Life Insurance Marketing in India (B): The Changing Distribution Norms

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One of the main objectives of forming LIC was to make insurance cover available to a large number of people, particularly to the lower segments of society. In 1972, the government took over management control of 106 private general insurance companies and formed the General Insurance Corporation (GIC). Over the years, LIC expanded its network all over the country and became one of the largest corporations in India. LIC had seven zonal offices, 100 divisional offices, 2,048 branch offices and army of agents totaling 6,28,031. Growth in Indian insurance industry was minimal in the 1960s and 1970s because of low savings and the low level of literacy. In addition, the insurance industry lacked sufficient funding and infrastructure. However, changes in the economy in the 1980s, such as growth in the rate of industrialization, improvement in infrastructure, the capital markets, increase in the savings rate and substantial capital formation resulted in tremendous growth in the life insurance industry. Over the years, LIC launched several group insurance and social security schemes to enhance its reach in the rural areas. In the early 1990s, the government felt it necessary to reform the industry, provide better coverage to the citizens and to increase the flow of long-term financial resources to finance the growth of infrastructure.

In 1993, the Indian government set up the Malhotra Committee to suggest reforms in the industry. The committee, which submitted its report in 1994, recommended opening of the insurance sector to private players, improving service standards, and extending insurance cover to larger sections of the population. Various labor unions and political parties in the country opposed the committee's suggestions. They felt that the entry of private players would lead to job cuts by the nationalized players to make them more competitive. There were a host of other arguments against these reforms. As a result, the government decided to restrict foreign stake in insurance companies to only 26%, which was well below the 51% required by the Insurance Bill for controlling the management of the company. Though one of LIC's basic objectives was to 'provide insurance cover to all Indians,' insurance penetration in India remained very low. According to reports, only 65 million people were covered by insurance. R N Jha, LIC's former Executive Director, commented in his book, Insurance in India, "Insurance coverage has been extended only to about 25% of the insurable population in 40 years". In other words, the insurance market in India was largely untapped.

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