Life Insurance Corporation was formed as a government regulated monopoly in September 1956 by an Act of Parliament, (LIC Act 1956) with a capital contribution of Rs. 50 million. Over the years, LIC built a strong distribution and agent network. By 2000, LIC had 2048 branches and 500,000 agents across the country. With income from premiums totalling Rs. 6,262 crore and a Rs. 1,60,935 crore asset base for fiscal 2001, LIC was a financial powerhouse, with a presence in mutual funds and housing loans besides life insurance. The company had insured more than 11.5 crore people in the country through its individual and group schemes. Of the 60-80 million life insurance policies outstanding, 48% were from the rural and semi urban areas. This was very impressive since no company in any other industry had been able to tap the rural market to this extent. LIC’s annual revenue growth rate was 8.8% during 1993- 2000. In December 1999, the Government approved the IRDA Act, making IRDA the authority to protect the interests of policyholders, and to regulate, promote and ensure the systematic growth of insurance industry. IRDA also framed detailed guidelines for inviting private players into the insurance sector. After August 2000, private licenses were given to HDFC-Standard Life, ICICI Prudential and Max New York. International companies that entered the sector included Lombard, Zurich, Allianz, Royal & Sun Alliance, Chubb Insurance, AIG, ING and CGNU, while ICICI, Hero Honda, Dabur, the Tatas, the Birlas, SBI, HDFC and Reliance were the major Indian players. With the opening up of the insurance sector, media reports predicted tough times ahead for LIC. A report revealed that LIC was 70% over-staffed, which meant that its competitors would have substantial labor- cost advantages. The report also predicted that LIC might find it difficult to retain and protect its extensive agent network and, in particular, to ensure that the most talented and influential agents stayed with it. LIC was also expected to face fierce competition on the new product development front. In November 1999, even as the IRDA Act was being debated in Parliament, LIC begun preparations for meeting the threat posed by private players. The company appointed consultants Booz, Allen and Hamilton to do a scenario-building exercise, suggest areas for process re-engineering, and recommend ways to sharpen customer focus. LIC gave top priority to introducing over-the-counter (OTC) facilities that would help it serve its customers better. By 2000, it had computerized and locally networked all its 2,048 branches. The speed of service delivery, particularly in the case of claims- settlement, had also improved. The total outstanding claims were brought down to 2.74% in 2000 from 3.47% in 1995. LIC realized that to be able to retain its position, it would have to match the technological sophistication of the multinationals. LIC extended its Metropolitan Area Network (MAN) system from Mumbai, Delhi and Bangalore to Ahmedabad, Pune, Hyderabad, and Calcutta. This enabled LIC customers to pay premiums and get status reports from any of its branches in these cities. LIC planned to eventually connect up to 27 cities in a Wide Area Network (WAN). E-mail and Internet facility were introduced at over 600 additional branches. A mechanism was put in place to facilitate insurance premium payment over the Internet in cities that were covered by the WAN. Over 98% of LIC’s branches had begun providing software assistance that helped the policyholders track premium payments, loans and claims positions. Information kiosks were set up in over 50 places across the country. The company also started an Interactive Voice Response System, to help customers get details of various policies over the telephone. LIC planned to tie up with corporate agents to enable customers to buy insurance products at banks or financial services companies or while buying a consumer durable. LIC also intended to use the services of brokers once brokerage concerns were allowed to operate in India. LIC initiated measures to revamp its service network and to open 600 new training centers. The new centers were to have a new training module in the curriculum which focused on marketing. It intensified its research activities in order to get market feedback and tailor its products according to customer needs. LIC also planned to offer new products and schemes and enter new markets, especially in the global arena. LIC began exploring the possibility of entering the Nepalese, African, Middle- East, Mauritius, US and UK markets. Under Section 27 A of the Insurance Act, 50% of LIC’s investments had to be in central and state government securities and 25% in the social sector (comprising power, telecom, ports, roads, bridges, housing etc.) LIC was free to invest the remaining 25% wherever it wanted. LIC was hoping that the 25% mandatory investment in social sector would be waived in the near future. LIC also decided to leverage its brand value to increase its presence into more lucrative areas like the equity markets. A major area of concern was retaining employees and strengthening the agency system, which was the backbone of the life insurance business. LIC had 8.5 lakh agents outside its payrolls who reported to its development officers in branch offices. As 80% of the business was brought in by just 30% of the agents, the private competitors were likely to make an attempt to poach the good agents. LIC, however, believed that there was no danger of its agents leaving, as it had a more competitive commission structure. Moreover, since IRDA had prohibited agents from working for more than one insurance firm, LIC could afford to relax a bit. Soon after the IRDA announcements, there were a number of breakups in the private sector joint ventures. This was largely due to IRDA rules and regulations, which stipulated that the partners to a joint venture could not disinvest from the venture for a period of seven years after the license was granted. This meant that no there was no exit route for companies that wanted to opt out. Also, foreign insurers were allowed only 26% equity participation. The companies that did stay back found the going tougher than expected as they had the added burden of having to build credibility in the marketplace and to build infrastructure. The average business LIC got per active agent was Rs. 1.26 million - a figure hard to achieve over a short period of time. The services offered by the new players were found to be quite similar to the ones offered by LIC, with differences only in the presentation and packaging of the policies. Reacting to media reports about LIC being adversely affected by the entry of MNCs, an LIC agent said, “The entry of the private players will not make any difference to LIC. The private players will concentrate more on the higher income groups while LIC will maintain its goodwill among the masses.” A policyholder added, “LIC has already been offering all the frills that the private players are now banking on and the only differentiating factor could be the quality of service.” Apprehensions of the MNCs ‘taking over’ the Indian insurance sector were gradually put to rest as various reports revealed that LIC would easily continue to be the market leader. A Monitor Group study predicted that LIC would continue to have 75-80% market share even in 2010. A report by consultants KPMG revealed that the threat of new players taking over the market had been overplayed and that the nationalized players would continue to hold strong market share positions. At the same time, there would be enough business for new entrants. A look at the developments in other countries which opened up their insurance sector to global players revealed that new companies seldom displaced the existing players. In China, Malaysia, Indonesia and Thailand, the foreign companies accounted for only 10% of the market share. In South Korea, the opening up of the sector saw the six biggest domestic players, who initially controlled the entire market, increase their business substantially. The foreign companies were not able to capture more than 0.4% of the domestic market. What LIC did to retain its competitive strength would determine its success in the future. LIC need to take the Business Wire report very seriously. This report aptly summed up the whole issue: “Over the years, LIC has made money the easy way. Hereafter, it must sweat for it.”

1. Write a brief note on LIC’s reaction to the entry of foreign players. Critically examine the steps taken by LIC to face the competition from MNCs. 2. Do you think LIC will be able to remain the market leader in the insurance business in the long run? Give reasons for your answer.