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Globalization of Insurance Sector in India

WHAT IS GLOBALIZATION ?

Globalization is a process of interaction and integration among the people,

companies and governments of different nations, a process driven by

international trade and investment and aided by information technology. This

process has effects on the environment, on culture, on political systems, on

economic development and prosperity, and on human physical well-being in

societies around the world.

Globalization is not new, though. For thousands of years, peopleand, later,

corporationshave been buying from and selling to each other in lands at greatdistances, such as through the famed Silk Road across Central Asia that

connected China and Europe during the Middle Ages. Likewise, for centuries,

people and corporations have invested in enterprises in other countries. In fact,

many of the features of the current wave of globalization are similar to those

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prevailing before the outbreak of the First World War in1914.

But policy and technological developments of the past few decades have

spurred increases in cross-border trade, investment, and migration so large that

many observers believe the world has entered a qualitatively new phase in its

economic development. Since 1950, for example, the volume of world trade has

increased by 20 times, and from just 1997 to 1999 flows of foreign investment

nearly doubled, from $468 billion to $827 billion. Distinguishing this current

wave of globalization from earlier ones, author Thomas Friedman has said that

today globalization is farther, faster, cheaper, and deeper.

This current wave of globalization has been driven by policies that have opened

economies domestically and internationally. In the years since the Second

World War, and especially during the past two decades, many governments

have adopted free-market economic systems, vastly increasing their own

productive potential and creating myriad new opportunities for international

trade and investment. Governments also have negotiated dramatic reductions in

barriers to commerce and have established international agreements to promote

trade in goods, services, and investment. Taking advantage of new opportunities

in foreign markets, corporations have built foreign factories and established

production and marketing arrangements with foreign partners. A defining

feature of globalization, therefore, is an international industrial and financial

business structure.

Technology has been the other principal driver of globalization. Advances in

information technology, in particular, have dramatically transformed economic

life. Information technologies have given all sorts of individual economic actors

consumers, investors, businessesvaluable new tools for identifying and

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pursuing economic opportunities, including faster and more informed analyses

of economic trends around the world, easy transfers of assets, and collaboration

with far-flung partners.

Globalization is deeply controversial, however. Proponents of globalization

argue that it allows poor countries and their citizens to develop economically

and raise their standards of living, while opponents of globalization claim that

the creation of an unfettered international free market has benefited

multinational corporations in the Western world at the expense of local

enterprises, local cultures, and common people. Resistance to globalization has

therefore taken shape both at a popular and at a governmental level as people

and governments try to manage the flow of capital, labor, goods, and ideas that

constitute the current wave of globalization.

To find the right balance between benefits and costs associated with

globalization, citizens of all nations need to understand how globalization

works and the policy choices facing them and their societies.

Globalization is altering the world economic landscape in fundamental ways.

Globalization has profound implications for developing countries. It

creates important new opportunitieswider markets for trade, an

expanding array of tradable, larger private capital inflows, improved

access to technology. In a globalizing economy, alliances are a means

of expanding internationally more rapidly. Alliances make it possibleto enter new markets using the distribution networks and the specific

knowledge of the local partners. Joint ventures between domestic

companies in developing countries and foreign companies have

become a popular means for both managements to satisfy their

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objectives. India is a marginal player in global insurance market. India

is a grossly underinsured nation. For a nation with huge budgetary

deficits, the insurance sector if properly exploited could have

mobilized valuable financial resources for the government. This paper

is divided into four parts. First part focuses on globalization and its

lesson for the developing countries. The Second part addresses the

various facets of strategic alliances. The Third part deals with the

importance of alliance for the Indian insurance sector in the emerging

knowledge based economy. The Final part suggests some policy

measures to make joint venture stable and successful.

As the new millennium dawns, the role of knowledge and information has

become increasingly salient in the structure, growth and organization of

economic activity all around the world. The rapid pace of scientific and

technological development is a major factor behind the fairly dramatic

economic restructuring occurring globally. It is also widely recognized that the

creation, diffusion, adaptation and effective use of knowledge and technology is

the major factors behind the growth and development of any economy.

Globalization is altering the world economic landscape in fundamental ways. It

is driven by a widespread push toward the liberalization of trade and capital

markets, increasing internationalization of corporate production and distribution

strategies, and technological change that is rapidly dismantling barriers to the

international tradability of goods and services and the mobility of capital.

DEFINITION OF GLOBALIZATION

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Globalization can be defined in several different ways depending on the level

we choose to focus on.

At a Worldwide level Globalization refers to the growing economic

interdependence among countries as reflected in increasing cross-border

flows of goods, services, capital and know-how.

At the level of a specific country Globalization refers to the extent of

the interlink ages between a countrys economy and the rest of the

World. Some key indicators to measure the global integration of any

countrys economy are exports and import as a ratio of GDP, inward and

outward flows of foreign direct investment and portfolio investment, and

inward and outward flows of royalty payments associated with

technology transfer.

At the level of a specific industry Globalization refers to the degree to

which a companys competitive position within that industry in one

country is interdependent with that in another country. Key indicators of

the Globalization of an industry are the extent of cross-border trade

within the industry as a ratio of total worldwide production, the extent of

cross-border investment as a ratio of total capital invested in the industry,

and the proportion of industry revenue accounted for by companies that

compete in all major regions.

At the level of a specific company Globalization refers to the extent to

which a company has expanded its revenue and asset base across

countries and engages in cross-border flows of capital, goods and know-

how across subsidiaries. Key indicators of the Globalization of a

company are international dispersion of sales revenues and asset base,

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intra-firm trade in intermediate and finished goods, and intra-firm flows

of technology.

FORCES OF GLOBALIZATION

Economic globalization is a set of processes leading to the integration of

economic activity in factor, intermediate, and final goods and services markets

across geographical boundaries and the increased salience of cross-border value

chains in international economic flows. The increased competition that is

driving globalization will always produce both winners and losers. It is

therefore not surprising that some managers see current trends as a great threat

while others view them as a challenge and an opportunity. Four forces are

behind the increase in global competition:

1. Changes in consumer expectation: Consumer expectations of quality,

service and price are higher than ever and still increasing. At the same

time, future consumer preferences are becoming extremely difficult to

predict.

2. Technological change: New information technology allows companies

to run their business in a way that was impossible yesterday and at a

fraction of the price.

3. Deregulation: In recent years, the global trend with the exception of

environmental regulation has been towards deregulations and less

government intervention. In newly, deregulated industries, competition

has increased dramatically.

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4. Regional forces: There are huge regional differences in n structure and

growth rates in the world. At the same time, politically motivated

regional trade blocs, such as the European Union and be Association of

South East Asian Nations are being formed. The objective of a trade bloc

is to maximize trade within the block and limit trade between blocs to

items that cannot be produced locally. The rules of the game are

changing.

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INSURANCE SECTOR IN INDIA

The basic human trait is to be averse to the idea of taking risks. There is always

an urge to minimize the risks and take protection against possible failure. The

risk includes fire, the perils of sea, death and accidents and burglary. Any risk

may be insured against at a premium commensurate with the risk involved.

Thus collective bearing of risk is insurance. Insurance is whether life or non-life

provides people with a reasonable degree of security and assurance that they

will be protected in the event of a calamity or failure of any sort. There are

number of forces driving the services sector today. Five environmental

variables that affect all industries-customers, competitors, government,

technology and globalization-are forcing rapid changes in the service sector. In

addition, there are four factors of particular importance to service providers-

change in how quality is perceived, cost control, customer services and the newdefinitions of the customer. Services are relatively intangible, produced and

consumer simultaneously and often less produced and consumer simultaneously

and often less standardized than goods. These unique characteristics of services

present special challenges and strategic marketing opportunities to the service

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marketers. The real competition between the service marketers is set on after

globalization of the Indian economy. The service marketing organization has to

adopt professional management and its marketers have to imbibe the qualities

of professionalism in order to meet the expectation of the customers. Hence, in

this paper an attempt has been made to discuss the penetration of insurance

industry, key issues in insurance and Emerging Areas of insurance, which is

one of the leading service sector in our country.

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ORIGIN AND GROWTH OF INSURANCE SECTOR

Insurance in modern form originated in the Mediterranean during the 13th

century. The earliest references to insurance have been found in Babylonia, the

Greeks and the Romans. Marine insurance is the oldest form of insurance

followed by life insurance and fire insurance. Life insurance activity in its

modern form started in India in 1818 to provide for English widows when

oriental life Insurance Company was incorporated at Calcutta, followed by

Bombay Life Assurance Company in 1823and Tritron Insurance Company for

General Insurance in 1850. Insurance regulation formally began in India

through the passing of two acts, the Life Insurance companies Act of 1912and

the Provident Fund Act of 1912.However the first comprehensive legislation

was introduced with the Insurance Act of 1938 that provided strict state control

over insurance business in the country. After independence, the business of

India Insurance grew at a faster place as competition amongst the Indian

companies intensified. The decision of nationalization of life is-

The author argues that opening up of the

insurance sector will foster competition,

innovation and product variations. However, in

this context one has to consider various issues

at stake including demand for pension plan,

separateness of banking from insurance sector,

role of IT, possible use of postal network for

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selling insurance products and above all, the role

of Insurance Regulatory Authority.

Insurance business took place in 1956when 245 India and foreign insurance

provident societies were first merged and then nationalized. It paved the way

towards the establishment of

Life Insurance was to raise the much needed funds for rapid industrialization

and self-reliance in heavy industries. General Insurance followed suit and 1968;

the Insurance Act was amended to allow for social control over the general

insurance business. Subsequently in 1973, non-life insurance business was

nationalized and the General Insurance Business (Nationalization) Act,

1972was promulgated.

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GLOBALIZATION OF INSURANCE SECTOR IN INDIA

The experience after independence in insurance sector showed that the ultimate

objective remained largely unfulfilled due to the relatively low spread of

insurance in the

country the efficient and quality functioning of the public sector insurance

companies and the untapped potential for mobilizing long term financial

resources to finance the growth of infrastructure, the government set up an

insurance returns Committee in April, 1993 under the chairmanship of R. N.

Malhotra, to suggest reforms in the insurance sector including improving the

functioning of the LIC, GIC and strengthening the regulatory system. The

committee submitted its report to union finance minister on 7-01-1994,

recommending phased program of liberalization and called for a private sector

entry and restructuring of LIC and GIC. The subsequent government moved an

insurance bill but it was not passed, the next government moved on insurance

bill again in1998, which was referred back to a select committee of parliamentafterwards the government introduced the insurance regulatory Development

authority (IRDA) Bill in parliament with some changes in the original structure

the government of India created history on October private sector companies.

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Insurance is a Rs. 400 billion business in Indias and together with banking

services adds about 7% to Indias gross domestic product (GDP) gross premium

collection is about 2percent of GDP and growing between15 and 20 percent per

annum. India also has highest number of life insurance policies in force in the

world. Yet more than three fourth of Indias insurance population has no life

insurance cover the penetration of insurance is very low in India the following

indices support this contention. While per capita insurance premium in

developed countries is very high, it is quite low in India per capital insurance

premium in India in 1999was only $8 while it was $ 4800 for Japan, $ 1000 for

Republic of Korea, $ 887 for Singapore, and $ 823 for Hong Kong and $ 144

for Malaysia. The insurance Premium as a Percentage Of GDP was 14% for

Japan, 13% for south Africa, 12% for Korea, 9% for UK and less than 2% in

India in 1999 Similarly the insurance Premium as a percentage of Gross

Domestic saving (GDS) was 52% for U.K, 35% for other European and

American countries, it was only 9% for India in 1999 The share of India in the

World market in terms of Gross insurance premium is again very 1000. For

instance, while Japan has 31%, European Union 25%., South Africa 2.3%,

Canada 1.7%share of the global insurance premium, it is only 0.3% for India.

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INSURANCE SECTOR HURDLES

The insurance industry has been growing between 15 and 20 percent, but it lags

for behind its global counterparts. This was due to the following reasons.

1. Insurance companies create products and go out to find customers. They do

not create products that the market wants.

2. Insurance awareness among the general public is low.

3. Term- Insurance Plants are not promoted.

4. Unit -linked assurances are not available.

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5. Insurance covers are expensive. Inefficient management and low investment

yield are responsible for the high premium charged by Indian Insurance

companies Investment restrictions have been responsible for 10w yields.

6. Returns from Insurance Products are low.

7. There is a dearth of innovative and buyer-friendly insurance products.

8. Most agents and development officers are interested only in producing new

business servicing existing customers satisfactorily has not been a priority for

them the obvious reason to this is that incentives are them the obvious reason to

this is that incentives are based on new business generation and not on

satisfactory serving of existing customers it is surprise to note that more than

10% of LIC policies are surrendered or get lapsed every year.

9. There is no market research worth the name and computerization is woefully

inadequate.

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INSURANCE SECTOR EMERGING AREAS

Some of the emerging areas for insurance sector in India are:

1 DEMAND FOR PENSION PLANS:

Two relatively modern trends affect life insurance business in India

significantly. The first one is the joint family system which worked like

an insurance arrangement. With more and more nuclear families becoming the

rule, there it a greater demand for life insurance cover the second trend is that

elderly increasingly have to fend for themselves. In 1990, India had about 54

million people above the age of 60. This number is expected to increase to 100

million by 2004 and to almost 10% of the total population by 2010. Thus future

senior citizens look towards planning for their own old age and the need for

pensions and annuities. These two trends portend a large and growing marketfor life insurance in India.

2. SEPARATENESS OF BANKING AND INSURANCE:

There is lot of speculation whether banks should be allowed to operate in the

insurance sectors. The reasons for allowing banks are competition would

enhance efficiency and benefit consumers, public- men enjoy a One- Stop

Financial Service Paradigm, banks could recoup some of the lost business to

securities firms and there would be synergies in operating insurance and

banking. The reasons against are - it would create unhealthy concentration of

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market power, it would expose banks to additional and unnecessary risks and

banks would have unfair advantages since they have detailed information on

their customers financial position. This debate is for from settled and we are

likely to see some restructuring in operations of banking and insurance.

3. ROLE OF INFORMATION TECHNOLOGY:

The Business of selling life insurance requires assessing the profile of the

customer and assigning the right policy. This process is facilitated by a database

and is completely driven by information technology. If it uses this network of

database to offer their products, it would have better utilized this vastly

underutilized capacity.

4. USING POSTAL NETWORK:

Another important factor is allowing the existing network of 150000 branch

offices of post and telegraph to sell life insurances and related financial

products. Already postal banks generate more deposits than all commercial

banks and hence their role can hardly he overemphasized. Post offices can also

act as avenues or agents of non-life insurance companies. However they cannot

be expected to underwrite risks.

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5. CREATING INSURANCE AWARENESS:

It is the need of hour to create insurance awareness among he general public. It

will require a whole lot of efforts on the supply and distribution side.

6. INNOVATIVE PRODUCTS:

Insurance companies should offer innovative products to tap huge amount of

resources for the developmental activities. In developed economies, insurance

products are sold Focus of insurance industry is changing towards providing a

mix of both protection / risk cover and long- term investment opportunities.

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NEED OF GLOBALIZATION IN INSURANCE SECTOR IN INDIA

Insurers promote financial system efficiency through their role of both life and

non-life financial intermediary in the following three ways:

1. Reduction in Transaction Costs: Because it collects the premium from a very

large number of policy holders from different regions of the country and

thereby commands huge funds at their disposal.

2. Creating Liquidity: Since there is no time lag between occurrence of loss on

the one hand and receiving the claim amount by the policyholders. Moreover

the funds raised are used for long term projects, which are not required to be

paid immediately. Thus liquidity is created in the capital market.

3.Facilitating Economies of Scale in Investment: Investment in large projects

such as national road projects, railways, ports; power projects facilitate

innovations and specializationss and thereby promote economic efficiency and

productivity in the economy.

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WHY DO INSURERS DECIDE TO GO GLOBAL?

First of a11 many countries are moving away from protectionism and

state control and taking a more market-driven approach, especially in the

insurance sector. They are regulating and deregulating insurance to

encourage a stable, properly managed, and thriving industry through

privatization and opening up their markets to foreign companies

Secondly, many previously volatile economies are settling down and as a

result a new middle class is emerging in countries around the world. A

significant proportion of the population in these emerging markets is

aging. Moreover these countries place a great importance on family

values. When you can earn a decent living and when you place a high

priority on taking care of family, you save money and buy insurance.

Thirdly, the new challenges many insurers face in their local markets

from non-traditional competitors like banks, non-financial companies,

financial retail centers; direct insurers; the Internet. Mature markets like

United States are coping with market saturation both real and perceived

and with stricter sales practices regulation.

GLOBAL INSURANCE MARKET- CURRENT SCENERIO

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Insurance companies are developing primarily from industry

consolidation rather than the growth of new companies or increased

overseas branching. Mergers and acquisitions are especially prevalent in

markets where there have been a large number of undifferentiated

players, none of which have controlled more than five percent of the

market.

Vertical integration is occurring, with a merging of the roles of agents)

underwriters and risk assessors. At the same time, there is a growth in

horizontal integration between insurance firms and other competitors

such as financial investment firms) banks, credit cards companies and

retailers. But, while consolidation may bring economies of scale, it

doesnt solve basic distribution problems.

In order to remain competitive, insurance companies are increasingly

unbundling the value-added chain, contracting out non-core support

services and specializing in specific market segments. As the business

community becomes more sophisticated in understanding the risk

exposures and risk management, it is increasingly unwilling to incur the

high costs of insurance from inefficient, multi-line firms.

Banks are helping corporate clients set up captives and risk retention

groups to bypass the traditional insurance market and acquire more

effectively exposure coverage at lower administrative costs.

Alternative such as captives, risk retention groups or self insurance now

control 40-45 percent of the total commercial market. Even mid-size

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companies are moving in this direction by going to rent-a-captive

where they can rent space in a captive as risk takers.

Internet is the growing as a global distribution channel world-wide,

which is increasingly being used for marketing of insurance products and

services. This is leading to a sharp rise in use of commercial on- lines

services, which allow policyholders to view, query and update policy

information. Insurance companies have revised their marketing strategies

to accommodate the interactive marketing style of the electronic media.

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IMPACT OF GLOBALIZATION ON INDIAN INSURANCE

SECTOR

The last millennium ended with a flourish of insurance mergers and acquisitions

across the globe. 1999 saw over 630 insurance-related deals world-wide, a 15

percent increase over 1998 figures. Over 33 percent of these deals happened

during the last quarter preceding year 2000. And the Asian marketplace has

contributed significantly to this activity.

Indias developing markets afford huge opportunities for growth, surpassing

anything available in the west. Also, in the coming future, large mergers and

acquisition activities are expected. Companies with the size to influence the

market will obviously gain the best benefits of globalization. To acquire that

influence, a focused merger and acquisition strategy must be implemented since

the current competitive environment may make it impossible to achieve growth

through internal developments. Alternative approaches will only show down the

process. Since the stock markets are unrelenting and insatiable in their

expectations, insurers will have to turn to mergers and acquisitions to meet

these demands.

Other insurers will find it increasingly difficult to retain their markets. And it

will become even less viable for them to maintain even partially functional

networks or competitive standards and service. If they wish to survive, they will

have to either merge or become niche specialists. India and Korea are the two

last countries in Asia to deregulate their financial sector. Although different

markets fundamentally, they both have strong privatization programs in the

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place. This renewed focus on privatization has a twin-pronged impact since it

presents greater business opportunities and strengthens to strong link that

privatization shares with deregulation.

Liberalization of the insurance sector has allowed foreign insurers to enter the

market. Most of the foreign insurers have started rushing find local partners

within the local market. India offers immense possibilities to foreign insurers

since it is the worlds most popular country, having over a billion people still

uninsured. The insurance industry is undergoing major restructuring as firms

are moving fr,being national to global in scope, as economies of scale become

increasingly important in commodity product lines. The main insurance areas

that have already become globalizes include marine, aviation, alternative risk

financing and reinsurance.

For a developing country like India, growth in per capita GNP arid education

levels brings an increase in demand for life insurance products. Most of the

economist felt that demand for insurance products will be strongest in the

country when:

Individual are increasingly responsible for their own retirement savings and

estate planning due to the removal of government safety nets.

Fewer children to care for aging parents.

A movement away from the extended family structures to nuclear families.

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OPPORTUNITIES OPEN FOR THE PRIVATE INSURANCE COMPANIES

As the threat of retirees outliving their assets increases, alternate support and

wealth conversation mechanisms need to be found. Given their large population

bases, India will continued to be high demand market. With the liberalization

and deregulation of the Indian financial sector, the following opportunities will

be open for the private insurance companies:

1. As governments struggle with budget deficits and the threat of an aging

population outliving its assets, new opportunities in private insurance

financing are opening up in workers compensation and old age pension

schemes. This is because the government is facing acute shortage of

funds to repay the pension to the government employees and is thinking

of phasing out such schemes.

2. The growth of private health care networks brings with it an increased

demand for health insurance, either through individual contracts or group

employee benefit programs.

3. Other high demand growth areas include professional and product

liability and political risk, especially as developing economies become a

more attractive to investors.

The World Wide Web has grown rapidly, ushering in widespread usage of e-

commerce that has impacted business world-wide changing the methods under

which they have traditionally operated.

Within India, the relatively immature insurance companies are structured in a

way where they are spilt by:

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Product-commercial, personal or life, or

the distribution method-broker, agency or direct.

The Indian insurance industry cannot remain the exception to the rule any more.

Some of them have tried to implement e-business in some form or the other to

make their business more efficient and effective but no has taken a gigantic step

towards complete commitment for e-business as the way of conducting

business.

New technology will give customers better, wider and faster access to products

and services than the options offered earlier. This freedom of choice will place

demands on business and this can be achieved only when insurance companies

have revamped and improved their product and delivery service just to stay

afloat.

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RESPONSES TO GLOBALIZATION

CORPORATE RESPONSES TO GLOBALIZATION

In response to the new context, most firms have adjusted quite rapidly to the

new types of competition. The largest firms have adopted strategies that are

increasingly global, with two main objectives in mind:

1. To improve profitability by reducing costs and

2. To strengthen their technological capability.

Corporate profitability is improved by spreading fixed costs between the parent

company and its new partners. To strengthen their technological capability,

firms can either continue to internalize activities via mergers or acquisitions of

other innovative firms, or adopt an external approach and conclude co-operation

agreements or alliances based on co-operation between independent firms

around a common program. With the growth of alliances, the R&D canters of

major firms have opened up to a certain degree and knowledge has started to

flow between them, although the technology transfers involved relate to pre-

competitive programs and are tightly controlled and reserved to member of the

network. A firm can externalize some of its activities in sectors that have

attained a certain degree of maturity, and simultaneously enter into

technological alliances to develop new products or processes. If this two-fold

trend continues, it could reshape the world economy.

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GOVERNMENT RESPONSES

Globalization is seen as a disciplinary force for governments that undertake

unsustainable economic policies. High fiscal deficits and unsound financial

policies that lead to inflationary pressures, current account deficits and/or high

real interest rates, sooner or latter tend to be penalized by international investors

and global capital markets. However, the other side of this is that fiscal policy

tends to lose its capacity to act as a counter cyclical instrument oriented to

maintain full employment. The fact is that international financial markets are

very sensitive on the stance of fiscal policy of a country and uses it as anindicator of the degree macroeconomic responsibility of governments. This,

tend to encourage governments to follow persistently austere fiscal policies in

order to satisfy financial markets and gain credentials of serious fiscal

behaviors. The classical role of fiscal policy to maintain a high level of

aggregate demand when private investment or private consumption declines is

substituted by restrictive fiscal policy oriented to gain credibility and induce a

recovery only through a reactivation of private spending. In short, Government

authorities have been slower to respond to globalization. Their response has

taken three forms:

1. adjustment measures

2. policies to promote international co-operation and

3. A reluctance to accept certain consequences of globalization.

First, they have realized that the degree of interdependence is now such that

solutions are needed which go beyond national boundaries. The number of

international agreements on the health, environment, research and technical

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standards has thus increased in recent years. Second, the authorities have sought

to correct certain ill-controlled instances of globalization. Also, the authorities

have become increasingly aware that, because of growing interdependence,

national policies are less effective when they are out of line with one another.

This aspect of globalization that may often be perceived as a constraint on

national independence and a loss of sovereignty. If the rate of Globalization is

indeed accelerating, the global economic landscape will undoubtedly look very

different 20 years from now. Companies will need to adapt to this changing

landscape and those that choose to move first will have a better chance of

turning these changes into competitive advantage. The events of the last two

years in the global economy indicates as a main challenge, the seizing the

opportunities open by globalization while at the same time managing the

tensions and problems it poses particularly, for developing countries.

National prosperity is created, not inherited. It does not grow out of a countrys

natural endowments, its labour pool, its interest rates, or its currencys value,

according to Classical Economics. A nations competitiveness depends on the

capacity of its industry to innovate and upgrade. Companies gain advantage

against the worlds best competitors because of pressure and challenge. They

benefit from having strong domestic rivals, aggressive home based suppliers,

and demanding local customers. In a world of increasingly global competition,

nations have become more, not less, important. As the basis of competition has

shifted more and more to the creation and assimilation of knowledge, the role of

the nation has grown. Globalization has profound implications for developing

countries. It creates important new opportunitieswider markets for trade, an

expanding array of tradable, larger private capital inflows, improved access to

technology. The outward-oriented reforms being adopted by more and more

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developing countries make the latter both agents and beneficiaries of

globalizationthese reforms both contribute to globalization and expand

opportunities for developing countries to participate in its benefits. The new

opportunities are accompanied by tough new challenges of economic

management. Integration requires adopting and maintaining a liberal trade and

investment regime. Policy-makers are confronted more and more with a new

disciplinethe need to maintain the confidence of markets, both domestic, and,

increasingly, international. In this setting, sound economic policies command a

rising premium; the payoffs are larger, but so are the penalties for policy

inaction or errors. What is more, globalization increases competition between

policy regimes; with greater capital mobility, investors increasingly are

exploring opportunities worldwide and assessing a countrys policies not only

in the absolute but also relative to those in other countries.

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HAS GLOBALIZATION HELPED OR HURT THE INSURANCE

INDUSTRY?

Globalization has provided many benefits for the insurance industry.

Over the years there has been a dramatic increase in

professionalism throughout the industry as companies apply best

practices developed by innovators in one market to other markets around

the world.

Sharing their expertise across borders that ultimately benefits both

consumers and the industry as a whole has created a uniform regulatory

environment.

Globalization has resulted in a free flow of managerial talent

across borders. Companies like New York Life are moving smart

managers from one market to another. This helps broaden

the horizons not only of each company but also of the entire industry

itself.

There are not many instances in which globalization have hurt insurance

industry.

The high negativity as a result of globalization occurs when an insurer enters

new foreign markets and pay high price to buy all or a portion of an existing

insurer in that market, or pays ridiculous sign-on bonuses to attract

experienced agents from established companies. When the insurer comes to

know his mistake, he is left with option either to take a big write-down or

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withdraw from the market which ultimately hurts the reputations of all

foreign companies operating in that market.

Even if you have no intention of establishing a global presence, you must be

prepared to compete successfully with those who do, because you can be

certain they are assessing the potential of your corner of the world like New

York Life, you may just have what it takes to succeed on both the home

front and in the international arena.

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TECHNIQUES USED BY INSURANCE COMPANIES AFTER

GLOBALIZATION

Globalization has opened the way for insurance companies to take their

business anywhere on earth. This has increased the competition among these

companies. All these companies have large capital, huge capital and advance

technology. The target is to cover more market shares by capturing more and

more customer. To attract and retain their customer these companies are coming

out with many innovative products and service. They are also outsourcing their

many activities to focus more and more on building customers and also reducetheir cost. Almost every company deals online. These all techniques are

explained in details below.

BUSINESS PROCESS OUTSOURCING

Insurance BPOs are most likely to have exceeded the target of $690 million

when work done by captive and third-party vendors is taken into thecalculation. Nearly half of insurers use BPO. Insurers have made great

progress in terms of BPO acceptance, with the practice having gone from

being considered a risky strategy for the few to a mainstream strategic

choice. In fact, insurers to a degree feel compelled to put BPO on the C-

level agenda.

As insurance services mature and more high-end processes like analytics,

actuaries and underwriting services move to India, the BPQ industry is

upbeat.

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Claims and policy administration BPO is among the fastest growing BPO

areas.

Procurement BPO in insurance will show the fastest growth, driven by a

focus on improving efficiency in the claims fulfillment process.

India has several advantages as a leading insurance outsourcing destination.

It offers low costs and is an established destination for outsourcing. Indian

companies offer near shore services and IT outsourcers can leverage existing

relationships with large insurers.

The growth drivers are common to all verticals - cost saving, aboutfocus on

core processes of product development, innovation and marketing strategy

and minimizing risk through multiple delivery centers. For the insurance

outsourcing vertical, the critical drivers are:

Understand the Insurance regulation and statutory documentation of

various nations.

Deregulation of insurance markets in countries like India, China and Japan.

Availability of credible service providers.

Minimizing risk through multiple delivery locations.

Expanding organically and inorganically to establish a multi-location

presence to derisk client business.

Resolve more than 85% of inquiries without handing off the caller to other

administrators.

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INFORMATION TECHNOLOGY

The use of Internet technologies in the insurance industry is not just limited

to distribution; it also has a fundamental impact on almost all other

production areas. Products that are not necessarily suitable for online

marketing can still benefit from the huge opportunities for quality and

service improvements presented by e-business:

If clients already have extensive product and risk expertise, the Internet can

still be used as a marketing tool, despite high complexity and transaction

volume. Internet team rooms, for example, could support the consulting

and negotiation process.

Policy administration or claims settlement can benefit from online support:

For example, a client may seek independent advice when choosing a private

health insurer, but still be prepared to use online facilities to process and

settle doctors bills.

Brokers can use e-business solutions to bundle together the needs of a large

number of clients, handle the administration themselves, and then forward

the data to the insurer.

Modern communication technologies allow more personalized products,

faster response times, greater flexibility in insurance covers and better

support for risk management.

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ELECTRONIC BUSINESS

The current advances in information technology mark the beginning of a

veritable efficiency revolution in insurance markets. While actual translation

into new solutions is still in its infancy, the effects of e-business are the

subject of intense debate in the insurance industry. Many insurers are in the

process of implementing the new possibilities provided by technology and

testing innovative business models. Compared to long-established

companies, the new insurers of Central and Eastern Europe have the

advantage that they can introduce new business systems unencumbered by

existing models.

E-BUSINESS TRENDS IN INSURANCE

Compared to books, CDs, travel, software & hardware toys and online stock

trading or banking, development of the Internet in the worldwide Insurance

industry has been somewhat cautious. There are a host of special factors

which make the online selling of insurance products more difficult:

They are less standardized

They can be quite complex

They are usually taken out (i.e. purchased) infrequently

Regulatory hurdles

Insurance products differ in their suitability for marketing on the Internet. It

depends chiefly on how much advice is required. The more complex the

product and the bigger its financial scale (transaction volume), the greater is

the clients willingness to pay for advice. Products that are particularly

suited to Internet distribution are those that can be described and rated using

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a small number of parameters, such as motor, private liability, homeowners,

household contents and term life insurance.

INNOVATIVE PRODUCTS AND SERVICE

Globalization has force the insurance companies to become more customer

centric. The customers have become more demanding; they need new

products at reasonable prices. Before the insurance companies used to design

product first and then send it to market. Nowadays the companies design

products according to the customer preferences. The policies are also

making available easily through internet. Some famous innovations are:

Banc assurance

Unit Link Insurance Plan (ULIP)

Pension Policy

Online Trading

Reinsurance

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SWOT ANALISIS OF INSURANCE SECTOR AFTER

GLOBALIZATION

OPPORTUNITIES AND THREATS FOR INSURANCE

Globalization will have mixed blessing for India. It will entail new

opportunities for players but also, simultaneously bring threats against the

national interests.

OPPORTUNITIES

1. Opening up of the sector will ensure a larger flow of funds in two ways.

Competition a larger portion of savings will find its way into infrastructure

through insurance companies. This will change the image of India being a

highly under-insured nation.

2. After the nuclear tests, the government needs to hold out a hand of friendshipto the west to achieve aims related to national security. Insurance will be a

visible gesture.

3. From the view point of the capital markets, opening up of the insurance will

have a bullish impact. In the near term, insurance is a highly visible industry

and the fact that in spite of motivated opposition, the government is prepared to

go ahead sends a positive signal to foreign investors, even if they are not in

insurance. In the medium term, insurance companies are traditionally majors

players in stock markets. Life Insurance Corporation and General Insurance

Corporation make substantial investments in stocks. Once half-a-dozen

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companies come and start operating, the size of the pie would become larger

and huge invest able funds would come in. Insurance companies tend to be

value pickers. They invest in stocks with relatively steady earnings and a strong

asset base. So when insurers enter the market they will invest in SAIL or SBI,

even if they seem sluggish in the short-term.

4. The biggest benefit will be to the stock market because of the actual

investment flowing into infrastructure development. When longer term

insurance money flows into these areas, there would be a stupendous impetus to

growth. When GDP grows, the stock markets will grow in tandem.

5. The opening up of the insurance sector by the Government of India to private

and global players, will lead to the phenomenal growth in terms of number of

new players and new products and services.

However, it is critical that when we open the doors for insurance we protect our

own national long-term interests.

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THREATS

1. There is a fear that there will be flight of capital from India, to ensure against

this we should stipulate that capital and dividend repatriation should start only

after some years. It is also necessary to ensure that domestic capital raised

through premium is not repatriated.

2. The other fear is that the foreign insurers will cream the market. A level

playing field between LIC and GIC and other foreign companies should be

ensured.

3. The biggest fear is ownership that is the foreign insurers do not control the

management of the insurance company through backdoor. To prevent this we

should ensure that the day-to-day management is with the Indian partner and

foreign holdings do not exceed the ceiling laid down by law.

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LIBERALIZATION OF INSURANCE SECTOR

One of the major impacts of insurance globalization is liberalization.

Benefits and challenges of market access liberalization

The opening up of the insurance markets in emerging markets to foreign

competition has long been a contentious issue. Numerous arguments,

including the unfavorable balance-of-payment effect and the need to

protect infant industries, have been advanced to justify measures to

confine foreign inroads in the market. It is often the case of striking a fine

balance between the stability of the insurance market on the one hand and

ensuring efficiency and good value for consumers on the other hand.

Liberalization enhances efficiency of local insurance market. The

benefits of liberalization are multi-faceted. Foreign insurance companies

can enhance the efficiency of local insurance markets by providing

superior customer services, introducing new products and transferring

technological and managerial know-how. Liberalization increases

competition and encourages a more pronounced specialization according

to comparative advantages.

Due to their greater financial strength and risk diversification capabilities,

foreign insurers also often have superior claims paying ability, which can help

to enhance the financial condition of individuals, households and corporations

in emerging markets.

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Not only is foreign participation important in promoting financial stability, it is

also imperative to facilitating the trade and commerce of developing economies.

The availability of a reliable insurance sector has long been recognized as one

of the prerequisites in attracting foreign direct investment. Globally active

industrial and service companies expect their insurers to follow them and

provide worldwide support.

Further, the participation of foreign insurers could improve the efficiency of

capital allocation in emerging economies. Underwriting and investment

decisions made by foreign insurers based on their international experience and

best-practice considerations could send useful signals to markets for efficient

resource allocations. The availability of these signals, particularly in markets

where credit allocations are not completely based on economic considerations,

is important in improving capital productivity.

These positive considerations have underpinned the liberalization drive in

emerging markets but the pace of market opening is far from ever as there are

still concerns over the potential pitfalls of greater foreign participation.

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Malhotra Committee Major Recommendation on

Liberalization

The Malhotra Committee had made certain recommendations to the

Government to change the face of the industry and to give it a more meaningful

direction. Regarding the liberalization of the insurance industry, the Committee

made the following important

recommendations:

Private sector should be allowed to enter the insurance business. No composite insurance companies.

Number of new entrants to be controlled.

Minimum paid-up capital.

Obligation to do business in rural areas and for weaker sections of the

community.

Selective entry to foreign companies.

Technology up gradation.

Pension sector

Privatization of LIC and GIC

Establishment of an Insurance Regulator

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THE THREE KEY ISSUES THAT IMPINGE ON LIBERALIZATION

OF INSURANCE IN INDIA ARE

1. REASON FOR OPENING UP THE INSURANCE

INDUSTRY:

An insurance policy protects the buyer at some cost against financial loss

arising from a specified a risk. Different situation and different people

require different mix of risk - cost combinations. Insurance company thereby

offers schemes of different kinds. Among the emerging economies, India

is one of the least insured countries, but the potential for further growth is

phenomenal. The demand for insurance is likely to increase with rising percapital incomes, rising literacy rates and increase of the service sectors.

After Korean and Taiwanese insurance sectors were liberalized, the Korean

market has grown 3 times faster than GDP and Taiwan the rate of growth

has been almost 4 times than that of its GDP. Further, opening of the sector

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ISSUES

WHY

LIBERALIZE?

WHAT TYPE

OF

MARKET

STUCTURE?

WHAT IS THE

ROLE

OF

REGULATOR?


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to private firms will foster competition, innovation and variety of products.

It will also generate greater awareness on the need for buying insurance as a

service and not merely for tax exemption, which is currently done.

2. MARKET STRUCTURE:

What is the appropriate market structure for insurance markets? Should it be

monopoly (state or regulated) or should there be unlimited private entry or

should there only be a few regulated players? The answer is quite obvious.

When traditional public sector businesses like banking, power, telecom,

airlines and even postal services have been allowed private entry, why must

insurance remain a state monopoly? State monopoly had little incentives to

offer a wide range of products with more complex and extensive risk

categorization, better technology and better customer service including faster

settlements. Keeping in view the recommendations of insurance reforms

committee that a limited number of high capital private companies be

licensed, and no firm be allowed to operate both in life and non-life

insurance, IRDA has granted licenses to three private companies on October24, 2000 - Reliance Fire and General Insurance, HDFC Standard Life

Insurance and Royal Sundaram Alliance Insurance, to set up the shop and to

get into business.

3. ROLE OF IRDA

IRDAs primary function is to protect consumer interests. This means

ensuring proper disclosure, keeping prices affordable but also insisting on

some mandatory products, and most importantly making sure that consumers

get paid by insurers. Further, ensuring the solvency of insurers is a very

important function of regulatory authority. IRDA has evolved a set of

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operational guidelines to deal with maintaining the solvency of insurers.

Growth of insurance business entails better education and production to

customers, creating better incentives for agents and intermediaries. It has

evolved guidelines on the entry and functions of such intermediaries.

Licensing of agents and brokers are required to check their indulgence in

activities such as twisting, fraudulent practices, rebating and

misappropriation of funds.

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Case Study

Why does an insurer decide to go global? For the answer to this and several

other questions, Resource asked Gary G. Benanav, chairman and CEO of New

York Life International, to share his perspective. A Fortune 100 company, New

York Life is the largest mutual life insurance company in the U.S. and one of

the largest life insurers in the world. Founded in 1845 and headquartered in

New York City, the company and its affiliates offer life insurance, annuities and

longterm care insurance. New York Life Investment Management, LLC, a

New York Life affiliate, provides institutional asset management, retirement

plan and trust services. Other New York Life affiliates provide an array of

securities products and services such as institutional and retail mutual funds,

including 401(k) products. The companys distribution channels are career

agents (insurance products) and registered representatives (mutual funds). New

York Life prides itself onand is internationally acclaimed forits integrity,

financial strength, highly trained and responsive agents, community service,

and commitment to the mutual form of ownership.

New York Life is truly a global life insurance company. The company

first moved into the international marketplace in 1870. At that time it appointed

Harry S. Homans as general agent with offices in London and Paris to develop

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the European markets. In April 1884, Seton Lindsay was appointed to develop

the East, including China, India and the adjacent islands. By 1899, New York

Life, with US$ 1 billion of insurance in-force, had operations in 83

countries.

By 1905, the company had a worldwide agency force of 8,000 men and

women who operated out of 208 branch offices. However, foreign operations

were interrupted by the onslaught of World War I, al which time New York

Life decided to withdraw from all overseas markets. It reentered the global

arena in 1988 with the acquisition of a life insurance company in Hong Kong.

Since then, it has established operations in Argentina, China, India, Mexico, the

Philippines, South Korea, Taiwan and Thailand through New York Life

International, its overseas arm, as well as a representative office in Hanoi,

Vietnam, New York Life International offers life insurance and asset

accumulation products and services to individuals and groups in selected

emerging markets through subsidiaries, joint ventures and affiliates.

International revenue has reached US$ 1.4 billion. New York Lifes

internation6 business now represents more than 25 percent of its total life

insurance sales.

Benanav joined New York Life in 1996, where he not only heads up

New York Life International, but also serves as vice chairman of New York

Life and as a member of its board of directors and executive management

committee.

During the previous 24 years, Benanav held positions of increasing

responsibility at Aetna. In 1972, he joined Aetnas law department. From 1975

to 1986, he served as vice president and investment counsel and was Aetnas

senior financial, acquisition and divestiture lawyer. In 1986, he was promoted

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to vice president of finance and treasurer and was responsible for the

management of Aetnas banking, corporate finance, domestic and international

treasury and short-term investment activities. In 1989, he was appointed

president of Aetna International, Inc., responsible for Aetnas insurance and

financial services businesses outside the U.S. In 1992, he was promoted to

group executive, with additional responsibility for Aetnas domestic life

insurance and asset accumulation businesses. In 1994, he became the CEO of

Aetnas property/casualty operations. Before joining Aetna be was associated

with the New York law firm Shea & Gould.

Benanav also is very involved in civic, business, and international affairs.

He lectures frequently at business seminars on various financial topics, chairs

the Pacific Basin Economic Council-U.S., and serves as one of the U.S.

representatives to the Asia-Pacific Economic Cooperation (APEC) Business

Advisory Council (ABAC). He earned his MBA at the Columbia University

Graduate School of Business and his JD at Columbia Law School.

So where is Benanav taking New York Life International and why? Despite

New York Lifes phenomenal 40 percent growth over each of the past three

years, says Benanav, we knew that the long-term trend for the U.S. life

insurance market would be slower growth. Several years ago, when the board of

directors was assessing the companys long-term strategy, it rejected the idea of

seeking growth through massive diversification; to us, the logic of the financial

services supermarket was not compelling. Instead, our board decided to seek

growth through exporting our core competency, life insurance, to attractive

developing markets internationally. Incidentally, we also decided to make a

concerted effort to expand into some very attractive developing markets in the

U.S.: the rapidly growing ethnic markets. New York Life is now the leader in

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the U.S.-Chinese and U.S-Indian markets and is doing very well amongst

Korean-Americans, Vietnamese-Americans, and Hispanics.

How does New York Life decide which markets to enter? Well, while Im

not going to divulge the criteria we use to assess a market, let me say that we

use a combination of outside experts and our own staff, says Benanav. We

have excellent in-house teams, both in New York and in our Asia regional

headquarters in Hong Kong, who are very skilled in seeking out opportunities

for New York Life. One of the benefits of having an experienced, diverse staff

representing many nations is the vast local knowledge these people can bring to

an organization like New York Life. This first-hand, intimate knowledge is

impossible to get simply by visiting a country. New York Life also often

establishes representative offices in a market like the one we currently have in

Vietnam. This allows us to build relationships and closely observe the market

before opening for business there.

New York Life is looking for attractive emerging marketsgenerally those

with a growing middle class and relatively stable political and economic

environmentsinto which we can bring our core life insurance expertise.

We primarily target middle-class individuals with traditional life insurance

products built around providing long-term financial protection but we also look

at the realities of each individual market and allow our local management to

seek a product and distribution mix that makes sense for local conditions.

We may not be in as many international markets as some of our competitors,

but wherever we operate we are committed to having the best agents and

employees in the local life insurance market. If this means we expand more

slowly into new markets, thats fine with me. New York Life in the US has

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become one of the most respected, trusted brands in the country and it did this

by providing excellent products sold and serviced by the best-trained, most

professional agents in the business. This philosophy has served New York Life

for the past 158 years in the U.S. and we have no intention of changing that

philosophy outside the United States.

On the organizational front, New York Life has a very flat organization

at its home office in New York and, by extension, in its Hong Kong regional

office. We like to keep the operational decision-making as close to the markets

as possible, says Benanav. This means giving a lot of latitude to our

individual country managers who live in the markets day-to-day. Some of these

managers are expatriates, but some are citizens of the countries in which we

operate. And, in almost every instance, even where we have an expatriate

manager, his (or her) senior management team comes from the local operation

and is nationals of the country with a strong understanding of how to market in

their own country. The role of the New York and Hong Kong corporate offices

is three-pronged: to set policies and procedures, to monitor, and to mentor. The

rest is left to the managers in the local operations.

What about global branding? While we do advertise and market the

company in traditional ways in each of our markets, says Benanav, the most

effective of New York Lifes brand-building revolves around our local agents.

These agents are New York Lifes brand ambassadors, living the companys

values and providing direct, tangible service to their communities. The agents

are the face of New York Life in each and every community in the markets

where we operate so it is logical that they would be our most effective

marketing assets. And our agents are very well respected in the local markets.

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Weve brought to our international markets the same training programs

weve used to build the best agency force in the U.S. so we know that New

York Life agents in international markets are the best trained, most productive

agents in each of the local markets, too. We believe that this new pan-regional

brand advertising will complement our existing local marketing efforts.

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CONCLUSION

The needs of the nation and its people have finally prevailed and privatization

of insurance is now a reality towards further liberalization of the Indian

economy. With the opening up of the industry after reforms, private sector

operators in collaboration with their overseas partners are likely to bring in a

more professional and focused approach. Hence, in this millennium, insurance

industry is likely to play an important role in changing the economic landscape

of the country. However the success of the insurance industry will primarily

depend upon meeting the rising expectations of the consumers who will be the

real king in the liberalized Insurance market in future.

final globalization

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