ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826

Online available at http://zenithresearch.org.in/

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT OF INDIA

MONALISA GHOSAL*

ABSTRACT
The economic development of India was dominated by socialist influenced policies, stateowner sector, and red tape and extensive regulations, collectively known as License Raj.
The Indian economic development got a boost through its Economic reforms in 1991 and
again through its renewal in the 2000. Insurance serves a number of valuable economic
functions that are largely distinct from other types of financial intermediaries. Insurance
contribution materially to economic growth by improving the investment climate and
promoting a more efficient mix of activities then would be undertaken, in the absence of
risk management instrument.
Insurance sector in India is one of the most booming sectors of the economy and is growing
at the rate of 15-20 percent per annum. In India, insurance is a flourishing industry, with
several national and international players competing with each others and growing at
rapid rates. Indian insurance companies offer a comprehensive range of insurance plans, a
range that is growing as the economy matures and the wealth of the middle classes
increases. Due to the growing demand for insurance, more and more companies are now
emerging in the Indian insurance sector. The economy of India is the eleventh largest in the
world by nominal GDP and the forth largest by Purchasing Power Parity (PPP).
KEYWORDS: License Raj, Economic reform, financial intermediaries, Investment
climate, Risk management instrument, Comprehensive range, Nominal GDP, PP.
______________________________________________________________________________

For economic development investments are necessary. Investments are made out of
savings. Life Insurance Company is a major instrument for the mobilization of savings of
people, particularly from the middle and lower group. All good life insurance companies
have huge funds accumulated through the payments of small amounts of premium of
individuals. These funds are invested in ways that contribute substantially for the economic
development of the countries in which they do business The system of insurance provides
numerous direct and indirect benefits to the individuals and his family as well as to
industry and commerce and to the community and the nation as a whole. Present day
organization of industry, commerce and trade depend entirely on insurance for their
operation, banks, and financial institutions lend money to industrial and commercial
undertakings only on the basis of the collateral security of insurance.

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INTRODUCTION

81

The economic reform of 1991 played a pivotal role in the economic development of India.
Reaping its benefit the growth of the country reached around 7.5% in the late
2000s.Insurance is a risk transfer mechanism whereby the individuals or the business

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
Online available at http://zenithresearch.org.in/

enterprise can shift some of the uncertainties of life on the shoulder of other. In peace the
insurance provides of trade industry which ultimately contribution towards human
progress. Thus, insurance is the most lending force contribution towards economic, social
and technological progress of man.
The Indian insurance market is the 19th largest globally and ranks 5th in Asia, after Japan,
South Korea china and twain. In 2003, total gross premiums collected amount to USD
17.3billion representing just under 0.6%of world premiums. Similar to the pattern
observed in other regional market and reflecting the countrys high savings rate, life
insurance business accounted for 78.5% of total gross premiums collected in the year,
against 21.5 for non-life insurance business.

Another measure of insurance development is per capita spending on insurance, i.e

insurance density. By this measure India is among the lowest-spending nations in Asia in
respect of purchasing insurance. An average Indian spent USD16.4 on insurance products
comprising USD 12.9 for life insurance and USD 3.5 for non life insurance products. One
factor that has been slowing down the improvement of insurance density is Indias
relatively high population growth rate, which has averaged 1.7% over the past ten years.

82

Source: The Indian Insurance Industry: challenges and prospect

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FIG-1

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
Online available at http://zenithresearch.org.in/

FIG-2

Source: The Indian Insurance Industry: challenges and prospects.

Financiers like, banks would collapse if the factory financed by it, is reduced to ashes by a
terrible fire. Insurers cover also the loss to financiers, if their debtors default.
LIC is one of the largest families in India consisting of over 1 lac employees and 11 lac
agents.LIC as a responsible corporate citizen has been fulfilling its social responsibilities
from time to time.Infact, most of their investments are geared towards industrial growth,
infrastructure growth and national infrastructure growth and national development. With
a view to channelise their social responsibilities and give a formal shape to the same they
have formed a public Trust named, LIC Golden Jubilee Foundation.

This paper examines the role of insurance in economic development of India and also the
changes occurred till day by differentiating the developing and developed economic growth
of India. The present study is based on secondary data and information the sources of
which have been complied from different government records publication and related
books and articles.
REVIEW OF LITERATURE
Marjina Curak Sandra Loncar in paper Insurance Development and Economic Growth
Nexus examines empirically if the insurance sector plays a growth supporting role while
controlling for other influences an economic growth. The author conclude that life

83

OBJECTIVES AND METHODOLOGY

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ESTIMATION

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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insurance companies are important for growth even after controlling for other influences
on economic growth. In other words Life insurance does not simply follow economic
growth but it positively contributes to it.
Ward and Zurbruegg (2000) examine relationship between growth in insurance activity
and economic growth for nine OECD countries during the period from 1961-1996. The
author conclude that the casual relationships between insurance and economic growth
might well vary across countries because of the influence of number of countries specific
factors such as cultural, regulatory and legal environment, the improvement in financial
intermediation and the moral hazard effect in insurance.
Another empirically country case analysis is the one by Adams et.al. (2006) which examines
the dynamic historical relation between banking insurance and economic growth in
Sweden in the period from 1830 to 1998.They use time series data and econometric tests for
co integration and granger casuality.The result shows that the development of banking but
not insurance preceded economic growth during the 19th century while it was reversed in
the twentieth century. Insurance development appears to be driven more by the pace of
growth in the economy rather than leading economic development over the entire period of
analysis.
ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT

The L.I.C is not an exception .All good life insurance companies have huge funds
accumulated through the payments of small amounts of premia of individuals. These funds
are invested in ways that contribute substantially for the economic development of the
countries in which they do business.
Apart from insurance business and trade benefits through insurance. Without insurance,
business and trade and commerce will find difficult to face the impact of major perils like
fire, earthquake, and floods etc.Financiers like banks would collapse if the factory financed
by it is reduced to ashes by a terrible fire. Financiers like, banks would collapse if the
factory financed by it, is reduced to ashes by a terrible fire. Insurers cover also the loss to
financiers, if their debtors default.

84

As on 31.3.2006, the total investment of L.I.C exceeded Rs 5, 20,000 crores of which nearly
Rs 300000 crores were directly in government (both state and centre) related securities,
nearly Rs 16000 crores in the state electricity Boards nearly Rs 22000 crores in housing
loans, Rs 19000 crores in the power generation (private) sector and Rs 10000 crores in
water supply and sewage system.

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For economic development, investment are necessary, investments are made out of savings.
Life Insurance Company is a major instrument for the mobilization of savings of people
particularly from the middle and lower income groups. These savings are channeled into
investment for economic growth .The insurance act has strict provisions to ensure that
insurance funds are invested in safe avenues, like government bonds, companies with
record of profit and so on.

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
Online available at http://zenithresearch.org.in/

INDIAN LIFE INSURANCE

Life insurance companies in India have their history dating back to 1818.The first life
insurance company in India was oriental life insurance company in Kolkata.It was started
by the Europeans to provide insurance cover to the Europeans .
Most of the present day Life Insurance Companies in India are joint ventures between
Indian groups and conglomerates and global insurance companies .The terms of the joint
ventures include a majority stake holding of Indian partner in the JV.
The life insurance companies work in close association with the life insurance agents and
brokers. Special training and education is provided to each insurance agent or broker
about of Life Insurance, how it works, industry info, insurance leads, types of Insurance
leads, types of insurance policies on offer, claims settlements, Life Insurance laws in India,
knowledge about the return of premium procedure of the life insurance company and the
tax savings the insurance policy would provide.

Milestones in the Life insurance Business in India

1912

The Indian life Assurance Companies Act enacted as the first statute to
regulate the life insurance business.

1928

The Indian life Assurance Companies Act enacted to enable the

government to collect statistical information about both life and non life
insurance business

1938

Earlier legislation consolidated and amended to by the insurance Act with

the objective of protecting the interest of the insuring public.

1956

245 Indian and foreign insurance and provident societies taken over by the
central government and nationalized LIC formed by an Act.

MARKET SHARE OF INDIAN INSURANCE INDUSTRY

Notwithstanding the rapid growth of the sector over the last decade insurance in India
remains at an early stage of development .At the end of 2003 the Indian insurance market
was the 19th largest in the world only slightly bigger than that of Denmark and comparable
to that of Ireland. The Indian insurance market is the 19th largest globally and ranks 5th in
Asian after Japan ,south, Korea china and Taiwan .In 2003 total gross premiums collected
amount toUSD 17.3 billion representing just under 0.6%of world premiums.

85

Year

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TABLE 1 MILESTONES IN THE LIFE INSURANCE BUSINESS IN INDIA

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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FIG-3
INSURANCE PREMIUMS IN ASIA 2003, USD BILLION

TABLE 2 THE MANE OF THE PLAYER IN THE MARKET

NAME OF THE COMPANY
Allianz Bajaj Life Insurance Co.
Aviva Life Insurance

NATURE OF HOLDING
Private
Private

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The introduction of private players in the industry has added value to the industry. The
initiative taken by the private players are very competitive and have given immense
competition to the on time monopoly of the market LIC. The new players have improved
the service quality of the insurance. As a result LIC down the years have seen the declining
phase in its career. The market share was distributed among the private players LIC
market share has decreased from 95 %( 2002-03) to 81 %( 2004-05).The following
companies has the rest of the market share of the insurance industry.

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Source: The Indian Insurance Industry: challenges and prospects

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
Online available at http://zenithresearch.org.in/

Birla Sun Life Insurance Co

Private

HDFC standard Life Insurance

Private

ICICI Prudential Life Insurance

Private

ING Vysya Life Insurance

Private

Life Insurance Corporation of India

Public

Max New York Life Insurance Co

Private

Met Life Insurance Co

Private

Om Kotak Mahindra Life Insurance

Private

Reliance Insurance

Private

SBI Life Insurance Co

Private

TATA AIG Life Insurance Co.

Private

There are total of 13 Life Insurance companies operating in India, of which one is a public
sector undertaking and the balance 12 are private sector Enterprises. List of companies are
indicated below:

TABLE - 3
SHOWS THE NAME OF THE COMPANY AND THEIR SHAREHOLDING PATEN
Name of the Insurance company
Agriculture Insurance Co.

Share Holding
Bank and Public Ins Co.

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India with about 200 million classes household shows a huge untapped potential for
players in the insurance industry. Saturation of markets in many developed economies has
made the Indian market even more attractive for global insurance majors. The insurance
sector in India has come to a position of very high potential and competitiveness in the
market. Consumers remain the most important centre of the insurance sector. This is a
evolutionary change in the technology that has revolutionized the entire insurance sector.
The insurance companies today must meet the need of the hour for more and more
personalized approach for handling the customer.

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SCENARIO OF INSURANCE INDUSTRY IN 2008

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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Bajaj Allianz General Insurance Co.Ltd

Privately Held

Cholomandalam MS General Insurance Co.

Privately Held

Export Credit Guarantee Company

Public Sector

HDFC Chubb General Insurance

Privately Held

ICICI Lombard General Insurance Co Ltd.

Privately Held

IFFCO-Tokio General Insurance Co.Ltd.

Privately Held

National Insurance Co.Ltd.

Public Sector

New India Assurance Co.Ltd

Public Sector

Reliance General Insurance Co.Ltd

Privately Held

Royal Sundaram Alliance General Insurance Co.Ltd

Privately Held

Tata AIG General Insurance Co.Ltd

Privately Held

United India Insurance Co.Ltd

Public Sector

Oriental Insurance C0.Ltd

Public Sector

FIG -4

88

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GROSS AND NET PREMIUM IN INDIA FOR LAST 10 YEARS

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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CURRENT SCENARIO
The Indian Government opened up this sector for the private players in 1999, and also
allowed for foreign Direct Investment up to 26% after which it began to thrive and Boom.
Currently a $ 41 billion industry, India is the worlds 5th largest Life Insurance market and
growing at rapid space of 32-34% annually as per Life Insurance Council Studies. The
reach of this sector can be gauged by the taking a look at the following statistics.

Predicted
growth
for(200910
in
April
2010)

Predicted
growth
for 201011

9.0

9.0

2009)
Banking
And
Insurance

2.2

8.8

14.2

20.3

15.4

11.2

8.5

89

2003- 2004- 2005- 2006- 2007- 2008- Predicted

04
05
06
07
08
09
growth
for (200910
in
December

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TABLE 4: GROWTH IN REAL GROSS DOMESTIC PRODUCT AT FACTOR (COST

%): BY ECONOMIC ACTIVITY

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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TABLE 5
SOME OF THE GROWTH STATISTICS FOR THE YEAR 2009-10
Increase in per-cent from Actual figures for 2009-10
equivalent previous year
period
Life Insurance Corporation 83
of India, new business
income(march-2010)
Private
business
2010)

players
,new 47
premium(march

New Policies Sold

10.55 million

Total Premium collected in 25.46

2009-10

US$ 24.64 million

Gross Premium collected in 13.42

General Insurance Industry
during 2009-10

US $ 78.4 billions

Growth in gross premium 13.85

for 2009-10 public sector
player

US $ 1.59 billion

Source: Insurance 2010

FUTURE TRENDS
The prospects of this industry look promising by way of growth as for as one can judge
from the present statistics and the general environment prevailing in the economy. In terms
of new product and sources Health insurance and Banc assurance are very likely to
dominate the insurance scene in the coming few years. Also, IT is expected to play a big
role in the growth of this sector in the coming year.

90

Non life insurer (April May 19

2010)

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Growth in Gross premium 12.82

for 2009-10 private players

ZENITH International Journal of Business Economics & Management Research

Vol.2 Issue 7, July 2012, ISSN 2249 8826
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HEALTH INSURANCE
This particular financial product seems to have news and highly lucrative growth avenues
for existing players as well as new entrants. According to insurance market ,2010[6] the
Indian health insurance market has contributed to post record growth in the last two
fiscals (2008-09 and 2009-10).Moreover as per the RNOS estimates the health insurance
premium is expected to grow at a compound annual growth rate (CAGR)of over 25% for
the period spanning from 2009-10 to 2013-14.
BANC ASSURANCE
Banc assurance, which is the distribution of insurance products through a banks network,
has been adopted by the private players in large scale. This particular method is also
expected to take-off in a big way in the coming years due to greater use of technology by
insurers as well and bankers along with the fact that the bankers really expanding their
product baskets in a big way.
CONCLUSION
It is very much apparent that the insurance sector is poised for huge growth by way of
number of policy holders, policy premium, new product, and increased technology focus,
This would in turn play an important role in facilating and sustaining growth. Life
insurance has today become a mainstay of many market economies since it offers plenty of
scope for garnering large sums of money for long periods of time. A well regulated life
insurance industry which moves with the times by offering its customers tailor made
products to satisfy their financial needs is therefore essential if we desire to progress
towards a worry free future.
REFERENCES
1. History of insurance sector (n.d).Retrieved August 30, 2010 from business maps of India.

4. Overview of Indian insurance sector; academic open internet journal; ISSN 113114360.Volume 22, and April 7, 2000.
5. Business Today, the monitory Group Study on Insurance I and II, March 22 and April 7,
2000.
6. Krishnan Rama Chandran, Babatosh Mishra, Alam Singh Business Intelligence and
Analytics in Insurance.

91

3. Insurance Kiyakya a Role of Insurance in Economic development.

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2. An overview of the Indian Insurance Sector (Knol, a unit of knowledge).

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