….From micro insurance to the macro economic environment, Dr Sadhak provides a solid foundation for anyone that wants to understand the transformation of one of the world’s most important insurance markets. As an active participant in this market, both before and after liberalization, the author brings a range of experience that makes the volume extremely useful to everyone from industry newcomers to policymakers and regulators. All of the above would benefi t from the wise counsel of Dr Sadhak as they face the challenge of ‘managing change’ in the coming years. Robert J Palacios Senior Economist, South Asia Human Development Sector (World Bank) Life Insurance in India: Opportunities, Challenges and Strategic Perspective by Dr Sadhak is a pioneering work on Indian Life Insurance Industry with a new perspective. The book is a culmination result of research and practical experience for a number of years by an internationally acknowledged fi nancial economist and practicing manager with proactive and visionary thoughts. The book has been written in the context of Globalization, Economic Reforms and Liberalization of Indian insurance and capital markets and overall fi nancial sectors. The scope and dynamics of growth of Indian Life Insurance Industry has been discussed in the light of changes in macro economic environment, demographic transition, changing market structure, changing product–market relationship, emerging convergence in fi nancial markets, etc. Dr Sadhak has also focussed on certain critical issues like Strategic Planning and Market Research, Change in Management Systems dealing with distribution and customers expectation with futuristic perspectives which, I think, would provide immensely helpful guidance to the practicing managers. Tarun Das ADB Adviser, Fiscal Management and Strategic Planning, Ministry of Finance, Government of Mongolia; Former Economic Adviser, Ministry of Finance and Planning Commission, Government of India Dr H Sadhak is one of a rare breed of Industry Executive and Practitioner with serious academic credentials, His new book Life Insurance in India: Opportunities, Challenges and Strategic Perspective rightly puts the spotlight on the new reality facing the industry in India following reforms and globalization. He has dealt with all three components of the life insurance industry—protection, pension and investment—in the overall framework of a rapidly changing fi nancial services marketplace. The historical data and current statistics supplied in the book are of particular importance. Dr Sadhak focuses on risk management as a key management function, which is a relatively new concept for the nationalized sector of the industry in particular. Finally, I am particularly pleased that corporate governance issues have been highlighted. In a globalized economy best management and governance practices are indispensable tools of survival. The old industry and its management culture must change to prosper in the new paradigm. I congratulate Dr Sadhak for his contribution to the process and will look forward to more intellectual output from him in days to come. Dilip Chakraborty Finance Director, Life & Pension Business, Canada Life Limited, UK ii LIFE INSURANCE IN INDIA Life insurance industry in India is transforming with the fast changing economic condition, emerging needs of the rising middle class, and evolutions in the capital markets. With its unique development history, India’s insurance industry has its unique challenges. An accomplished writer and an industry expert, who also has extensive practicing experience in various fi nancial sectors, Dr H Sadhak provided unique and powerful insights on the changes and strategies of the Indian life insurance companies. As an actuary and a practitioner in the pension and insurance industry in Asia, I have thoroughly enjoyed reading this book and I am deeply impressed by the depth and breadth of knowledge of Dr H Sadhak. I would encourage anyone who would like to gain deeper understanding of India’s insurance industry and keep this book in his library. Vanessa Wang FSA, Regional Head of Retirement Consulting, Mercer Asia, Beijing Dr Sadhak’s work Life Insurance in India: Opportunities, Challenges and Strategic Perspective is a com- prehensive treatise on Life Insurance industry in India. The book is unique in that it spans both breadth and depth of knowledge. It provides powerful insight with a historical perspective into the life insurance sector. It is a great book in terms of lucidity of presentation of a complex subject. I strongly recommend this book to academicians as well as practicing managers. Pritam Singh Professor of Eminence, Management Development Institute, Gurgaon; Former Director, Indian Institute of Management, Lucknow Long-term drivers for growth in life business are increasing awareness of life-protection, higher income and savings levels and increasing working age population. Factors like booming capital markets and an inclination of consumers to use life products as an investment-cum-protection vehicle, greater awareness spread by players in terms of innovative product design, aggressive marketing and widening distribution also drive life business. A practicing author like Dr H Sadhak harmonizes the drivers to accelerate the process of life business to carry it to a disruptive growth phase. K C Mishra Director, National Insurance Academy, Pune, India Life Insurance in India iv LIFE INSURANCE IN INDIA Life Insurance in India Opportunities, Challenges and Strategic Perspective H Sadhak Copyright © Manjushree Sadhak, 2009 All rights reserved. No part of this book may be reproduced or utilized in any form or by any means, electronic or mechanical, including photocopying, recording or by any information storage or retrieval system, without permission in writing from the publisher. First published in 2009 by Response Books Business books from SAGE B1/I-1 Mohan Cooperative Industrial Area Mathura Road, New Delhi 110 044, India SAGE Publications Inc 2455 Teller Road Thousand Oaks, California 91320, USA SAGE Publications Ltd 1 Oliver’s Yard, 55 City Road London EC1Y 1SP, United Kingdom SAGE Publications Asia-Pacifi c Pte Ltd 33 Pekin Street #02-01 Far East Square Singapore 048763 Published by Vivek Mehra for SAGE Publications India Pvt Ltd, typeset in 11/13 pt Minion by Star Compugraphics Private Limited, Delhi and printed at Chaman Enterprises, New Delhi. Library of Congress Cataloging-in-Publication Data Sadhak, H. Life insurance in India: opportunities, challenges and strategic perspective/H. Sadhak. p. cm. Includes bibliographical references and index. 1. Life insurance—India. I. Title. HG9163.S23 368.3200954—dc22 2009 2009006971 ISBN: 978-81-7829-846-7 (PB) The SAGE Team: Anjana C. Saproo, Meena Chakravorty, Anju Saxena and Trinankur Banerjee Disclaimer: This Publication has been designed with a view to disseminate academic information. While every effort has been made to enhance reliability of the same from multiple sources, readers must not construe the contents of this book as investment advice. The views expressed by the author are purely personal. Neither the Author nor the Publishers are liable for any discrepancy, which may have appeared. Sound professional advice and services relating to investment by the reader can be sought from professionals in the fi eld. The author(s) of this book has/have taken all reasonable care to ensure that the contents of the book do not violate any existing copyright or other intellectual property rights of any person in any manner whatsoever. In the event the author(s) has/have been unable to track any source and if any copyright has been inadvertently in- fringed, please notify the author(s) and the publisher in writing for corrective action. To Partha and Cosmica viii LIFE INSURANCE IN INDIA Contents List of Tables x Foreword by T S Vijayan xiii Preface xv Acknowledgements xviii Chapter 1 Globalization, Liberalization of Financial Markets and Life Insurance 1 Chapter 2 Reforms and Emerging Economic and Financial Environment in India 30 Chapter 3 Indian Life Insurance—Changing Market Structure and Emerging Opportunities 74 Chapter 4 Product–Market Relationship and Distribution in Convergent Financial Market 158 Chapter 5 Managing Life Insurance Investment 219 Chapter 6 Issues in Life Insurance Governance 295 Chapter 7 Managing Change and Challenges 343 Glossary 359 Bibliography 372 Index 378 About the Author 383 List of Tables 1.1 Extent of Globalization 11 1.2 Exports Growth and Share in World Trade 12 1.3 Distribution of Household Assets in Financial Instruments in 2000 16 1.4 Asset Allocation of Life Insurance Companies—A Global Scenario 17 1.5 Mature Markets: Assets under Management by Institutional Investors—A Gobal Scenario 19 1.6 Assets under Management of Insurance Companies in Emerging Markets (in terms of GDP) 20 1.7 Global and Regional Growth in GDP and Life Insurance Premium 22 1.8 Regional Variation in Market Share, Penetration and Density 24 1.9 State and Foreign Ownership, Tariffs and Entry Barriers, 2003 26 2.1 Sectoral Real Growth Rates in GDP (at Factor Cost) 32 2.2 Macro Economic Aggregates (at Current Prices) 34 2.3 BRICs Real GDP Growth: 5-year Period Averages 35 2.4 Financial Assets of Banks and Financial Institutions (as on 31 March) 41 2.5 Trend in Domestic Savings in India 44 2.6 Distribution of Financial Saving (Gross) of the Household Sector in India 47 2.7 Changes in Financial Assets of the Household Sector (at Current Prices) 48 2.8 Trends in Institutional Investment 52