for retirement, asubstantial portion of the populationwill inevitably depend on children,charity or the state when their abilityto earn wanes………”

— World Bank Document on India

In India, currently there are anumber of vehicles that facilitatebuilding up of assets for old age incomeand it might be useful at this stage toreview the coverage achieved by thesevehicles. The World Bank documentreferred to above has given the coverageunder the Compulsory, Voluntary (tax

preferred) and government sponsoredSocial Assistance schemes for old ageincome security which is reproducedherein:

The document does not specify as towhat constitutes “labor force.”

Pension coverage in IndiaAs mentioned earlier, pensions in

India remained confined to the salariedsection of the population in the form oftheir occupational retirement benefitsand, till about 1987-88, there was hardlyany personal pensions business in India.The Deferred Annuity product of LIChad hardly any sale and the immediateannuities were purchased by only thetrustees of occupational pension funds.In 1987-88, LIC introduced two personalpension plans, a deferred pension plan

CompulsoryProgramme Legal Coverage* Effective Coverage # FinancingEmployees’ Employees in firms About 5.8 per cent of the Employer andProvident Fund with more than 20 labour force employee

employees contributionsEmployees’ Pension Same as above with About 5.4 per cent of Employer, governmentFund some exemptions the labour force contributionsCivil Service Civil servants at About 3.5 per cent of State or centralPension Scheme state and federal level the labour force government budgetsGovernment Civil servants at Most civil servants EmployeeProvident Fund state and federal level contributionsSpecial Provident Certain occupations About 0.5 per cent Employer andFunds and employees in of the labour force employee

Jammu and Kashmir contributions

Voluntary, tax-preferredPublic Provident Fund All individuals About 0.8 per cent Contributions

of the labour forceSuperannuation plans All employees About 0.2 per cent Contributions

of the labour forcePersonal pensions All individuals About 0.2 per cent Purchase of annuity like products

of the labour force

Social assistanceState level Varies by state Varies by state State budgetssocial assistanceNational Old Age Destitute persons About 15-20 per cent Central budgetPension Scheme over age 65 of population over 65

*Legal coverage for EPS/EPF extends to 177 types of establishments. #Effective EPS coverage refers to a subset of EPF members.”


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by name “Jeevan Dhara” and animmediate pension plan by name“Jeevan Akshay” with return of one percent per month. The Government allowedpremium on these two plans up to Rs40,000 to be paid from pre-tax income.

Because of the tax incentive, therewas a great demand for these products.This demand continued till 1992, whenthe Government decided to withdrawthe tax incentive. While withdrawingthe tax incentive, the Governmentallowed the policyholders of JeevanDhara to surrender their policieswithout treating the surrender value astaxable income in their hands. The salesof these plans immediately dropped andlarge number of policyholderssurrendered their Jeevan Dhara policies.

In 1996, LIC introduced a deferredpension plan by name “JeevanSuraksha.” The Government allowedpremium for policies under this plan upto Rs 10,000 to be paid from pre-taxincome. The plan was well received inthe market. Yet, as on March 31, 2003,LIC’s in-force portfolio of these policieswas just 1.3 mn. Allowing for the JeevanDhara portfolio of LIC and deferredpension policies sold by private insurers,the total deferred pension portfolio ason March 31, 2003 could be just abouttwo mn.

In India, the two mandatory employeeretirement benefits are provident fundand gratuity or severance pay.Establishments satisfying certainspecified conditions have to providethese benefits. Retirement benefit in theform of monthly pension is essentiallya British legacy, with this benefitavailable in government service andMNCs.

In the late eighties, the public sectorbank and insurance employee unionsmade a demand that they be providedretirement benefits on par withgovernment employees, the governmentemployees having the retirementbenefit of non-contributory index linkedfinal salary pension, gratuity andprovident fund to which only employeescontribute.

The Government, after protractednegotiations conceded the demandand the final salary index linkedpension financed by employers’contribution to provident fundwas introduced in mid-nineties inpublic sector banks and insurancecompanies. Following this, theGovernment also allowed final salaryindex linked pension to the subscribersof Employees’ Provident Fund (EPF)by diverting 8.33 per cent of employer’scontribution to the provident fund to

the pension fund called EmployeePension Scheme 1995 (EPS 95), withthe Government contributing 1.16per cent of salary to this scheme.Currently 26.4 mn employees arecovered under the scheme.

The number of members coveredunder the occupational pensionsarranged with LIC was 1.083 mn as onMarch 31, 2003. The portfolio of privatesector life insurers as on date is notsignificant. Allowing for the personscovered under the Trustee administeredpension schemes, the number coveredby such occupational pension fundscould be just about two mn.

Thus, the coverage under personalpensions and occupational pensions issmall. The following Table givessegment-wise pension coverage in India:

According to the 2001 Census, thetotal number of workers in India is402.5 mn of which 313.2 mn are mainworkers and 89.3 marginal workers. Ifwe group the retirement benefitsegments mentioned in the Table belowinto mandatory and voluntary, thedivision would be as follows:

Of the 10 segments listed in theTable the following schemes are notincluded for the reasons given herein:

Scheme and Nature of Benefit Coverage

1. Govt employees’ pension(Central, state, other departments like Post and Telegraph, Railways and armed forces) 11.1 mn- Non contributory index linked final salary pension (DB)- Govt Provident Fund – employees only contribute (DC)

2. Means tested tax financed assistance to the destitute aged 65 and above 6.9 mn

3. Public Provident Fund (DC) 2.8 mn4. Employees’ Provident Fund (DC) 29.3 mn5. Provident Funds for Coal Mines, Assam Tea Plantations,

Seamens’ and Jammu and Kashmir (DC) 2 mn6. Employees’ Pension Scheme 95 (Hybrid) 26.4 mn7. Gratuity or severance Pay NA8. Occupational Pensions (Both DB and DC) 2 mn9. Personal Pensions offered by life insurers and mutual funds 2 mn10. Varishtha Pension Yojana – Immediate Annuity for persons

aged 55 and above 0.30 mn

Mandatory Benefit Coverage

Government Employees’ Pension 11.1 mn

Employees’ Provident Fund 29.3 mn

PF for Coal Mines, Assam TeaPlantation, Seamens’ and J & K 2.0 mnTotal Mandatory 42.4 mn

Voluntary

Public Provident Fund 2.8 mn

Occupational pensions 2.0 mn

Personal pensions including VarishthaPension Yojana 2.3 mn

Total Voluntary 7.1 mn

Total of Mandatory and Voluntary 49.5 mn

�� Jour Jour Jour Jour Journal, July 2004nal, July 2004nal, July 2004nal, July 2004nal, July 2004 11

��

� Means tested tax financedassistance: a social assistancescheme for destitute

� Employees’ Pension Scheme 95:membership of EPS 95 being sub-setof

� EPF membership Gratuity: membersmostly covered under EPF andnumber covered for gratuity notavailable.

The proposed DC individualretirement account pension schemeis yet to start but the indicativecoverage numbers are : 50,000 newCentral Government employees perannum and 50,000 new stategovernment employees per annum. Thevoluntary coverage in the initial yearswould be very small.

The comprehensive social securityscheme designed by the Ministry ofLabour providing death benefit ofRs. 1,00,000, hospitalisation benefit ofRs 30,000 p.a. and pension benefit ofRs. 500 p.m. to be funded throughparticipants’ contribution of Rs. 50 andRs. 100 p.m. and cess of Rs. 0.10 perlitre of petrol / diesel sold has not beentaken into account here. This scheme isenvisaged to cover more than 250 mnworkers.

The participation rates for coverageunder mandatory schemes for mainworkers works out to 42.4 /313.2 = .1354,i.e. 13.54 per cent and for voluntaryschemes it works out to 7.1 / 313.2 =.023, i.e. 2.3 per cent. The totalparticipation rate working out to 15.84per cent.

According to the OASIS Committeereport there are 13 mn salaried workerswho do not have access to any schemefor building up assets for old age income.Providing them access to the proposedDC pension scheme is a win-winsituation for the pension providers andthe individuals concerned.

It will thus be seen that coverageunder schemes for building up old ageincome is very low and a lot of

developmental work is required toincrease the coverage.

Future prospects

The Government, realising the need fordevelopmental work, has entrusted thetask of developing privately-managedpensions in India to the PFRDA. Thispart of the paper attempts to analysethe prospects of increasing the coveragefor old age income.

For the purpose of this analysis itmay be useful to divide the workingpopulation into four segments, viz.:

� the government sector;

� public sector units and local bodies;

� the private sector; and

� individuals, particularly nonsalaried workers.

The employees in the Governmentsector are fully covered. The employeesin Central Government employment ason December 31, 2003 have non-contributory final salary index linedpension, gratuity and GovernmentProvident Fund to which the employeesonly contribute and those joining theCentral Government service on andafter January 1, 2004 would be coveredby the proposed defined contributionindividual retirement account pensionto which the Government andemployees both will contribute 10 percent of salary each.

In fact, the main driving force behindthe formulation of the proposed DCindividual retirement account pensionscheme appears to be the need to arrestthe growing unfunded liability of thegovernment employees’ pension.

This scheme, in a phased manner,will be made applicable to othergovernment departments and the stategovernment employees. Since this is amandatory benefit to which everygovernment employee is entitled, thecoverage will increase with increase inemployment. Currently this isestimated to be 50,000 new CentralGovernment employees p.a. and 50,000new state government employees p.a.

The public sector units and localbodies provide two mandatoryretirement benefits, viz. provident fundand gratuity. The retirement benefits inthese units have to be on the patternspecified by the Government and manyof these units have introduced pensionfor their employees by utilisingemployer’s contribution to the providentfund for funding index linked final salarypension. It would also not be logical forthese establishments to adopt theCentral Government route of divertingtheir new employees to the proposedDC individual retirement accountpension scheme.

If the new employees of theseestablishments were not to be given theDB pension funded through theemployer’s contribution to the providentfund, the employer’s contribution to theprovident fund in respect of theseemployees should remain in theprovident fund as there is no logic inmoving the new employees from one DCscheme to another DC scheme. Further,there is no scope for introducing pensionas a third retirement benefit here.

In the private sector again there arevery few employers who can afford toprovide pension as a third retirementbenefit, provident fund and gratuitybeing the two mandatory retirementbenefits. Further, practically all these

Personal pension buysare tax driven and when

tax incentives werewithdrawn sales have

fallen. However, with thetax paying population

being only about two percent, we must go beyond

tax incentives toincrease coverage.


��

It is necessary to focuspublic education on the

need for self-financing ofold age income on a

massive scale and thiseducation must start from

an early stage in life.

establishments are covered by theEmployees’ Provident Fund andMiscellaneous Provisions Act, 1952.

A few of these establishments haveexempt provident fund and the otherscontribute to the Central Provident Fundadministered by the EPFO and both thecategories are also covered by EmployeePension Scheme 95 or have a pensionscheme of their own in lieu of EPS 95.Here again, there is little scope forintroducing pension as a thirdretirement benefit. In fact, asmentioned above, the number ofmembers covered by LIC under theoccupational pension schemes arrangedwith it as on March 31, 2003 was 1.086mn under 6,461 schemes.

Private sector life insurers haveentered this business very recently andtheir contribution in this area is notsignificant. One area in this segmentwhich has a significant potential is theestablishments which are not coveredby the EPF Act and Payment of GratuityAct. The OASIS Committee report hasindicated that there are 13 mnemployees in this segment who do nothave access to any vehicle for buildingup retirement benefit.

In many jurisdictions where pensionschemes of the proposed DC pensionscheme type with universal access havebeen introduced, it has been mademandatory for the establishmentsemploying five or more employees toprovide to their employees access to thescheme. This access is limited tofacilitating the employees to contributeto the pension scheme. In the UK, theStakeholder Pension Regulations havethis requirement.

The non-salaried section of thepopulation, and the salaried section tosupplement their occupationalretirement benefits, can buy personalpensions offered by the life insurers andin future they can also subscribe to theproposed DC individual account pensionwhen it is open to individuals. Pastexperience indicates that personal

pension buys are tax driven and whentax incentives were withdrawn thesales had fallen. However, with the taxpaying population being very small,about two per cent, it would benecessary to go beyond tax incentivesto increase coverage.

This has been achieved in the caseof life insurance. The community atlarge has recognised the importance oflife insurance as a powerful tool formanaging the risk of dying too soon andbecause of this, even after withdrawalof tax incentive under section 88 of theIncome Tax Act, 1961 for those withtaxable income beyond Rs 5,00,000, andreducing the tax incentives for others,life insurance continues to be anattractive buy for people from a riskmanagement perspective.

This can happen in the case ofpensions also, if pensions are projectedas a powerful instrument for managingthe risk of not dying soon enough. Thiswould, however, require sustainedefforts to create awareness amongst thepeople about pensions. It is thereforenecessary to focus public education onthe need for self financing of old ageincome on a massive scale and thiseducation must start from an earlystage in life so that the importance ofself-financing of pensions is ingrainedin young minds.

It is only through this initiative thatthe coverage for old age income wouldincrease. In these efforts, the PFRDA,pension providers, intermediaries,

teachers and the social organisationsmust participate. It is a huge andchallenging task where the resultswould be very slow in coming. However,with the sustained efforts of all, it wouldbe possible to achieve the objective ofincreased coverage for old age incomethat would enable people to live indignity in old age. In the absence of suchefforts, the World Bank prophecy aboutthe proposed DC pensions that “Thereis little evidence that a sufficientnumber of individuals in the informalsector will voluntarily save with amulti-decade horizon if not encouragedby direct subsidy,” would come true.

While the proposed DC individualretirement account pension which isexpected to be operationalised this yearmight hold lot of promise for increasedcoverage for old age income, it might beuseful to understand the UK experiencein respect of the Stakeholder Pensionwhich in some respects is similar to theDC pension scheme proposed to beintroduced in India. To give an overviewof the UK experience, a report on theStakeholder Pension that appeared in theNovember 2003 issue of ‘The Actuary,’ amonthly publication of the Staple InnSociety of the Institute of Actuaries, UK,is reproduced below (see box next page).

The DC pensions of the typeproposed to be introduced are low costpensions and the experience in the otherjurisdictions where such pension hasbeen introduced is that there is a lateralshift from other pensions, bothindividual and group, to this pension.This is borne out by the findings of theresearch conducted in the UK about theStakeholders Pension quoted in theprevious para. Further, a recent pressreport indicated that the Governmentintended to provide a separate taxincentive, similar to the tax incentiveallowed under section 80 CCC (1), oncontributions to the proposed DCpension by allowing contributions, upto the prescribed ceiling which would behigher than Rs 10,000, to this pensionto be paid from the pre-tax income. Thiswould hasten the process of lateral shiftmentioned herein.


��

The Faculty of Actuaries, UK, hadconstituted a Pensions Research Groupfor researching the directions that futurepension design was likely to take. ThePensions Research Group, whilereviewing the stakeholder pension has,inter alia, said that “The Governmentmay not be able to encourage wider takeup amongst the low to medium paidwithout introducing compulsorycontributions.” This is despite the factthat in the UK all establishments withfive or more employees were obliged tocomply with the stakeholder pensionrequirements by October 2001. Thesefindings are very relevant for India asone of our major concerns is to increasethe old age income coverage amongstthe low to medium paid.

These findings have been reproducedhere only to focus on the magnitude of

IF SHORT OF MATTER USE GOOD AND

BAD AD

the challenges that face any governmentattempting to ensure success of a newDC individual retirement pensionscheme. The key issue of increasing

voluntary take-up and ensuring thatthe contributions are invested in suitablydiversified long-term assets for

The author is Senior Advisor, PrudentialCorporation Asia Ltd. the views expressedhere are his own.

sufficiently long periods to enable assetaccumulation that would achievereasonable old age income, are challengeswhich the Government of India is nowseeking to address.References:1. A note on pension scheme design

issues by the Pension ResearchGroup, Faculty of Actuaries.

2. The Actuary, November 2003 issue,published by the Staple Inn Society,Institute of Actuaries, UK.

3. India The Challenge of Old AgeIncome Security.

4. First Report of the ExpertCommittee for Devising a PensionSystem for India – Project OASIS.

“Stakeholder pension failure to lead compulsion?� � �� !��

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Send your articles to: Editor, IRDA Journal, Insurance Regulatory and Development Authority,Parisrama Bhavanam, III Floor, 5-9-58/B, Basheer Bagh, Hyderabad 500 004 or e-mail us at [email protected]

AND BADWe welcome your experiences.Tell us about the good and the bad you have gone through and your suggestions. Your insights arevaluable to the industry. Help us see where we are going.

GOOD

��

“The Government may notbe able to encourage widertake up amongst the low to

medium paid withoutintroducing compulsory

contributions.”— Pensions Research Group,The Faculty of Actuaries, U.K.


��

What & Why?U.K. Sinha

Pension is a serious business. Reformshave to be gradual and not one big bang.

NPS is a very small initiative.Initially, it will cater to newly recruitedCentral Government employees, exceptthe armed forces and to those in theunorganised sector. Hardly 50,000workers will be covered in the first year.

The NPS will be able to cater only tothose workers in the unorganised sectorwho are taxpayers and can be motivatedto join the scheme through taxincentives. For those who are livingmarginally above the poverty line andare not taxpayers, a recent initiative isthe pilot scheme for unorganised sectorworkers being implemented in 50districts in the country.

The uniqueness of the NPS is two-fold:

(i) it creates a system where both theGovernment servants as well as inthe unorganised sector are coveredby one scheme and supervised by oneregulator and

(ii) the choice about fund managers orabout different schemes of a fundmanager can be exercisedindependent of the fund managerthrough the mechanism of a CentralRecord-keeping Agency (CRA).

The guiding principles behindformulating NPS have been thefollowing:

(a) To define upfront the liability of theGovernment for its employeestowards pension

(b) To give the choice to the customer.

(c) To facilitate portability of labourforce

(d) To ensure transparency and fair-play in the industry

(e) To build a model which is small inthe beginning, but is capable ofreplication and of handling largenumbers.

The pension liability of the CentralGovernment employees has risen from0.6 per cent of the GDP (at constantprices) in 93-94 to 1.66 per cent of GDP(at constant prices) in 2002-03. Actualoutgo has increased from Rs.5,200 croreto approximately Rs.22,000 crore in2002-03.

In the same period the total pensionliability as a percentage of net taxrevenue has increased from 9.7 per centto 12.68 per cent.

In the states more than 10 per centof the revenue receipts are pre-emptedby pension expenditure, whereas thefigure was approximately five per centin 1991. Eleven States have pensionexpenditure that is higher than

expenditure on the administrativeservices.

With rising longevity and lifeexpectancy the pension liability is onlygoing to increase further. For CentralGovernment employees the dependencyratio i.e. the ratio of pensioners versusactive employees is 0.85. There arecountries in the world where this ratiois more than one.

Up front commitmentBy prescribing a 10 per cent upfront

employer contribution and 10 per centcontribution by the employees, NPSattempts to distance the contributionwhich the Government has to make forits employees and also remove theGovernment from any explicit or implicitguarantee about the pension paymentat retirement.

While this implies an additionalliability on the Government for theinitial three or four decades, itempowers the employees who receive theGovernment contribution up front. Thisalso highlights the concern of theGovernment that it must look after allthe generations, not just the oldest.

There are several rich countries inthe world where pension liabilities aremore than the GDP, the Governmentsare reneging on their pension promisesor negotiating new changes in theexisting pension promises. Even inIndia it is not uncommon for thepensioners to move the courts or tolaunch agitations to receive timelypension payment.

Pension is a seriousbusiness. Reforms have tobe gradual and not one bigbang. NPS is a very small

initiative.

- New Pension Scheme

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ChoiceThe inalienable requirement of such

a defined contribution pension systemis that the customer has a choice forchoosing his fund manager or hisscheme. NPS proposes to have a numberof pension fund managers registeredwith a regulator.

The number of schemes will belimited to three. However, within a givenscheme different fund managers canhave different mix of investment optionsso as to offer different returns. The NAVof all these schemes of the fundmanagers will be widely published on adaily basis so that the customer canexercise his choice.

In order to cater to those who are notinformed and cannot exercise theirchoice, there is default option alsoavailable where all the investments willbe parked pending exercise of a choice.As a measure of providing furthercomfort, it is also proposed that one ofthe fund managers will be in the publicsector.

PortabilityWith the growing and opening

economy, it is natural to expectportability of labour. At times pensionbecomes a big deterrent to labourmovement.

In the NPS, the individual will carryhis pension account whether he is goingfrom one job to another in theGovernment or from Government to theprivate sector or the self-employmentsector or vice-versa.

Besides, tax incentives will beavailable in the EET mode. This meansthat the contribution will be tax-exempt(E), the accumulation will be tax exempt(E) but the withdrawal will be taxed (T)at marginal rates. However, it isexpected that at the time of withdrawalthe worker will not have any regularsource of income, as such, the pensionpay out will not entail any big taxburden.

TransparencyMoving away from defined benefit to

a defined contribution obviously exposesthe worker to the vagaries of the market

forces. So far as the accumulation ofhis pension wealth is concerned, theminimum that the system mustprovide to him is to ensure that thereare transparent rules and there is anindependent active supervisor.

The NPS will have an independentPFRDA. Initially, it has been set upwith a Government order but soon anenactment will be in place to ensureindependence of the regulator,protection of the investors andprescription of the rules of the game forintermediaries like pension fundmanagers, collection agents etc.

In addition, the CRA will have theright to maintain all the records of allthe investors and also effect requestsfor change independent of the pension

fund managers. This is a major changefrom the existing practice in, forexample, the mutual fund industry.

While on the one hand this willempower the customer to exercise quickchoice, on the other hand it will also helpin minimising the cost of fees of thepension fund manager as they will notbe required to set up detailed and costlymarketing infrastructure for customers.The PFRDA will also have an activesystem of redressal of customergrievances.

UpscalingNPS is designed on a modular

concept. Initially a very small numberis expected to join the system. Whenthe PFRDA has been able to select aCRA, pension fund managers (PFMs)and points of presence (POPs) and

prescribe the regulations, NPS iscapable of being replicated to take careof the needs of millions and millions ofcustomers. Already several stategovernments have shown theirwillingness to join the NPS for theirnewly recruited employees.

The middle-class and the workers inthe unorganised sector having less than20 employees can be covered under thisscheme because of the tax incentives.It need not be forgotten that this classof people is also exposed to the capitalmarket and are active participantsthrough their savings or investmentinstruments of their choice. It shouldbe possible to attract a very largenumber of such persons into the system.

Going by global experiences onehopes that, over a period of time, theNPS will be the largest investmentoption for the large population of thiscountry.

Capital market perspectiveWhile global experiences do not

indicate any particular sequencing ofcapital market reforms and pensionreforms, it is true that decisions aboutNPS would have been difficult in thiscountry if the capital marketinfrastructure was not so well developedas it is today.

The Indian capital market todayoffers equity, corporate debt,Government securities, futures andoptions on equity and indices. There aremore than 400 cities and towns whichhave live broker terminals. There areapproximately 10,000 companies whosesecurities are listed and there are10,000 brokers in the country.

The average daily transaction isapproximately Rs. 7,000 crore. Thenumber of transactions which areeffected daily are to the tune of 2.5million.

There are two national leveldepositories, which have records ofapproximately 5.7 million customersand of about Rs.10,75,000 crore ofsecurity. The NSE for example has adaily volume of approximately 1.7

The inalienablerequirement of a defined

contribution pensionsystem is that the

customer has a choice forchoosing his fund

manager or his scheme.


��

The author is Joint Secretary, Departmentof Economic Affairs, Ministry of Finance.The views expressed here are his own.

The challenge before thePFRDA is to evolve an

approach which istransparent and

consultative and meets thelong-term requirements of

the system.

million transactions, which is next onlyto the New York Stock Exchange andNASDAQ. The risk management,margining and settlement systems areamong of the best in the world.

Besides the brokers, more than 50per cent of the bank business is throughbranches which are computerised andelectronically linked. A customer in aremote corner of the country cantransmit his payments or execute hisorders electronically. The RBI hasimplemented the Real Time GrossSettlement System from April 1, 2004.

In fact, the early suspicion about anyinstitution in the country being capableof working as a CRA has alreadyevaporated and everybody nowrecognises that there are managerialand IT capabilities available in thecountry to discharge the function of aCRA without any failure.

Issues and ChallengesThe PFRDA has to select the CRA

and the PFMs. It is heartening to notethat the PFRDA is following the practiceof wide consultations amongst all thestakeholders, academics and experts.

For selection of the CRA a discussiondocument has been placed on the websiteand a number of comments have beenreceived. After incorporating some ofthese viewpoints an open-housediscussion with the stakeholders isplanned before initiating the process ofselection of the CRA.

In selection of PFMs one approachis to have a limited number initially –as the corpus will be small, and thenincrease the number after a few yearswhen the corpus increases. The otherapproach is to have minimum eligibilitycriteria and register all those who meetthe same.

International experience is mixed. Inmost of the countries there have beenmergers and acquisitions and marketconcentration has increased due to highstart-up and administration costs andpoor financial results.

In countries like Chile, Argentina,Mexico, Peru and Bolivia between 50

and 100 per cent of business isconcentrated amongst top three firms.As such, the challenge before thePFRDA is to evolve an approach whichis transparent and consultative andmeets the long-term requirements ofthe system.

On the question of investmentguidelines, while Government hasindicated three types of schemes, thechoice of running different schemeswithin the investment types should beleft to the fund managers.

Similarly, the choice between activeand passive fund management shouldalso be left to the fund manager.However, the customer should know inadvance the investment philosophy andthe type of the scheme in which he ismaking the investment.

The challenge of the NPS is toestablish the PFRDA as an efficient,customer friendly and professionalregulator. The benefits of NPS are notonly for the customers but also for theeconomy. Besides fiscal advantages the

main benefit to the economy will bethrough the provision of long-term fundsfor infrastructure and other growingsectors in the economy.

Due to pension funds, equities arenow almost double the market value ofprivate debt in the US. Between 1960and 1993 while the share of lifeinsurance companies has come downfrom 19.6 per cent to 13.0 per cent of allfinancial assets in the US, the privatepension funds have grown from 6.4 percent to 17.0 per cent.

In Chile pension assets representmore than 40 per cent of the GDP and100 per cent of total external debt. InEurope, the impact of the pension fundis equally strong.

The benefits of pension reforms areslow, the perception is still slower, butonce the system establishes itself it hasthe potential to meet the twin objectiveof old age income security to theindividual and growth of the wholeeconomy in general.


��

Preparing the GroundLife insurance, which deals with therisk of dying early, is regarded as abusiness which needs long terminvestment. The pension business dealswith just the opposite kind of risk i.e.the risk of living long, and this businessis of an even longer term. In most of theadvanced countries pension business isdeveloped along with the life insurancebusiness and, in some of these countries,the fund available under pensionbusiness is much bigger than the fundavailable in the life business.

Historical PerspectiveIn India, for historical reasons, the

pension business has not developed andthere has not been any concertedattempt by the Government to providean infrastructure which will help in itsdevelopment.

In fact, with the enactment of theEmployees’ Provident Fund andMiscellaneous Provisions Act (EPFMP)in 1952, the long term savings for oldage provisions are being accumulatedin the Provident Fund and are handedover to the employees at the time ofretirement/ superannuation.

The investment of such funds isguided by Rule 67 of the Income TaxRules which gives what is regarded as aquite conservative and safe investmentpattern. All employees in the organisedsector are mandated to becomemembers of the Employees’ ProvidentFund managed either by trusteesappointed by the company or byProvident Fund Commissioners.

The only exceptions to this are thecentral and state government employeeswho are eligible for defined benefitpension calculated on the basis ofnumber of years of service and terminalpay. This pension is also linked to thecost of living and payment is made outof current revenue. In the late 80s somepublic sector organisations switchedover to a defined benefit pension schemefor their employees in lieu of theirProvident Fund.

In the late 60s some employersintroduced pensions for their senior

- Pension Reforms in IndiaT.K. Banerjee

executives. These were mainly meantthose who became ineligible for theannual bonus because of the Bonus Actwhich came in to effect in 1965. These‘bonus diversion’ pension funds alsowere not able to ensure a handsomepension for the senior employees.Moreover, since these pensions were notlinked to inflation the real value of thepension amount became meagre after afew years because of the high inflationrates prevailing in the past.

The first serious reference to thedevelopment of the pension business inthe country came in the report of theCommittee of Reforms in the InsuranceSector in 1994 (popularly known as theMalhotra Committee Report.) A seriousstudy of the pension requirements of thecountry and the consequent

recommendations came through theOASIS Report (Old Age Social andIncome Security Report) in January,2000. The present pension model thathas been envisaged for the country isbroadly in line with therecommendations of the OASIS Report.

OASIS ReportThe report for the first time brought

out the stark realties of thedemographic changes that have takenplace in the country. Estimates weremade of the number of senior citizensthat the country will have to provide forby the year 2020 and also of thefinancial pressure that is likely on theexchequer on account of thedisbursements to be made to thepensioners who have retired fromGovernment service, civil or defence.

The report recommended a newpension system for the country. Thebasic architecture of the system dependson portable individual retirementaccounts (IRA) with service providerslike pension fund managers, points ofpresence for collection of contributionsand a central recordkeeping agency. Thesystem envisages providing threeoptions by the pension fund managers,namely safe, balanced and growth.

This model of pension system hasproved quite successful in the SouthAmerican countries. The modelprescribed in the OASIS report providesthat the contributions to the pensionfund is managed by a fund manager andthat, on superannuation of the person,a pension or annuity is purchased froman annuity provider (a life insurancecompany) using the accumulations inthe credit of that person.

South American modelPension benefits to those retiring

from organised sector jobs was in voguein the South American countries sincethe 20s. The benefits were being paidfrom the current revenue of theGovernment under a ‘pay as you gosystem.’ In the late 50s, the benefitsbecame politicised and each politicalparty started promising better than theexisting benefits in their electionmanifestoes.

In some countries, thefund available in the

pension business is muchbigger than the fundavailable in the life

business.


In the 70s things came to such a statethat the governments started feeling thepressure of the high pension amount tobe disbursed and Chile was the firstcountry to decide a change in the systemin 1981. Accordingly, all workers weregiven the option to change to a systemwhere the funds were to be managed bywell established fund managers. Ninetythree per cent of the workers opted forthe private scheme as they also hadbecome worried about the viability andservice levels of the government scheme.

By 1998 the benefits of thischangeover became very visible and itwas observed that the persons who hadopted for the privately managed fundbenefited immensely in comparison tothose who continued with thegovernment scheme. A few years afterChile’s pension reforms, Bolivia wentahead on similar lines and thereafterone after another South Americancountries followed suit. The US debatedintroducing this model for their SocialSecurity Scheme and decided against itin late 90s.

The major reason for the success ofthis model was the aggressiveinvestment policy which the fundmanagers followed. It is estimated thatthe ‘average real return’ (in excess of theinflation rate of the country) on the fundswas 12 per cent p.a. during the first 15years of the reform.

The positive effects of the pensionreforms were:-

1. Pension tax in the country wasreduced for the first time.

2. The available retirement pension inthe new system increasedconsiderably and in some cases italmost doubled.

3. Much of the funds, about 85 per cent,were invested in equities and thatgave a great boost to the industry inthe country.

4. Employment opportunities in thecountry went up.

5. A sizeable portion of the funds movedto the international market forinvestment.

There were several side effects too:-1. The new pension system contributed

to privatisation of the economy. Amajor portion of the equity shares ofbigger companies came into thehands of these pension funds.

2. Since, there were a number of pensionfund managers, each was trying toattract the individual workers whohad the option to shift from one fundmanager to another.

3. The agents appointed by the fundmanagers shifted between fundmanagers often, taking with themtheir customers. This resulted inhigher cost of administration of fundsand a reduction in benefits.

4. Accounts keeping was not of thedesired level and quite often

maintenance of the accounts for theself-employed became a problem.South American countries that

followed Chile after two to three yearstried to reduce the side effects bysuitable modification of the Chileanmodel.

Proposed pension reforms in IndiaIn India we seem to be starting the

pension reforms in stages. TheGovernment has now decided to go outof the defined benefit pension systemfor the employees who have joined theservices from January 1, 2004 and tomake them members of a manageddefined contribution pension fund.Later on probably other groups likeemployees of state governments, publicsector undertakings, companies nowunder the Regional Provident Funds

Commissioner (RFPC) andprofessionals now contributing to theirPublic Provident Fund accounts maygradually be included. Inclusion of eachof these groups will be an importantdecision in the purview of theGovernment.

In order to make pension reformssuccessful in this country several stepsneed to be taken.

a) Legal InfrastructureThe Government has to provide adeveloped infrastructure on whichthe pension system can be built.

Some existing laws of the countryneed modification to bring in fullfledged reforms in pension sector.These need be identified andamended at the earliest possibleopportunity. If the fundmanagement rules allowed by thepension fund regulator aresignificantly more liberal than therules followed by the funds underRPFC there will be a clamour for alevel playing field. If it is decided tobring Provident Funds, PPF, etc.under pension reforms a number ofActs have to be revisited. Similarly,at some point of time if it is decidedto bring the organised sector underthe reforms, the EPFMP Act of 1952has also to be revisited.

The country has to decide once forall about the income tax structureon the amount invested in pensionfunds. One of the reasons whypension funds did not develop earlierin this country was that theindividuals who were investing inpension funds perceived that therewas a sort of double taxation of suchinvestments.

When the amount is invested,income tax relief that is available tothe individual is at best partialwhereas when the pension is payablethe whole amount is treated astaxable income including the capital.

There is of course a provision in thepresent income tax rules whichallows commutation of one third ofthe pension and such commutation

The limit of exemption,which at present is

Rs.10,000, should beraised to Rs. 40,000 toencourage sufficient

contribution for areasonable pension.

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on normal retirement is free fromincome tax. But in today’s interestrate the scenario, one third of theaccumulation does not represent thecapital invested by the person.

What is needed today is an incometax structure which would be stableand would promote the developmentof pension funds. Investments whichpeople will be making will be of along term nature and they wouldalso expect long term stability onincome tax policies on suchinvestments.

The present thinking of exemptingboth contribution and accumulationstages and only taxation at payoutstage seems to be quite justified.The limit of exemption which atpresent is Rs.10,000 level should beraised to Rs. 40,000 to encouragesufficient contribution for areasonable pension. In that eventexempting commutation value fromIT will not be necessary.

b) Fund managersThe fund managers have to be thebest in the world and, instead of goingfor many fund managers, it wouldbe probably be better if the numberis kept at a lower level, so that thecompetition will be healthy and thetypes of mal-practices whichdeveloped in Chile will not developin this country. The OASIS reporthas rightly recommended for six

fund Managers to start with.

c) Accounting infrastructureIn most of the countries wherepension sector reforms have beenintroduced, inadequacy of theaccounting infrastructure hasbecome a big problem and has led toa large number of complaints andlitigations. Today a high level ofinformation technology support isavailable in the country and it has

to be ensured from the day one thata highly effective record keeping andaccounting infrastructure is in place.

d) InvestmentThe countries that have carried outpension sector reforms successfullyhave laid a great emphasis on anaggressive investment policy by thepension fund managers. Asmentioned earlier Chile, the firstcountry in South America which wentahead with such reforms quitesuccessfully, did allow at least 85per cent of the investment inequities and a sizeable portion ofthat in the foreign market. All alongin our country we have emphasisedon a conservative investment policy

for insurance and pension funds.If we continue to follow a similarpolicy the chances of a decent returnto the pensioners will be remote.

The investment guidelines proposedin the OASIS report are:-

Today the maximum equitycomponent allowed in insurance andannuity business to insurancecompanies under unit linkedbusiness is 100 per cent. In the lightof this we may probably have toconsider more liberal investmentnorms under the new pension system.

e) Capacity buildingPension account holders should beadvised and trained to switch fromone type of fund to another. Forexample a person at a young age can

Investment Safe Balanced GrowthGovernment Paper >50% >30% >25%Corporate Bonds >30% >30% >25%Domestic Equity <10% <30% <50%of which International Equity <10% <10%

opt for a comparatively risky optionto earn a better return but the sameperson at an advanced age may liketo go for a Safe Fund. They shouldbe able to judge when a shift isneeded from Growth Fund toBalanced Fund and also fromBalanced Fund to Safe Fund.

The OASIS report envisages a rolefor retirement advisors who will helppeople in making choices about assetmanagement options. It would be areal challenge for the country to builda force of professional retirementadvisors who will be able to providepositive help to the large pool ofindividuals with limitedsophistication who will participatein the pension system.

In the next few years the country willprobably decide how far and how fastit will go ahead with pension sectorreforms which started with therecommendations in the OASISreport. In order to make such reformssuccessful we have to initiate stepsto address the following countryspecific inadequacies:

1. The equities market in thecountry is not mature enough anddoes not have adequate depth.

2. The decades of the 80s and 90swere different when very highrates of interest were prevalentin many countries and it waspossible for a fund to shift apercentage of the funds to suchcountries to earn a much higherrate of interest than obtaining inthe parent country. Today thosetypes of options are gettingrestricted.

3. Members of the new pensionfund would be a pool of individualswho have a very limitedknowledge of the equity marketand a large number of them wouldnot even be able to distinguishbetween a Growth Fund and aBalanced Fund.

All along we haveemphasised on a

conservative investmentpolicy for insurance and

pension funds. If wecontinue to follow a

similar policy the chancesof a decent return to

pensioners will be remote.

The author is Member (Life), IRDA.


��

In India, the statutory retirementbenefits are provident fund and gratuityor severance pay. These benefits are tobe provided in terms of the provisions ofthe Employees’ Provident Fund andMiscellaneous Provisions Act, 1952 andthe Payment of Gratuity Act, 1972.These vehicles build up assets for oldage income.

Pension in the form as is commonlyunderstood is mainly provided by theGovernment and the MNCs. Very fewemployers provide pension as a thirdretirement benefit. In the late eighties,the bank and insurance employeesunions raised a demand for havingretirement benefits on par withgovernment employees, who were gettingnon-contributory defined benefit indexlinked pension, gratuity and providentfund with the employees contributingonly to the last.

After protracted negotiations, thisdemand was conceded and definedbenefit pension was provided byutilising the employer’s contribution tothe provident fund thus allowing thema retirement benefits packageconsisting of non-contributory definedbenefit index pension, gratuity andprovident fund. Later, a package onsimilar lines was made available to thesubscribers of the Employees’ ProvidentFund (EPF) by setting up Employees’Pension Scheme 95 (EPS 95).

For the salaried class, retirementbenefits form a very important part oftheir savings for old age income security.In 2001-02, provident and pension fundsaccounted for 19 per cent of the grossfinancial savings of the household sectorin India. Any inadequacy in managementof these benefits would wreak havoc onthe plans of consumption in old age forthese people as the employees haveexpectation that the benefits wouldaccrue with service and be paid when due.

It is in this context that theoccupational retirement benefits arefunded through a trust structureensuring that the accrued benefits do notdepend on the financial position of the

Perks of the Jobemployer. This structure is encouragedby the Government by providing taxincentives to the employers following thisroute. All these measures ensure safetyof employees’ savings.

Provident fund is a definedcontribution benefit and is regulatedand supervised by the EPFO, whetherthe fund is exempt or otherwise.However, there is no legislativeframework for regulation andsupervision of gratuity andsuperannuation funds except that theCommissioners of Income Taxapproving these schemes are envisagedto monitor that the funds adhere to theprescribed investment pattern. Theother aspects are left to self-regulationby auditors and actuaries.

While self-regulation is good it hasto be within a legislative framework. Thisarticle deals with the regulation of salaryrelated retirement benefits viz. gratuityand defined benefit pensions. In thisarticle the word “regulation” is used forthe process of framing legislation andthe word “supervision” is used for theprocess of ensuring compliance.

Regulation and supervision ofretirement funds get divided into twoparts, viz. regulation and supervision ofthe asset management part andregulation and supervision of the fundingpart. In provident fund or definedcontribution pension, the regulation andsupervision is confined to the assetmanagement part but where the benefitsare defined funding of these benefitsassume critical importance.

GratuityIn respect of gratuity benefit, the full

cost of the benefit is borne by theemployer. Employers have essentiallytwo choices:

i) Leave the gratuity liabilityunfunded, in which case a provisionis held in the books of accounts of theemployer; or

ii) Fund the gratuity liability by settingup a trust. In this case, the employerhas the following two options:

� trustee managed selfadministered fund; or

� trustees entering into anarrangement with a life insurerfor managing the trust fund assets.

Accounting Standard 15 (AS15)issued by the Institute of CharteredAccountants of India requires liabilityto be computed on an actuarial basis.This can be done by an independentactuary in the case of trustee managedfunds or as worked out and certified bythe insurer in case of life insurermanaged funds.

The liability so ascertained iscompared with the assets (in case offunded arrangement) and provisions (incase of unfunded arrangements) and thedifference between the liability andasset/provision is taken as the chargefor the year which is expensed off in theP & L account of the employer. For thesevaluations, the valuing actuary has tofollow the professional guidance notes(GNs) provided by the Actuarial Societyof India (ASI). However, in India thereis no legislation specifying the minimumfunding requirement.

In respect of gratuity funds that aremanaged by life insurers, they have tofollow the prescribed pattern as also theexposure and prudential norms forinvestment of these funds. However, inrespect of trustee managed funds, whilethe investment pattern is prescribed, noexposure / prudential norms have beenlaid down. It is necessary that thisinadequacy be addressed.

Arpan Thanawala and Renuka Sane- Occupational Pensions & their Regulation

In trustee managedgratuity funds, the

investment pattern isprescribed but no exposure

/ prudential norms havebeen laid down. It isnecessary that this

inadequacy be addressed.


��

Defined benefit pension

In India, it is very common foremployers to bear the full cost ofproviding pension benefit. For fundingthis benefit, the employer has thefollowing options:

i) leave the pension liability unfunded,in which case an accounting provisionhas to be held in the books of accountsof the employer; or

ii)Fund the pension liability by settingup a trust. In this case the employerhas the following two options, viz.

� trustees manage funds and buyannuities from life insurers whenemployees retire; or

� trustees entering into anarrangement with a life insurer formanaging the scheme.

The accounting and investment issuesare identical to those discussed forgratuity funds.

Structure of occupational funds inIndia

The defining characteristic of all suchoccupational retirement benefit fundsis the trust structure. Trust laws onlydefine the obligations of the trustees.There is no legislative framework thatwould ensure proper standards inadministration of retirement benefitschemes. . The trustees should also berequired to apply an extra degree of careand diligence in taking investmentdecisions. The trust deed of the schemesshould clearly envisage delegation offund management to professional fundmanagers. It is necessary thatOccupational Retirement BenefitsRegulations be framed andadministered by the pension regulatoryauthority.

The regulations, among other things,must cover:

* the primary duties of employers,trustees and others underoccupational retirement benefitschemes

* the protection of accrued rights

* the appointment and removal oftrustees, the composition of the trustboard and the discretionary powers

of the trustees so far as not varied orexcluded by the trust deed

* minimum funding requirement

* general criteria for appropriateinvestment

* powers of the retirement benefitombudsman

* the application of unallocated surpluson winding up and the priority ofpayment of schemes in deficit

* the appointment of a scheme actuaryand a scheme auditor, and the powersand duties of the actuary and auditor

* the employers liability for schemedeficits

* the rights of early leavers andmatters relating to transfers

* the compensation scheme for losssuffered through fraud, theft ormisappropriation of scheme

Assets

* dispute resolution

* grievance redressal machinery

Further the law should protect thepension promise, particularly in respectof accrued rights. Funding needs to beset up at a level which ensures that thescheme is in a position to meet itsliabilities when those fall due.

Generally, there is a solvency bandbetween the minimum fundingrequirement of 100 per cent and a baselevel of 90 per cent. Any scheme whichfalls below this base level would requirean immediate injection of funds, as maybe stipulated by the regulatoryauthority, to bring it up to the base level.

All schemes should be required toestablish and keep in place a fundingplan adhering to not less than 100 percent level, i.e. having assets at least

equal to liabilities. In the event of a dropbelow this level but at or above the baselevel, the trustees should be made tosubmit a plan to the regulatoryauthority providing for restoration ofthe fund up to a specified time limit.

As the trust law is the basis of thevast majority of occupationalretirement benefit schemes, the role ofthe trustees is of crucial importance inthe administration of schemes. Theregulations need to address issues likequalification and disqualification oftrustees, the degree of employer controlover their appointment and removal, thecomposition of the trust board, thedistribution of power between theemployer and the trustees’ conflict ofinterests.

The employers should not have thesole power to appoint trustees, andshould not be able to veto a trusteeselected by the scheme members. Itshould not be mandatory to appointpensioner trustees but it should beencouraged to consider including themon the board.

The primary purpose of theoccupational retirement benefitregulations would be to create aframework for regulation andsupervision of these schemes by layingdown principles and general rulesgoverning these benefits.

It is essential to have in place a legalframework which is conceptuallycoherent and at the same timeapplicable to the industry. A fair andsound regulatory environment wouldensure that scheme members feel secureabout their accrued benefits and, at thesame time, employers feel secure abouttheir future commitments.

Mr. Arpan Thanawala is an Actuaryand is Director, Thanawala andAssociates and Ms. Renuka Sane isResearch Associate with India PensionsResearch Foundation. The authors wishto thank Mr. S.P.Subhedar, SeniorAdvisor, Prudential Corporation AsiaLtd., for his ideas and guidance.

The law should protect thepension promise,

particularly in respect ofaccrued rights.


��

Pension reform is not new to the world.As the demographic transition matures,payment of defined benefit or meanstested pensions is being viewed moreas a burden on national treasuries.Countries have found themselves eitherreneging on their pension commitmentsor implementing measures such asextending or scrapping mandatoryretirement ages (US, Australia, NewZealand).

Further still, many have initiatedfundamental restructuring of theirpension systems, which primarilyinvolves a move away from the definedbenefit structure to a definedcontribution structure.

The technical definition of definedbenefit scheme is that it is a pensionscheme that provides a guaranteedbenefit based on a formula that takesinto account pay, years of employmentand age at retirement.

In a defined contribution scheme onthe other hand, the benefit may bebased solely on the value of theaccumulated assets in a pension fundat the time payment is to begin. (Seehttp: / /www.free-def init ion.com/Pension.html)

India too has made the transition toa DC system for its civil servants. Whilemuch of the public debate in India hasfocused on the operational merits of aDC scheme over a DB scheme, the issueof the impact of these schemes onhousehold behaviour, the economy andwelfare and wealth inequality meritsdiscussion.

At the outset, a DB scheme leads topeople forming expectations of benefitson retirement. High benefits, which area result of generous formulas designedin the past, typically result in reducedsavings and hence lower wealthaccumulation over the life cycle.

As in India, there is normally a capon the maximum pensions in a definedbenefit pension scheme. Such caps havea very strong effect on redistribution ofwealth and hence on savings of

individuals in various income classes.Such caps result in high savings bywealthy investors in alternative savingschemes as the pension mechanism maynot provide a good consumptionsmoothing over their lifetime.

In a defined contribution pensionscheme, the consumption may not besignificantly affected by the returns oninvestments. The deductions in a DCscheme however may reduce thedisposable income of the investors andlead to lower current consumption.Preferential tax treatment of savingstowards the pension fund (e.g. section80 CCC) may, however, lead to higheraccumulations. There may not be anyredistribution of wealth in a DC system.

As the level of defined benefitsincrease, one would normally expect areduced savings rate in the economy.This would make less funds availablefor investment and hence a lower levelof capital stock. This is likely to triggerlower output and hence highunemployment. A DB scheme with highexpected benefits may also lead to ahigher tax rate to fund the DB scheme.The decline in savings and henceinvestible funds may raise the interestrates in the economy. Thus in the longrun, as the percentage of workingpopulation declines, a DB scheme mayresult in higher interest rates and hightax rates. This may further distort theconsumption patterns of the subsequentgenerations.

A defined contribution scheme,however, may encourage savings andhence lead to higher capital stock

accumulation and higher output and alower interest rate. The consumption inthe economy, however may decline. A DCeconomy hence may lead to lowerinterest rates. An increase in the DCrate encourages savings and henceinduces higher investment. This has thepotential of increasing employment,wages and hence may result inredistribution of wealth through anincrease in productivity rather thanthrough a cross-subsidy as is implied ina DB scheme.

In the short run therefore, a definedbenefit scheme can be percievedasmaximising social welfare by increasingcurrent consumption, and a DC schemeas reducing social welfare by decreasingcurrent consumption.

However, the long run effects of a DCscheme which translate to higherinvestments and therefore productivitygains for the economy, outweigh thebenefits of a DB scheme.

Increasing burden of payments in aDB scheme also has the propensity totranslate into a higher tax burden onthe population, thus negating anywelfare gains out of increase in currentconsumption.

It is not without reason thatcountries, including India, are shiftingto DC structures for pension payments.

Debate RevisitedDr. Puneet Chitkara

The author is Senior Researcher, IndiaPension Research Foundation. The viewsexpressed here are his own.

- Defined Benefit Vs Defined Contribution

The long run effects of aDC scheme, whichtranslate to higher

investments and thereforeproductivity gains for the

economy, outweigh thebenefits of a DB scheme.


��

Life insurers are governed by theInsurance Act,1938 and IRDARegulations and thus investment intheir pension scheme may be wise andsecure and safe for mitigating the riskof living longer.

The First Report of Project OASIS(Old Age Social and Income Security) hashighlighted the greying population inIndia. It reports that India is in the phaseof a rapid demographic transition. Lifeexpectancy is increasing while birth ratesare on the decline. The share ofpopulation above the age of 60 is growingat a rapid rate. Those who cross the ageof 60 are expected to live up to or beyondthe age of 75.

Populations, worldwide, are ageing.In India, while the total population isexpected to rise by 49 per cent (from846.2 million in 1991 to 1263.5 millionin 2016), the number of aged (personsaged 60 and above) is expected toincrease by 107 per cent, from 54.7million to 113.0 million, in thecorresponding 25 year period.

In other words, the share of the agedin the total population will rise to 8.9per cent in 2016 (from 6.4 per cent in1991). Population estimates furthersuggest that the number of the aged willrise even more rapidly to 179 million by2026, or to 13.3 per cent of the totalIndian population of 1331 million.

India has taken several measuresto tackle the woes of the older generationand has been among the enlightenednations which recognised the need forsocial security during old age quite early.The Provident Fund Act was introducedway back in 1925 for select publicenterprises. We have the EmployeesProvident Fund and MiscellaneousProvisions Act (EPFMP) of 1952 whichcovers 177 industries today. From 1995,

workers covered under the EPFMP Act,1952 are also covered by the EmployeesPension Scheme.

There is also the Public ProvidentFund (PPF) scheme for self employed andthose not covered by the EPFMP Act.

The National Policy for OlderPersons (NPOP) January, 1999, withthe primary objective viz. to encourageindividuals to make provision for theirown as well as their spouse’s old age; toencourage families to take care of theirolder family members; to enable and

support voluntary and non-governmental organisations tosupplement the care provided by thefamily; to provide care and protection tothe vulnerable elderly people, to providehealthcare facilities to the elderly; topromote research and training facilitiesto train geriatric caregivers andorganisers of services for the elderly; andto create awareness among elderlypersons to develop themselves into fullyindependent citizens.

Several other organisations havealso come out with schemes to lessenthe woes of the older generation. TheDelhi-based International Federationon Aging has been campaigning for freehealthcare for senior citizens; decreasein the age limit for pension; a bigger,

respectable living allowance; change inthe eligibility criteria so that even if thecombined family income is Rs. 8,000 thesenior citizen is entitled to pension;creation and implementation of a socialsecurity scheme.

The relatively affluent, who cansupport themselves in homes for theaged, want companionship, care andreasonable facilities including medicalservices. There are 1,200 such homes inthe country, which charge nominally forboarding and lodging. The MatoshreeVridashram is one such run by theMaharashtra Government.

HelpAge India is asking theGovernment to set standards forfacilities provided by all homes for theaged. There are efforts like the first parkonly for senior citizens was opened atChowpatty, Mumbai in 1999. There areseveral benches that have been donatedby banks and once a week the medicalteam from Lilavati hospital checkssenior citizens for blood pressure anddiabetes. A medical chart is maintainedin the van.

The English poet Robert Browningwrote “Grow old with me, the best is yetto be.”

But this is a nightmare for most oldpeople in India and we have to live withthis reality. The OASIS report alsosupports it. It states “While these havebeen laudable steps, and are serving theworking class well, their coverage iswoefully small, with only 11 per cent ofthe working population in India coveredby them.”

Old Age was not really a majorconcern till migration started fromvillages to the big cities and childrenstarted going abroad for studies andwork and the joint family system stillexisted.

We are a society intransition. We have

neither the facilities of theWest nor the care andconcern for the elderly

that has traditionally beena part of our culture.

In Your HandsDinesh Chandra Khansili

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Young people now see senior citizensas a burden. The respect they onceenjoyed in the joint family is slowlydisappearing. Many suffer mental andphysical abuse.

In Mumbai, a man and his wifelocked his 68-year-old mother out of thehome without food and water for the day.She was let in only when they returnedfrom work in the evening. This wasallegedly in her “own interest” as shewas absent-minded and they feared shecould even forget to switch off the gas.Ironically, the old lady was the owner ofthe property. Her neighbors complainedto the police who intervened.

Crimes against senior citizens areon the increase. In Mumbai alone, therewere 192 crimes in 2002, a large numberresulting in death.

Thus we are a society in transition.We have neither the facilities of the Westnor the care and concern for the elderlythat has traditionally been a part of ourculture.

To meet this reality of life, oneshould start saving during active life.The need of small savings regularly hasbeen emphasised in the OASIS report.“Investing Rs. five per working day intothe equity index, from age 25 to age 60,works out to Rs.36,00,865.”

Life insurance companies offerretirement solutions to the generalpublic. Life insurers are governed byInsurance Act, 1938 and IRDARegulations. They may do business inhealth, pensions and general annuityalong with Life business. There arevarious deferred pension plans andimmediate annuity plans offered to thepublic.

Here are explanations of some termsused in pension business which may beuseful to the insuring public. Once oneknows the basics of pension schemes, itwill be easy to understand the variouspension schemes in India or the world.

What is a deferred pension plan?In a deferred annuity plan a person

pays regular contributions. Thecontribution may depend on a fixed

accumulated amount, say Rs. 25 lakh,that a 25 year old wants at hisretirement at 58 or 60 or an age of hischoosing. Or a person decides to paysome fixed contribution up to retirementage, and it gets accumulated at a rateof interest declared by the insurer andthe person is not certain how much shallaccumulate at retirement.

The policy may be Par (aparticipating policy) which means thatthe policy participates in the profits/surplus declared by the life insurer. Thecondition in a deferred annuity plan isthat at exit-which may be by severalcauses like attaining superannuationage, earlier death or withdrawal-theaccumulated sum on vesting atsuperannuation is compulsorily to beused to purchasing an annuity. Whichmeans that the person may receive alumpsum/accumulated amount.

However the accumulated sum may

be commuted for a maximum of onethird of total accumulated value. Thismeans that if one has Rs. three lakhaccumulated value, then at time ofvesting one may take a maximumpermissible amount of Rs. one lakh ascommuted value and the remainingRs. two lakh may be utilised topurchase the annuity. The contributionpaid under deferred annuity plan isexempted under section 80CCC of theIncome Tax Act. Here Rs. 10,000maximum premium paid underdeferred annuity plan may be takenaway directly from gross income ofassessee and income tax is calculatedafterward.

What is an immediate annuity plan?The difference between a deferred

pension plan and an immediate annuityplan is that like in a deferred annuityplan the contribution is paid during thedeferment period i.e. 58-25=33 years (or60-25=35 years) and then, at retirementage one purchases an annuity. This maybe taken as advance planning forenjoyable old life as described byEnglish poet Robert Browning!

In an immediate annuity plan aperson should have enough money, sayRs. three lakh, immediately as fromsale of house, receipt from lottery, giftfrom son or daughter, receipt oflumpsum retirement benefit like PF/Gratuity/leave encashment, receipt ofsome award like Magasaysay, contractsigning amount to act as Model/ Actorin some advertisement/film etc. etc.This amount is utilised to purchase theannuity. One thing to remember is thatannuity amount is taxable at the handsof annuity holder.

The annuity amount depends on–generally–the amount of purchase price(higher the purchase amount higher theamount of annuity), age of the person(higher the age higher the annuityamount as with advancement of age riskof dying is higher that means theannuity shall be payable for lessertime), option to choose annuity andmode of receipt of annuity- that meansif annuity is taken one in a year theannuity amount shall be higher than ifannuity is opted to be taken quarterly.

The options on annuities are:� The annuity may be purchased for life.

This means that as long as the annuityholder survives, he shall be paidannuity. The annuity stops on thedeath of the annuitant. The purchaseprice, say Rs. two lakh in the above case,shall not be refunded to the nominee ofthe annuity holder but the annuitantgets a higher annuity amount.

� The annuity may be purchased for lifewith return of capital. This means thatas long as the annuity holder survives,he shall be paid the annuity. Theannuity stops on the death of theannuity holder. But the purchaseprice, say Rs. two lakh in above case

“Investing Rs. five perworking day into the

equity index, from age 25to age 60, works out to

Rs.36,00,865.”

��


shall be refunded to the nominee ofthe annuity holder. This option ispopularly known as Life +ROC(Return of capital/purchase price). Thecommon sense says that the annuityamount payable on Life plus ROCoption shall be lower than the lifeoption, if other things remain same.

� The annuity may be guaranteed for acertain numbner of years say 5/10/15/20/25 years and life thereafter. Thismeans that, suppose an annuity holderhas opted for 10 year certain plus lifeoption, and dies after seven years,then the remaining three years annuityis paid to the nominee of the annuityholder and annuity payment stops atend of 10 years. But if the annuityholder survives beyond 10 years thenhe shall be paid annuity throughouthis/her life and on death the annuity

stops and nothing is paid to thenominee.

� Another option may be joint life lastsurvivor annuity with or withoutreturn of purchase price. Here annuityshall be paid on the joint lives, say ofhusband and wife. If, say, the husbanddies then the wife (last survivor) shallget annuity depending on the term (50per cent or 100 per cent of originalannuity) till she survives and on herdeath the purchase price may or maynot be paid to the nominee dependingon what option was exercised.

LIC’s Varistha Pension Bima YojanaThe Government has launched this

scheme with the assistance of LIC ofIndia. This is of an immediate annuitytype with option to choose the pension -a Life plus return of capital. There is

guarantee of nine per cent return perannum. LIC gets any shortfall ininterest income from the Governmentof India.

If a senior citizen above age 54deposits Rs. 2,66,665 he shall getRs. 2,000 per month for his life and theRs. 2,66,665 shall be returned to hisnominee on his death. The annuityamount is fixed irrespective of age above54 unlike traditional annuities. Theminimum monthly annuity is Rs. 250and maximum Rs. 2,000.

End to EndH.O. Sonig

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- Insurance Companies can Span the Width

The author is Deputy Director(Actuarial), IRDA. The views expressedhere are his own.

Insurance provides for the future ofthe dependants of an individual andpension provides for the individualhimself in the later stages of his life.Both are financial products and both arein the long term interest of an individualwho contributes to these. In fact, apension product is often offered by a lifeinsurance company as a matter ofcourse. It is all the more so in Indiathat annuities can be granted only by

life insurance companies. Therefore, onehas to carefully look into the businessportfolios of insurers in India.

The thing that would attractimmediate attention is the business inregard to individual and group pensionsthat has been done in the last threeyears by these companies. Detailedanalysis undertaken by institutions likethe IRDA has established the positionthat the pension market in due course

would be much larger than the lifeinsurance market.

To understand the nuances of thebusiness, we give below the reasons whywe feel that an intelligent pensionssystem would lead to the growth of thefinancial market in an exponentialmanner.

Pension system has the followingimportant ingredients :

��


marketing personnel, besides theskill of investment.

� The insurers have been aiming atproviding better customer serviceand more innovative products, whichwill help pension market expansion.Also the combination of leadingbusiness houses and establishedforeign insurers has enabled thedevelopment of fresh channels ofdistribution besides the traditionalagency network. Corporate agenciesand bancassurance are insuranceavenues which will help develop thepension market.

� Insurance companies are equippedwith technical skills of the actuarialprofession, knowledge of pensionproduct pricing, valuation etc.

� Insurance companies are capable ofoffering customised pension

products to maintain high brandequity with customers. They willdesign products to target specificneeds of the niche segments.

� Insurers see a tremendous pensionpotential. In the falling interest ratescenario, insurance companies havestarted re-orienting their strengthsfrom a typical pension product to acustomer–centric model so thatpeople may buy pension policies/schemes for retirement planning andnot for guaranteed returns.Retirement solutions offered byinsurance companies are beingpreferred.

� Insurance companies may come

forward to offer packaged “retirementsolutions” equipped as they are withthe technological support of theirforeign partners in terms of productknowledge, business processes andproven sales models.

� Rule No. 18 of the guidelines ofOECD (Organization of EconomicCooperation & Development) alsosuggests “The activities of insurancecompanies in the “Pensions” and“Health Insurance” fields should beencouraged within an appropriateregulatory and supervisoryframework. The regulator shouldendeavor to ensure fair treatmentbetween all private companiesoperating in these areas.

� It is worth mentioning that onlyabout 11 per cent of the employeesin the “Organised Sector” includinggovernment servants, are covered byan approved pension procedure. Thebalance 89 per cent though gainfullyemployed, need protection througha pension system, which can betaken care of by insurancecompanies with their vastdistribution network.

� The insurance companies arecapable of addressing various issuesof the pension challenge a fewdecades hence by devising a systemto channelise long term savingstowards much needed infrastructureinvestments.

� The Government may also considerthat a life insurance company, whichinvolves nearly 50 per cent of thework of an integrated pensionsystem, handles the payment of theannuity to the subscriber. It istherefore, desirable that theinsurance companies are allowed tolook after the pension field as oftoday, and as also provided in theInsurance Act, 1938.

� Insurance companies have also asystem which has interface betweenthe contributors and thedistributors, with an emphasis onlow and clear charges to enablecustomers to compare easily

1. Awareness creation anddevelopment

2. Contribution collection

3. Record keeping

4. Money management

5. Benefit payoutsThe objective of pension reforms in

the Indian context is to arrive at anappropriate mix of these components.Life insurance companies can play anintegrated role across all segments orin individual segments while someothers may play a role only in a singlesegment.

� Life insurance companies, at no extracost, can contribute towards theabove and manage the systemefficiently. The distribution networkand data bank already availablewith them is certainly more effective.May be that for the above reasons,section 2(11) of the Insurance Act1938 includes ‘this field’ in thedefinition of ‘life insurance business’.

� Insurance companies which areprimarily capital intensive, have thecapacity to handle large sums, investthem properly over long periods oftime like insurance premiainvestment. Additionally, sincethese companies were grantedregistration on the basis of theirfinancial and organisationalstrengths, they enjoy publicconfidence of being capable andcredible. While the other “FundManagers” may be admitted to thesystem, the insurance companiesmay “continue” in the pension fieldfor the reasons mentioned above.This will also control administrationfees and costs like “agency” fee toagents and retail distributors,contribution collection, transferchanges, record keeping, fundmanagement, fee payable to pensionfund managers, exit charges forcharging providers cost of purchasingan annuity at retirement, fees forpremature withdrawal etc.Insurance companies have also theadvantage of having qualified

��

Life insurance companiescan play an integrated

role across all segments orin individual segments,while some others may

play a role only in a singlesegment.


channels will be of great help topromote pension schemes.

� The initiatives taken by insurancecompanies during the last two tothree years, and their thinking on thedevelopments required to pave theway for a vibrant pension system,should lay the foundation for growthin pension penetration.

� Having individual retirementaccounts in private pension fundswould be prohibitively expensive toadminister. In some cases wherecontributions are small (say Rs. 100a month) administration costs maybe quite high. If insurancecompanies with their existingnetwork and infrastructure do it, itmay be competitive.

� In the matter of Group Superannuation

and Group Pension Schemes,insurance companies can demonstratethat they can provide good productswith consistently high service qualityat very competitive rates.

� Some of the insurance companieshave undertaken projects tounderstand the pension market, theconsumer profile and the type ofpension products that would meetthe felt needs of various segments ofthis market.

� They are capable of spearheading amassive consumer educationcampaign to highlight and ignite thelatest pension needs of workers andself-employed individuals.

� Insurance companies should

therefore, be allowed to continue toplay the role of pension fundmanagers and annuity providers inthe new pension system. They havethe experience here and in othercountries to help evolve a realisticdatabase in relation to mortalityand morbidity statistics. LIC ofIndia, for example has a tremendousdatabank relating to Indian lives.

� Insurance companies’ experienceand practices will help in betterunderstanding of the followingissues :

� Product design

� Appropriate long rangeassumptions

� Pricing approach

� Innovating benefit packaging

� With the development of theinsurance market and theintroduction of a variety of insuranceand pension products, the time isripe for adequate strategies whichinsurance companies have alreadystarted developing.

From the above, it may become clearthat life insurance companies have akey role in the pension business.Insurance industry in India with itsliberalisation is well poised to play aleading role to the benefit of theIndian society.

If the pension business is conductedas per definition contained in Section2(11) of the Insurance Act 1938, stepsfor pension fund administration couldbe initiated immediately as part of thereforms in the insurance sector withoutlosing time.

The author is retired Member (Life),IRDA. The views expressed here are hisown.

different choices of pension schemes.

� It will also have an emphasis oncompetition through a system ofmultiple providers as already 13 lifecompanies in addition to LIC ofIndia exist. This will minimise costsand optimise fund management andcustomer service.

� The ability of the insurance sectorcould effectively provide annuitycoverage to the survivors and in thearea of disability benefits whicheventually prove crucial indetermining the success of thepension reforms.

Besides the above, the other key areasof insurance companies’ strengths thatwould push the pension sector aheadinclude:

� Access to reliable statistical dataand information which insurancecompanies richly possess. This willalso instill a high degree ofcredibility among the public.

� Benchmarks based on internationalbest practices in the pension sector,as possessed by insurancecompanies having foreign jointventures, will raise the standards inthe pension field.

� High solvency standards achieved byinsurance companies will generatepublic faith in the system.

� Introduction of new pension schemesto ensure social security insuranceto the unorganised sector and alsoto have a thrust on innovatingpension products for rural areas.

� Entry of co-operatives into theinsurance sector will be highlyhelpful in developing pensionschemes for the unorganised sectorspecially in the rural areas.

� To facilitate penetration of pensionschemes throughout the country,doors have been opened for newdistribution channels like corporateagents including banks and brokersin the insurance sector. These

��

Insurance companies arecapable of offeringcustomised pension

products to maintain highbrand equity with

customers.

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In the fast changing and competitivemarket in insurance, executives requireall sorts of information that were notpredicted earlier. Such information isto be supplied in a timely manner. Incritical situations, it assumes greaterimportance. Functional managersrequire time-critical information. Oftensuch demands are either impossible ordifficult to meet, and result ininadequate or incorrect information.

Managers need to formulateobjectives, to determine whether thoseobjectives are being met, and then tosupport the decision-making process.This comes from not only analysis ofoperational information but alsoexternal sources.

Examples of MIS include percentageof claims processed in time, ‘in force’business comparatively, profitability ascompared to its competitors’ products,analysis of customer feedback, and cycletime for critical operations. Externalorganisations include regulatoryagencies, consumer groups, andfinancial institutions besidespolicyholders, prospects, stockholders,brokers and rating agencies.

The key drivers for modernorganisations in a competitiveenvironment will be businessintelligence (BI), derived out ofconsolidated data available withinsurance companies. Insurers in Indiahave to evaluate this as strategicallysimilar to the thrust that the customerservice deserves. Currently the usage ofBI technologies is very low partly due tonon-automation of core businessprocesses. BI is implemented throughOnline Analytical Processing (OLAP)and Data Mining. Analytical processinganswers business questions andtherefore helps in decision support.

Even in the advanced countries,although transaction processing iscarried out efficiently, generation ofmanagement information involves aheavy strain because of ‘silos’ of theirdisparate systems, which are mostly

legacies. Nevertheless, they do not failto deliver the required information intime by using a mix of manual andcomputerised methods, and by relyingupon data in excel sheets and differentdatabases.

Some instances that were noticed inthe US are:

� A large life insurer, with assets over$120 billion and 10 companiesmerged into it, with around twentydifferent channels of intermediaries,has isolated pockets of systems. Inthe nightly operation, the systemtriggers a process to receive dataextras from different productionsystems and, transform, clean andload it into a repository to be

available for analysis the next day.Right from the agency manager(limited to his agency) to the CEO(for the entire corporation) can viewinformation that they require formonitoring without hassles.Information available to them on theweb includes new business figures,premium income, and achievementlevels company wise, agency orchannel wise and so on.

� A non-life company withpredominantly auto and propertyinsurance business has datawarehousing for its automobile lineof business for several analyses. Oneof the data warehouses storessuggestions from members and

tracks these suggestions during thedifferent phases of considerationuntil these are logically closed withaction taken.

Insurers in developed countries likethe US and in Europe devote seriousattention to information analysis.Notwithstanding the fact that theirsystems are disparate andheterogeneous, the companies employall possible methods to integrate datainto a common repository and provideregular on demand information thatexecutives require for their planning,operational, and monitoring activities.The most important method is buildinga correctly designed data warehouse andinvoking its data, both current and past,for regular analysis (pre-definedformats) and for ad hoc needs(impromptu).

Business intelligence based ontransaction details for individualclients, policies and claims, or summaryinformation showing results and trendsallows decision-makers to makedecisions better. Business intelligencetools provide insights into business, andit is up to the users to identify patternsand try to infer what may be the causesof a problem like a ‘fishbone analysis’ orthe indication of an opportunity.

A CEO (or any functional chief) hasto get information when he needs it andthe way he needs it. As an example, forthe reported premium income, there isa need for dicing and slicing this data,say by payment method (branch, auto-debits, salary saving schemes) andwithin method of payment by cash,cheque, electronic transfer, and so on.To extract such and many moreinformation in a manual way is neitherpossible, nor practical. Technologyprovides a role in generatinginformation about:

� Performance of the product

� Comparative review based on thenumber of policies, annualisedpremium, net premium underwritten,broken into geo, channel, mode and

Datamining - the “Secret Weapon”M. Arunachalam

- Technology and the Indian Insurer

��

When new products areintroduced, the existingcustomer database and

profiles need to be mined sothat the targeted customersget newly launched product

details. This is yet tohappen in India.


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method of payment and so on, inrelation to targets and previousperiods

� Rate of and reason wise analysis ofrejections of proposals

� ‘What if’ Analysis – If the retentionwas high for a class of business, whatwould have been the performance ofthe treaty

� Claim analysis by cause of loss,duration, channel, product, geo,medical examiners and so on

� Profitability Analysis – by product,channel, geo and so on, to focus onrealignment of product mix

� Persistency rate of policies, product,segment and channel wise

� Persistency rate of agents, in termsof their various characteristics

� Persistency of customers, newcustomers etc. Persistency ofbusiness, analysed by product,geography and channels of business

� Loyal and profitable customers

There was a query: “What would bethe increase in commission paymentsif the lapse experience decreases by oneper cent, two per cent and so on”. Therewas no way to get that impactinformation. This is where we think of‘what if’ analysis; it is a powerfulmechanism in a variety of practicalsituations and is an important decisionfacilitator. Insurers have to improvegetting clues on many things that wouldoccur years hence, which may impactprofitability.

The cost of acquiring a newcustomer is much more than servicingand getting repeat business from theexisting customer. Therefore when newproducts are introduced, the existingcustomer database and their profilesneed to be mined so that the targetedcustomers get newly launched productdetails. This is yet to happen in India.

Business intelligence also plays animportant role in understanding thecustomer better. A customer can be anindividual, family or a corporate.Insurers need to know more about them,their lifestyle preferences, many of

which are beyond actuarial studies, to‘cross sell’ and ‘up sell’ their prospectson their additional products.

At all the levels and for differentlines of business, measurement can beon the following dimensions (manymore): gross premium, net premium,claims incurred, paid claims,outstanding claims, and outstandingpremiums. Each of the level from thetop can be drilled further to find moreinformation. The information at eachlevel can be viewed on the basis of beforeand after reinsurance. It is importantthat this information is available onlinereal time at the point where it isrequired. As a picture is worth athousand words, advancement intechnology has resulted in converting

numbers to various pictorial formsinstantly, and is used as a powerfulpresentation mechanism.

Insurance companies in the US andin other advanced countriesnotwithstanding the strain involved incollecting and collating data have takenserious steps to derive a consolidatedview of information that the managementneeds at strategic and operational levels.Some companies view a ‘balancedscorecard’ to gauge the progress onfinancials, new business development,client care, internal effectiveness andnew product development. CEOs requireinformation on the fly and would like tohave a brief view. A dashboard with adata repository built-in for criticalinformation would be a welcome

preposition. If he wants furtherinformation, he should be in a positionto drill down. Management needsinformation on what happens now morethan what happened in the past.

Business intelligence will deriveadvantages from external databasesalso. A recent news report states: Theaverage citizen (in India) can lookforward to an orderly transition toe-governance…with the Centerannouncing that it will create a nationalcitizenship database in…18 months.This probably indicates that a goodamount of demographic data will beavailable for use and Indian insurershave to set the foundation for analysisof internal data meanwhile.

PricingThe price of insurance products is

dependent upon, inter alia, theinsurance industry’s claims experience,which would be available from thedatabase of premia and incurred claims.

The highest level of precaution needsto be taken for pricing calculations.Technology on pricing can help theinsurer because complex formulae gointo insurance ratemaking techniquesand manual computations are errorprone and subject to limitations andconstraints. Pricing revolves aroundmany factors such as past claimsexperiences and the nature and trend ofloss. This information is collectedpreferably from all the insurers and fedinto a database to generate class ratesbased on territory.

That needs powerful systems andmassive analysis of data. Tools toperform data extraction, transforming,cleansing and loading and later do thenumber crunching. Models can bedeveloped based on data that iscollected and decisions taken quickly.All advanced countries have access todedicated ratemaking systems withalgorithms and formulas in respect ofproperty and casualty and healthinsurance. It is very important to havesuch systems in place especially whenIndian non-life insurance is set to bedetariffed in 2005.

All advanced countrieshave access to dedicatedratemaking systems withalgorithms and formulae.

It is very important tohave such systems in place

especially when Indiannon-life insurance is set to

be detariffed in 2005.


In the US, a variety of programs areavailable for basic medical insurance,disability insurance, specified insurancecoverage like Critical Illness and moreimportantly Long Term Care dedicatedto the aging population. Quite a numberof managed care facilities are available.There are schemes where the health-care providers (such as hospitals, clinicsand physicians) rather than insurancecompanies bear the risk, at least partly,and the insured person need not beareven the deductible.

In India, the public healthcaresystem has not been healthy andmedical insurance is yet to grow in a bigway with hardly any ‘morbidity’ databeing available now. In that situation,fixing health premiums on the lines asavailable in advanced countriesparticularly in the US will be a matterof great concern. Mediclaim policies havebeen in vogue for quite a few years andthere have been repeated revisions ofpremium too. It is not known whetherclaims under these policies, on riskfactors such as age, sickness/accident/disability, number of claim occurrences,expenses incurred and benefits paidhave been built over a period of years,and whether such increased rates reflectthese classified experience.

Compilation of a ‘morbidity’ table ismore complex than the ‘mortality’ tableand the role of IT is critical in buildingand maintaining such tables that canbe contributed commonly and shared byall insurers.

ControlsIn manual or semi-manual systems

the scope for errors is very high. Controls,when they are built in as part of the processand systems, ensures transparency to thebusiness operations. A US company hasa system in place to record in a repositoryall irregularities, financial or otherwise,across all regions, and monitor them toits logical closure, and analyse the rootcauses for effective and proactive remedialactions. A summary of irregularities,classified by cause, timeline, geographyand authorities responsible for its originand closure is a noteworthy tool available

to senior executives to administercontrols. The automated analysis goesto designated authorities for review andensures that there is no leakage inrecovery or slippage in remedial action.Fraud detection is one of the importantcontrol measures.

Fraudulent practices involving non-existence of insurance subject matter,fake proofs of loss and suchmalpractices have taken an enormoustoll on the claims reserves of insurers.Bad claims and adverse claimexperience have to be tracked to preventfraudulent claims. Association ofBritish Insurers (ABI) estimates the

total loss by insurers to fraudulentclaims at one billion Pounds. The sameinstitution released data garnered from2,000 people that indicated that nearlyhalf of them would not rule out makingdishonest insurance claims inthe future.

New technologies are helpinginsurers analyze and control exposureto fraud. These are powerful analyticalsoftware that can detect patterns bycollusion by individuals workingtogether. For example, this can beapplied to health claim data to detectexcessive billing, and improper orfraudulent charges.

Thanks to technology, frauds havebeen controlled in the US and in Europeancountries. The Coalition AgainstInsurance Fraud (CAIF) in the USestimates a total fraud cost of $80 bnannually. Many states there requireinsurance companies to establish Special

Investigative Units (SIUs). Combatingfraud undoubtedly has been receivingincreasing attention during the last twoor three decades, and more so in the recentyears. With every step forward incontrolling this menace, organisedinsurance fraud perpetrators are moreand more creative with new methods ofperpetrating fraud and are able to eludeall internal audit practices.

Anti-fraud technology has been aroundfor sometime, but the results are only asgood as the analytical tools used and thedata available. Obviously without acentralised repository for sensitive datalike claims and without the mechanismfor the analysis being in place, fraudremains unchecked and continues to grow.The pre-requisite to wage the ‘war onfraud,’ is organising dependable data andcreating a common view, and probably aco-operative effort by all insurers.

Regulatory complianceComplying with insurance

regulations is one of the standard dutiesof an insurer. Insurance companieswould like to follow the regulations inletter and spirit. Regulations includeadhering to the guidelines and providingperiodic and ad hoc reports to theregulator. Not complying withregulations and deadlines could resultin fines for insurers and could mar theimage of the insurer.

Regulations also help the insurermonitor business performance. Theinsurers have to keep changesincorporated into the process foradherence and generation of reports, ifany. In one company in the US, a set ofthree analysts was exclusively allottedto track changes in regulations andincorporate the needed changes into thesystem (of course, it is complex therebecause of different state-specificregulations). It is necessary to gauge theimpact of changes in regulatoryrequirements on to the source systems.The system should be flexible toaccommodate regulatory changes. Howdoes an insurer make sure that theregulations are indeed being followed,and that he is able to comply with

��

Compilation of a‘morbidity’ table is more

complex than the‘mortality’ table and the

role of IT is critical inbuilding and maintaining

such tables.


��

changing reporting requirements? If arightly designed repository is in place,any reporting becomes possible.

In the U.S., insurance commissionersbesides receiving the periodical reports,which in some cases are micro in nature,conduct state inspections. They ask forreports of information for which theyframe questionnaires and format forresponse on the areas to be inspected,months ahead. Inspection includescritical areas such as rate of claimrejection, delays and defects in customerservice, compliance of procedure on policyreplacements and so on. Even thoughthese requirements are made well inadvance, insurance companies in the USstrive hard to extract information, butthey do produce the required informationinvariably on time.

In India, companies do meet theregulatory requirements, mostlystatistical information, and annualreturns. The regulatory requirementswill keep evolving, and will undoubtedlyincrease as more lines of business willbe transacted, health insurance willwitness growth, and pension businesswill take new dimensions.

It is ideal to source the informationfrom the system where the data existsrather than undergoing the pain ofextracting and calculating the numbersmanually; this will avoid errors and helpin submitting the standard reports in timeand non-standard reports when required.Regulatory requirements could be manysuch as stipulations on cessations,investment portfolio, risk-based solvencymargins, rural/social sector business andso on. If the right kinds of IT systems anddatabase are in place, informationproduction, whether for internal analysisor regulatory submission, should be amatter of a simple process, rather thaninvolving several person days such ashappens at present.

Societal needsSocietal needs consist of several

facets: Tapping rural and otherunexplored market, inculcating savingshabits, extending protection to uninsuredpeople, offering health insurance and

many more. This article will be limitedto cover the rural market.

Rural business is a regulatoryrequirement. It is perceived as a greatopportunity, rather than a societalobligation, as our rural market hasaround three-fourth of total populationand four-fifths of working population ofthe country. In terms of production, ruralIndia commands a premier position inthe world. Thrift habits of villagepopulation are a boon to life insurance.However, one third of the ruralpopulation is indeed very poor but itis they who really need social protection.It could be through a subsidisedgroup scheme.

Insurers in India are required toundertake specified percentages ofinsurance business in the rural or socialsector and shall discharge suchobligations to persons residing in therural sector, workers in the unorganisedor informal sector or for economicallyvulnerable or backward classes of thesociety and this shall include insurancefor crops.

Penetration into rural areas hasbeen receiving constant attention withvarying degree of success. Initiativesinclude creation of rural career agents(not same but similar to debit or homeservice agents in US), publicity thrustin rural market and so on. In spite ofefforts made by insurers, and regulatoryrequirement, less than one-fifth of thepolicies are sold in life insurance andmuch less in general insurance, whichis again mainly for Motor insurance.

How can IT help in this direction?IT can be steadily and cleverly used topropagate products specifically for ruralmarket. To introduce rural products,companies would have to do anassessment of the market basedon geography, income level, productionstatistics etc., including awarenessof insurance.

A part from research needed in theabove direction, infrastructure has to bebuilt in the areas of product offering,ease of selling, friendly service includingclaims settlement, and easy paymentmethods. IT systems can support allthese, and can be used to establishfacility to improve product informationdissemination, submission of proposaldata, easy customer service includingclaims settlement and policy inquiries,and most importantly payment ofpremiums.

The Indian Institute of Technology(IIT), Chennai has come out with lowcost models of ATM and more of thesedevices can be established in ruralareas. Channels like e-choupal, co-operative societies and bancassurancecan play an important role. A direct linkin rural area bank branches ifcomputerized can ease premiumpayments. An IT support to administerthe mass of rural population, group orindividual, in the matter of buildingawareness or settling a claim, needsconsideration.

The Central Government and anumber of state governments haveestablished a number of socialinsurance schemes, includingcontributory and subsidised models. ITcan extensively be used for themaintenance of records includingmembers/benefits/beneficiaries andsimplify claim settlement and generateseveral statistics that the Governmentwill require from time to time.

The author is Advisor, Insurance, HCLTechnologies Ltd. The views expressed hereare his own.

If the right kinds of ITsystems and database are

in place, informationproduction, whether for

internal analysis orregulatory submission,should be a matter of a

simple process,


(Rs. in lakhs)

Sl No. Company Premium u/w % No. of Policies % of No. of No. of lives covered under % of lives of Premium / Schemes Policies Group Schemes covered

under GroupSchemes

May Upto May Upto May May Upto May Upto May May Upto May Upto May

1 Allianz BajajAllianz BajajAllianz BajajAllianz BajajAllianz Bajaj 2,343.752,343.752,343.752,343.752,343.75 3,722.723,722.723,722.723,722.723,722.72 1.621.621.621.621.62 12,01412,01412,01412,01412,014 18,25318,25318,25318,25318,253 0.820.820.820.820.82 1,2931,2931,2931,2931,293 1,7511,7511,7511,7511,751 0.260.260.260.260.26Individual Single Premium 781.14 1,064.94 1,108 1,494Individual Non-Single Premium 1,537.67 2,627.49 10,902 16,751Group Single PremiumGroup Non-Single Premium 24.94 30.29 4 8 1,293 1,751

2 ING VysyaING VysyaING VysyaING VysyaING Vysya 315.62315.62315.62315.62315.62 536.94536.94536.94536.94536.94 0.230.230.230.230.23 3,1233,1233,1233,1233,123 8,7108,7108,7108,7108,710 0.390.390.390.390.39 3,6263,6263,6263,6263,626 3,6263,6263,6263,6263,626 0.540.540.540.540.54Individual Single Premium 4.07 31.39 599 4,621Individual Non-Single Premium 287.20 481.20 2,522 4,087Group Single Premium 11.93 11.93 69 69Group Non-Single Premium 12.42 12.42 2 2 3,557 3,557

3 AMP SanmarAMP SanmarAMP SanmarAMP SanmarAMP Sanmar 317.03317.03317.03317.03317.03 547.28547.28547.28547.28547.28 0.240.240.240.240.24 2,2632,2632,2632,2632,263 4,4784,4784,4784,4784,478 0.200.200.200.200.20 4,2634,2634,2634,2634,263 5,3085,3085,3085,3085,308 0.790.790.790.790.79Individual Single Premium 109.16 253.13 329 536Individual Non-Single Premium 198.12 283.19 1,933 3,939Group Single PremiumGroup Non-Single Premium 9.75 10.95 1 3 4,263 5,308

4 SBI LifeSBI LifeSBI LifeSBI LifeSBI Life 1,628.561,628.561,628.561,628.561,628.56 2,747.392,747.392,747.392,747.392,747.39 1.191.191.191.191.19 6,1476,1476,1476,1476,147 10,63910,63910,63910,63910,639 0.480.480.480.480.48 17,25017,25017,25017,25017,250 35,43635,43635,43635,43635,436 5.245.245.245.245.24Individual Single Premium 409.81 781.64 234 389Individual Non-Single Premium 418.50 646.76 5,808 10,142Group Single Premium 765.44 1,173.69 1 1 6,964 11,927Group Non-Single Premium 34.81 145.31 104 107 10,286 23,509

5 Tata AIGTata AIGTata AIGTata AIGTata AIG 1,745.791,745.791,745.791,745.791,745.79 3,497.543,497.543,497.543,497.543,497.54 1.521.521.521.521.52 16,39716,39716,39716,39716,397 33,14933,14933,14933,14933,149 1.491.491.491.491.49 21,68721,68721,68721,68721,687 41,00541,00541,00541,00541,005 6.076.076.076.076.07Individual Single Premium

Report Card:LIFELife Premiums grow 62% in May over AprilThe life insurance industry underwrotea premium of Rs.1,42,726.96 lakh duringthe month of May, 2004 taking thecumulative premium underwrittenduring the current year 2004-05 toRs.2,30,452.08 lakh.

The private sector insurers playersreceived a premium of Rs.38,546.12 lakhupto May, 2004 viz., 16.73 per cent oftotal premium underwritten. LICunderwrote premium of Rs.1,91,905.96lakh i.e., a market share of 83.27 percent. LIC’s market share has declinedfrom 86.99 per cent for the year2003-04. Most of the new players, otherthan ING Vysya, OM Kotak and MaxNew York Life, increased their marketshare over the year 2003-04 numbers.

In terms of policies underwritten, themarket share of the new players and

LIC were 9.04 per cent and 90.96 percent as against 5.79 per cent and 94.21per cent respectively for the year2003-04. ICICI Prudential continuedto lead amongst the new players withpremium share at 5.91 per cent andpolicies at 2.88 per cent.

The premium underwritten bythe industry towards individualsingle and non-single policies stoodat Rs.18,363.80 lakh andRs.1,29,137.70 lakh respectivelyaccounting for 41,876 and 21,88,360policies. Group single and non-singlepremium accounted for Rs.77,156.45lakh and Rs.5,794.14 lakh towards1,588 and 242 schemes respectively.The number of lives covered by theindustry under the various groupschemes was 6,75,947 during the two

month period. Under the groupinsurance business, in terms ofnumber of lives covered, Tata AIG ledamongst the new players with 41,005lives viz., 6.07 per cent of the totallives covered, followed by SBI Lifewith 35,436 lives at 5.24 per cent.LIC covered 4,87,722 lives under thegroup schemes accounting for 72.15per cent of the lives covered.

The accompanying table does notinclude the numbers under theVarishtha Pension Bima Yojana.Premium underwritten by LICunder the pension scheme upto themonth of May, 2004 wasRs.70,186.15 lakh towards 35,662policies. The rural sector accountedfor 34 per cent of the premiumunderwritten under this plan.

First Year Premium – May 2004

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(Rs. in lakhs)

Sl No. Company Premium u/w % No. of Policies % of No. of No. of lives covered under % of lives of Premium / Schemes Policies Group Schemes covered

under GroupSchemes

May Upto May Upto May May Upto May Upto May May Upto May Upto May

Individual Non-Single Premium 1,510.09 2,706.03 16,381 33,128Group Single Premium 50.40 100.47 5,945 12,717Group Non-Single Premium 185.30 691.04 16 21 15,742 28,288

6 HDFC StandardHDFC StandardHDFC StandardHDFC StandardHDFC Standard 2,018.472,018.472,018.472,018.472,018.47 3,300.663,300.663,300.663,300.663,300.66 1.431.431.431.431.43 9,6189,6189,6189,6189,618 17,01917,01917,01917,01917,019 0.760.760.760.760.76 7,0677,0677,0677,0677,067 18,27718,27718,27718,27718,277 2.702.702.702.702.70Individual Single Premium 480.62 1,021.50 1,046 1,825Individual Non-Single Premium 1,484.39 2,154.37 8,565 15,165Group Single PremiumGroup Non-Single Premium 53.46 124.79 7 29 7,067 18,277

7 ICICI PrudentialICICI PrudentialICICI PrudentialICICI PrudentialICICI Prudential 8,224.108,224.108,224.108,224.108,224.10 13,625.4013,625.4013,625.4013,625.4013,625.40 5.915.915.915.915.91 31,59231,59231,59231,59231,592 64,18164,18164,18164,18164,181 2.882.882.882.882.88 3,1493,1493,1493,1493,149 5,0685,0685,0685,0685,068 0.750.750.750.750.75Individual Single Premium 1,532.22 2,392.15 984 1,677Individual Non-Single Premium 5,345.72 8,838.52 30,598 62,480Group Single Premium 4.72 5.79 2 3 408 622Group Non-Single Premium 1,341.44 2,388.94 8 21 2,741 4,446

8 Birla SunlifeBirla SunlifeBirla SunlifeBirla SunlifeBirla Sunlife 3,741.893,741.893,741.893,741.893,741.89 5,981.815,981.815,981.815,981.815,981.81 2.602.602.602.602.60 7,5347,5347,5347,5347,534 14,41614,41614,41614,41614,416 0.650.650.650.650.65 1,9981,9981,9981,9981,998 2,9512,9512,9512,9512,951 0.440.440.440.440.44Individual Single Premium 105.00 191.40 813 2,585Individual Non-Single Premium 2,449.23 3,862.84 6,713 11,821Group Single Premium 33.81 65.71 280 548Group Non-Single Premium 1,153.85 1,861.85 8 10 1,718 2,403

9 AAAAA vivavivavivavivaviva 1,069.461,069.461,069.461,069.461,069.46 1,791.371,791.371,791.371,791.371,791.37 0.780.780.780.780.78 6,3766,3766,3766,3766,376 9,9169,9169,9169,9169,916 0.440.440.440.440.44 3,4043,4043,4043,4043,404 13,58013,58013,58013,58013,580 2.012.012.012.012.01Individual Single Premium 59.60 90.56 21 49Individual Non-Single Premium 995.51 1,666.55 6,353 9,860Group Single PremiumGroup Non-Single Premium 14.35 34.26 2 7 3,404 13,580

10 Om Kotak MahindraOm Kotak MahindraOm Kotak MahindraOm Kotak MahindraOm Kotak Mahindra 433.73433.73433.73433.73433.73 939.09939.09939.09939.09939.09 0.410.410.410.410.41 3,1893,1893,1893,1893,189 4,4264,4264,4264,4264,426 0.200.200.200.200.20 267267267267267 21,59221,59221,59221,59221,592 3.193.193.193.193.19Individual Single Premium 75.00 75.70 38 40Individual Non-Single Premium 354.80 477.13 3,151 4,383Group Single PremiumGroup Non-Single Premium 3.94 386.27 3 267 21,592

11 Max New YorkMax New YorkMax New YorkMax New YorkMax New York 1,066.171,066.171,066.171,066.171,066.17 1,460.281,460.281,460.281,460.281,460.28 0.630.630.630.630.63 11,56911,56911,56911,56911,569 14,05914,05914,05914,05914,059 0.630.630.630.630.63 19,54219,54219,54219,54219,542 24,19724,19724,19724,19724,197 3.583.583.583.583.58Individual Single Premium 9.93 37.21 20 23Individual Non-Single Premium 1,032.60 1,387.24 11,533 14,020Group Single PremiumGroup Non-Single Premium 23.63 35.83 16 16 19,542 24,197

12 Met LifeMet LifeMet LifeMet LifeMet Life 221.04221.04221.04221.04221.04 395.65395.65395.65395.65395.65 0.170.170.170.170.17 1,7781,7781,7781,7781,778 2,4662,4662,4662,4662,466 0.110.110.110.110.11 3,2873,2873,2873,2873,287 15,43415,43415,43415,43415,434 2.282.282.282.282.28Individual Single Premium 9.22 10.31 29 33Individual Non-Single Premium 195.52 313.15 1,742 2,418Group Single PremiumGroup Non-Single Premium 16.30 72.19 7 15 3,287 15,434

Private TotalPrivate TotalPrivate TotalPrivate TotalPrivate Total 23,125.6223,125.6223,125.6223,125.6223,125.62 38,546.1238,546.1238,546.1238,546.1238,546.12 16.7316.7316.7316.7316.73 1,11,6001,11,6001,11,6001,11,6001,11,600 2,01,7122,01,7122,01,7122,01,7122,01,712 9.049.049.049.049.04 86,83386,83386,83386,83386,833 1,88,2251,88,2251,88,2251,88,2251,88,225 27.8527.8527.8527.8527.85

13 LICLICLICLICLIC 1,19,601.341,19,601.341,19,601.341,19,601.341,19,601.34 1,91,905.961,91,905.961,91,905.961,91,905.961,91,905.96 83.2783.2783.2783.2783.27 14,47,91114,47,91114,47,91114,47,91114,47,911 20,30,35420,30,35420,30,35420,30,35420,30,354 90.9690.9690.9690.9690.96 2,23,1872,23,1872,23,1872,23,1872,23,187 4,87,7224,87,7224,87,7224,87,7224,87,722 72.1572.1572.1572.1572.15Individual Single Premium 8,494.62 12,413.87 19,652 28,604Individual Non-Single Premium 65,629.23 1,03,693.23 14,27,263 20,00,166Group Single Premium 45,477.49 75,798.86 996 1,584 2,23,187 4,87,722Group Non-Single Premium

Grand TotalGrand TotalGrand TotalGrand TotalGrand Total 1,42,726.961,42,726.961,42,726.961,42,726.961,42,726.96 2,30,452.082,30,452.082,30,452.082,30,452.082,30,452.08 100.00100.00100.00100.00100.00 15,59,51115,59,51115,59,51115,59,51115,59,511 22,32,06622,32,06622,32,06622,32,06622,32,066 100.00100.00100.00100.00100.00 3,10,0203,10,0203,10,0203,10,0203,10,020 6,75,9476,75,9476,75,9476,75,9476,75,947 100.00100.00100.00100.00100.00

Note: LIC’s business figures exclude Varishtha Pension Bima Yojana.

��


Report Card:GENERALG.V. RaoMay growth nears 16%

(Rs. in lakhs)

��

PREMIUM 2004-05 PREMIUM 2003-04 MARKET SHARE GROWTH %INSURER FOR UPTO FOR UPTO UPTO MAY, 2004 YEAR ON

MAY 04 MAY 04 MAY 03 MAY 03 YEAR

Royal Sundaram 1,944.71 5,646.00 1,744.75 4,833.98 1.61 16.80Tata AIG 2,600.18 10,033.07 2,131.25 8,858.52 2.87 13.26Reliance General 1,572.22 3,769.48 1,170.15 3,086.38 1.08 22.13IFFCO-Tokio 3,136.32 9,755.96 3,207.93 8,779.15 2.79 11.13ICICI Lombard 5,271.38 16,723.14 2,608.44 10,137.22 4.78 64.97Bajaj Allianz* 7,964.89 16,050.95 2,234.96 8,624.26 4.59 86.11HDFC Chubb 1,341.54 2,594.71 405.34 689.07 0.74 276.55Cholamandalam 1,280.62 3,574.87 994.06 2,048.09 1.02 74.55

PRIVATE TOTAL 25,111.85 68,148.18 14,496.88 47,056.67 19.49 44.82New India* 28,208.00 76,568.00 30,554.00 76,406.00 21.90 0.21National* 31,652.00 73,072.00 23,121.00 57,065.00 20.90 28.05United India* 26,317.00 64,088.00 25,602.00 62,896.00 18.33 1.90Oriental* 23,772.00 60,819.29 22,959.88 59,380.91 17.40 2.42PUBLIC TOTAL 1,09,949.00 2,74,547.29 1,02,236.88 2,55,747.91 78.53 7.35ECGC* 3,758.81 6,917.36 3,426.37 5,989.38 1.98 15.49GRAND TOTAL 1,38,819.66 3,49,612.83 1,20,160.13 3,08,793.96 100.00 13.22* Data revised by the respective insurers for the corresponding month of the previous year.

Gross Premium Underwritten – May, 2004

Performance in May 2004Performance in May 2004 by the

majority of the non-life industry playershas been impressive. They have recordedan accretion of Rs. 186 crore at a growthrate 15.6 per cent (In May 2003 theaccretion was Rs. 93 crore at a growthrate of eight per cent).

The contribution of the privateplayers to this accretion is Rs. 106 croreat a growth rate of 73 per cent (In May2003 it was Rs. 39 crore at a growthrate of 34 per cent) and that of the fourpublic players is Rs. 77 crore at a growthrate of 7.5 per cent (In May 2003 it wasRs. 44 crore at a growth rate of 4.5 percent). These parameters would suggestthat 2004-05 so far has been turningout to be a better year than the last.

Private sector in May 2004Among the private companies the

most impressive performance has comefrom Bajaj Allianz. It has recorded inMay 2004 a premium of Rs. 80 crore upfrom Rs. 22 crore in May 2003. ICICILombard has recorded a premium ofRs. 53 crore up from Rs. 26 crore in May2003. IFFCO-Tokio has surprisinglyshown a marginal fall in its business inMay 2004.

Though the private players haveexcelled in their performances, the bulkof the accretions have come from ICICILombard and Bajaj Allianz followed byHDFC Chubb. A perceptibledifferentiation in the growth strategiesof the eight private players is beginningto emerge. Tata AIG and IFFCO-Tokioseem to be in the race for the third placejust as the ICICI Lombard and BajajAllianz seem to be vying for the firstrank in the private players’ group.

Public sector in May 2004The public sector players have

recorded in May 2004 an accretion ofRs. 77 crore at a growth rate of 7.6 percent (In May 2003 it was Rs. 44 crore ata growth rate of 4.5 per cent).

National Insurance has turnedout the most impressive premiumperformance with an accretion of Rs. 86crore. New India with a fall of Rs. 24 crorein its premium and United India andOriental each recording accretions ofRs. seven crore, the future performanceof public players seems to hinge onhow well National Insurance continuesto perform.

A couple of public players haverevised their last year’s premium figuresto lower than what they had reportedlast year giving them a slight pick up intheir accretions.


��

Overall the month of May 2004 hasshown a comparatively improvedperformance for the industry whenmeasured against the correspondingmonth of last year. But the anaemicperformance of public players with theexception of National Insurance for thesecond year stands out as a trend ofsome concern.

Among the private players ICICILombard and Bajaj Allianz stand outas important players who willincreasingly aim to dominate themarket. A growth rate of 15.6 per centfor the month of May 2004 is asatisfactory one, thanks mainly to theperformance of three players in themarket — National Insurance, BajajAllianz and ICICI Lombard.

Performance up to May 2004The industry has recorded an

accretion of Rs. 408 crore with a growthrate of 13.2 per cent up to May 2004 (Itwas Rs. 276 crore accretion at a growthrate of 10 per cent up to May 2003). Thisperformance is indeed impressive incomparison.

The private players have contributedRs. 211 crore with a growth rate of 45per cent ( Rs. 200 crore with a growthrate of 79 per cent last year). The fourpublic players have contributedRs. 187 crore with a growth rate 7.5 percent ( Rs. 71 crore with a growth rate ofthree per cent for the correspondingperiod last year). National Insurancealone has chipped in Rs. 160 croreOriental Rs. 15 crore and United India

Rs. 11 crore andwith New India’sg r o w t hr e m a i n i n ga l m o s tstagnant.

T h eaccretion ofprivate playersof an additionalof only Rs. 11crore in 2004-05is a pointer thatthey are findingthe market not

that easy this year. The public sectorcompanies that have recorded anaddition of over Rs. 106 crore over lastyear have performed very well withNational Insurance alone contributingin an overwhelming manner.

Among the private players out ofRs. 211 crores, Bajaj Allianz has turnedin an accretion of Rs. 74 crore, followedby ICICI Lombard with Rs. 66 crore andHDFC Chubb Rs. 21 crore.

ECGCECGC has shown an increase of 15

per cent with an accretion of Rs. 10 croreup to May 2004.

Market sharesThe private players have continued

to maintain their market share of 20per cent as at the beginning of 2004-05.Bajaj and ICICI have market shares ofalmost five percent each. TataAIG and IFFCOhave about threeper cent each.Together thesefour companiesamong theprivate playersand NationalI n s u r a n c eamong thepublic playersare likely to bethe trendsettersfor the growthstrategies for the

future if their current progress in theirpremium performance is any indication.

ProspectsWhat of the future? While the year

2004-05 has begun on a promising noteof improved growth rates on acomparative basis, will the current yeartrends prevail in the future? Will thebig three growth companies – National,ICICI and Bajaj continue to maintaintheir current grip on the future growthrates as before? What sustains theircontinued high growth for two years insuccession?

With agriculture and rural sectorsgaining the attention of the newgovernments at the centre and in a fewstates, will there be expansion ofinsurance sales in these sectors? Whyhave the numerous tie-ups with banksfor distribution of new products failedto significantly benefit insurers likeNew India and United India who havemany bancassurance schemes as partof their marketing plans?

While the market has performedbetter this year than last, it would seemthat among the 12 non-life players, it isonly four or five insurers that seem tobe the creators of new markets.

The author is retired CMD, The OrientalInsurance Company Ltd.


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Aegon, the Netherlands-basedinsurance group major, is looking outfor a life insurance joint venturepartner among domestic infotech firmswith a large market capitalisation, itis reported.

“It could partner with either suchan IT company or its promoter,” Aegonsources have been quoted saying.

Apart from their ability to rustleup the large investments required in

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life insurance business, Aegon alsoexpects such a partner to put in placethe IT network for the venture.

E- learning for Insurance AgentsThe Boston Group (TBG), a global

information technology (IT) solutionsand e-learning provider, has joinedhands with College of Insurance andFinancial Planning (CIFP) andInternational Institute of Insuranceand Finance (IIIF) to launch a certificatecourse in insurance salesmanship.

The online course is offeredthrough TBG’s dedicated portal,www.financialcampusindia.com.

The company is planning to offer itto insurance companies who want theiragents to be trained in the soft skillsof salesmanship and individualsdirectly wanting to take up the coursecould be few in number.

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ECGC’S PRODUCT FOR THE SOFTWARE SECTOR


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Reinsurance written by ZurichInsurance Australia, a division ofSwitzerland-based Zurich FinancialServices, is being investigated to findout what risk, if any, was transferredin the contracts.

Recent scandals in the reinsurancesector have involved purportedinsurance contracts that weredisguised loans.

Suspicious contracts wereuncovered during a routine compliancereview by the Australian PrudentialRegulation Authority (APRA) and werebeing reviewed with the insurer’s fullsupport, the company is quoted saying.

The Australian Securities and

Investments Commission issupporting the inquiry.

Zurich, the nation’s seventh-largestreinsurer, has said the probe involvescontracts that have been unwound andthat no policyholders will suffer anyloss.

The Australian operation said ithad nearly doubled the prudentialregulator’s minimum capitalrequirement to meet its solvency testand the European parent had said itwould provide additional support.

The insurer also said the inquirydid not involve its life insurance,superannuation and managed fundsbusinesses.

��

UK companies are awaitingclarification by the government andthe Financial Services Authority(FSA) about an insurance directivefrom Europe.

Mr. Nick Chown, Chairman of theAssociation of Insurance and RiskManagers in Industry and Commerce(Airmic), told the body’s annualconference that there was a lack ofclarity from the Treasury and the FSAover whether managers who boughtinsurance for their own companieswould be subject to regulation.

Insurance intermediaries who willbe covered by the regulations mustapply for registration with the FSA byJuly 13 to comply with the EuropeanUnion directive, which comes into forcein January next year. Mr Chown saidAirmic had requested clarificationfrom the FSA nine weeks ago but theregulator had said only that anyonewho buys insurance “by way ofbusiness” must register.

“Whenever we ask them what they

mean by the term ‘by way of business’,they admit they don’t really know,” hesaid. “This lack of clarity is wastingtime and costing business a lot ofmoney in legal fees.”

Mr Chown said the UK appearedto be the only country in the EU whererisk managers might be regulated,which he said would make the UK “aless efficient” place to do business.

Mr. David Hough, ExecutiveDirector of the London MarketInsurance Brokers Committee, said hesaw no reason for managers arranginginsurance for their own companies tobe regulated.

“There’s no consumer protectionissue, they are not acting asintermediaries or being remuneratedaccording to what they buy or not,” hesaid.

The FSA and Treasury haveacknowledged that regulating riskmanagers would serve no publicpurpose but neither has issued anyclarification.

US STUDY FINDS BROADGAP IN HEALTH INSURANCE

CHINA TO SET UPFIRST PENSION

INSURANCECOMPANY

The question of regulating insurancemanagers

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The China Securities RegulatoryCommission (CSRC) has approved aShanghai company’s application to set upthe country’s first professional pensioninsurance company, a move seen as abreakthrough in China’s corporate pensionmanagement market.

Shanghai-based Taiping Life InsuranceCompany, one of China’s oldest insurancecompanies, said that it had startedpreparation to set up Taiping PensionInsurance Co Ltd, which is scheduled tostart operation in August this year.

The new company will have aregistered capital of 200 million yuan(US$24 million) from five shareholdersincluding Taiping Life, China Life (Holding)and Fortis Insurance International NV.

It will cooperate with commercial banksclosely to provide full services to corporatebusinesses, sources with Taiping Life said.

Last year, Taiping Life became thecountry’s first insurance company to set upa corporate pension department.


��

A coalition of US insurancecompanies is suing the U.S.Department of Agriculture, claimingthe government has shortchangedthem millions of dollars in aprogramme to provide crop insuranceto farmers.

The lawsuit, and a separatedisagreement over new terms set byUSDA for the Federal Crop InsuranceProgram, are the latest battlesbetween the crop insurance industryand the government.

Taxpayers subsidise theprogramme to help farmers who losecrops to natural disasters — such asthe flooding, hail and tornadoes thatstruck across a large swath of theMidwest this spring. The result islower premiums for farmers, butinsurance companies complain theyaren’t reimbursed adequately by thegovernment.

“The way it’s been going, you’ve hada significant amount of unreimbursedcosts that have been imposed on the

companies for years,” said Ms.Elizabeth Haws, a lobbyist with theAmerican Association of CropInsurers, a trade association.

The companies warn that cuts tothe programme could reduceinsurance availability to farmers orforce companies in the industry intomerging to be able to make a profit.

In their lawsuit they claim thegovernment violated a 1998 contractwhen Congress cut their fees andsubsidies. They said the changes costthe companies at least $60 millionbetween 1999 and 2002.

Eight of the 12 companies in thelawsuit, including ACE Property andCasualty Insurance Co. and AllianceInsurance Cos., continue to take partin the programme, originally startedin the 1930s to help farmers cope withthe Dust Bowl.

USDA this week announcedfurther cuts in subsidies in a newagreement with companies.Companies have until June 30 to

decide whether to sign the agreement,which reduces reimbursementsindustrywide by $36 million over twoyears.

Trade groups predict that some ofthe 14 companies now in theprogramme will opt to drop out ormerge. That will mean fewer choicesfor farmers, especially in high-riskareas where companies don’t want tooperate, officials said.

“This year certainly is starting outto be very challenging, so I think thecrop insurance industry is justifiablyvery worried about what’s going on,”said Mr. Paul Horel, president of theCrop Insurance Research Bureau inOverland Park, Kan. “It’s going to bereal challenging for much of theindustry to be profitable over the nextcouple years with this agreement.”

Farmers and ranchers paid morethan $3 billion in premiums to protect215 million acres of land under theprogram in 2002, according to theresearch group.

��

The Association of British Insurers(ABI) has warned that premiums in thehome, motor and health insurancemarkets were set to rise significantlyover the next few decades, as the effectsof global warming begin to set in.

In a report published last week,written by Mr. Andrew Dlugolecki, aformer insurance industry executiveand academic, the association warns itsmembers not to underestimate theeffects of climate change on theirbusinesses, advising them to startadapting now.

The report says claims for storm-and flood-related damage have alreadydoubled to more than £6 billion (R71.3billion) since 1998, and this figure couldtriple to almost £20 billionby 2050.

Premiums for home insurance,particularly those that provide coveragainst weather-related damage, havealready begun to increase as a result.

Longer, hotter summers - predictedto occur in two out of every three years inthe future - are also set to take their toll.

Motor insurance premiums couldalso rise as a result of climate change,with early signs already starting toemerge of an increase in claimsresulting from weather-relatedaccidents. The report warns that thistrend could accelerate.

In the health insurance market,Dlugolecki says the rise in pollution andheat stress in summer could contributeto reduced longevity and higherpremiums.

GLOBAL WARMING WILL HEAT UP INSURANCE PREMIUMS

“Managing the impacts of climatechange is a major challenge for society,”said Mr. John Parker, the head of generalinsurance at the Association of BritishInsurers.

“Insurers must be equipped toanalyse the new risks arising fromclimate change, and to help customersprotect against them.”

Mr. Steve Kingshott, the head ofhome insurance at More Than, said manypeople were already finding it hard tofind flood cover.

“While some insurers are starting touse new technology to help themunderstand the risk of flooding, a lot ofothers are still using crude riskassessment methods,” he said.

�� Jour Jour Jour Jour Journal, July 2004nal, July 2004nal, July 2004nal, July 2004nal, July 200448 �� Jour Jour Jour Jour Journal, July 2004nal, July 2004nal, July 2004nal, July 2004nal, July 200448

��

48

L to R: Mr. P. B. Ramanujam, Managing Director, General Insurance Corporation of Indiaspeaks at the Pure Risk Rate Regime Seminar. Also in the picture are Mr. Liyaquat Khan,President, Actuarial Society of India, Mr. P. Chandrasekhar, Co-Chairman, InsuranceCommittee, Bombay Chamber and Head, Insurance and Risk Management, HindustanLever Limited and Mr. P. A. Balasubramanian, Member (Actuary), IRDA.

L to R: Dr. B. S. R. Rao Dean, IIIF, Mr. D. P. Sharma, Managing Director, The BostonGroup and Mr. C. S. Rao Chairman, IRDA.

L to R: Mr. H. S. Wadhwa, Chairman and Managing Director, National Insurance CompanyLimited and member of the S.V. Mony committee, looks on as Mr. C. S. Rao, Chairman, IRDAreceives the committee's report from its Convenor-Member, Mr. P. K. Swain. Mr. S. V. Mony,Vice Chairman, AMP Sanmar Life Insurance Company and Chairman of the committee andMr. Jagdish Khattar, Chairman, Maruti Udyog, who was part of the committee look on as well.

��!��3��! ��3�� F�� )

��The S. V. Mony committee, constituted by the IRDA to drawup a road map for detariffing Motor Own Damage businesssubmitted its report in April, 2004

��

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Intra-group transactions and exposures(ITEs) can adversely affect the solvency,liquidity and profitability of individualentities within a group. ITEs are also

sometimes used as a means ofsupervisory arbitrage, thereby evading

capital or other regulatory requirementsaltogether.

Report of RBI's Working Group onFinancial Conglomerates

As capital is not a problem for LIC, thereis little need for it being listed.

Mr. R.K.Vashishtha,Managing Director, LIC

Regulators and politicians ...must face the hard truth that auto

premiums will continue to go up unlessthey implement reforms to set limits on court

awards and eliminate no fault benefits that leadto fraudulent claims. Ultimately, they must not put the

financial health of the insurance industry — andtherefore the consumers they represent — at risk due

to the demands of politicians whose views may beclouded by the need to attract votes.

Lord Peter Levene, Chairman, Lloyd's of Londoncommenting that the Canadian insurance market

is one of the most highly regulated.

Insurance is in the frontline of climatechange. Few businesses sectors have

attempted to analyse the impact of climatechange on their industry

and customers.

Mr. John Parker, Association of British Insurers (ABI)

Of the 2,39,361 private sector nonfarmworkers who were separated from their jobs

for at least 31 days in the first quarter of2004, the separations of 4,633 workers

were associated with the movement of workoutside of the country, according to prelimi-

nary data. Domestic relocation of work–both within the company and to othercompanies–affected 9,985 workers.

US Bureau of Labor Statistics, Labor Department, study onoffshoring and layoffs.

“ ”We are aiming at a minimum of 20 per cent

this year, but are keeping our fingerscrossed for the Budget next month.

Mr. S. B. Mathur, Chairman, LIC referring to businessgrowth prospects and taxation.

Events

RNI No: APBIL/2002/9589

5 - 10 July 2004Venue: PuneMarket Intelligence in Non-Life insurance by National Insur-ance Academy, Pune

8 - 10 July 2004Venue: PuneHarnessing Rural Business Potential (Life), by NIA, Pune.

11 - 14 July 2004Venue: LondonInternational Insurance Society Conference,

15 - 17 July 2004Venue: PuneActuarial Appreciation Progrmme for Senior Executives (Life)

18 - 21 July 2004Venue: SeoulAPRIA Conference

29 July 2004Venue: SydneyAustralia and New Zealand Insurance Industry Awards 2004

30 - 31July 2004Venue: PuneStrategic Issues for Global Competition by NIA

09 - 14 August 2004Venue: PuneWebsite Design by NIA

1- 2 September 2004Venue: Mumbai4th Asian Healthcare Insurance Conference by Asia Insurance ReviewWith a Special Focus on Coping with Healthcare Needs of the Indian Market

4 - 8 September 2004Venue: MonacoMonte Carlo Rendezvous

2 - 4 September 2004Venue: PuneManagement of Executive Stress by NIA

6 - 11 September 2004Venue: PuneData Warehousing and Data Mining by NIA

13 - 18 September 2004Venue: PuneInsurance Management of Infrastructure Projects by NIA

13 - 18 September 2004Venue: PuneResearch Methodology and Market Research by NIA

13 - 14 September 2004Venue: PuneC.D.Deshmukh Seminar on Agenda for Growth of Insurance Industry by NIA

1- 48 pages (july issue) repaginated · jour jour journal, july 2004nal, july 2004 2 vantage point...

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