Life Insurance Corporation's Future Prospects
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LIC – AFTER IRDA Contd...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.
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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. |
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The issue of loss of actuaries[3] was another issue to be
addressed. Of the 40,000 qualified actuaries worldwide, only 150 were in
India. Since, the IRDA had stipulated that insurance companies could only
use actuaries who were of Indian nationality, a fight for actuaries would be
inevitable. LIC had recruited 65 actuarial assistants, and planned to create
200 such jobs each year.
THE FUTURE
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. With the majority stake being with the domestic partner,
foreign insurers would have little say in the management of the company and
important decisions could be easily considered without them. This led to the
break up of several partnerships: AXA-Cholamandalam, Hindustan Times-CGU,
Alpic-Allianz, Dabur Finance-Allstate, CGNU-Bombay Dyeing, Chubb-Kotak
Mahindra, Eaglestar-ITC, Cigna-Ranbaxy, Manulife-UTI etc.
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.
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QUESTIONS FOR DISCUSSION
ADDITIONAL READINGS & REFERENCES
[3] Industry professionals who
design the life insurance benefit programs.
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