International Journal of Research and Development - A Management Review (IJRDMR)

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Competition in Life Insurance Sector of India

Sriman Srichandan
Research Scholar Fakir Mohan University, Balasore
Email: [email protected]

Abstract - My research is aimed at understanding the life

insurance sector in India and flagging issues relating to While the committee submitted its report in 1994, it took
competition in this sector. The life insurance sector has a another six years before the enabling legislation was
small market and cover approx. 3 % of population in passed in the year 2000, legislation amending the
India. As a growing sector, it is important that all players Insurance Act of 1938 and legislating the Insurance
get a level playing field. The competition act is to provide Regulatory and Development Authority Act of 2000.
for a level playing field to all players to encourage The same year that the newly appointed insurance
competition in market. Through my study I have tried to regulator - Insurance Regulatory and Development
substantiate this with facts and evidence proving that LIC Authority IRDA —started issuing licenses to private life
as a state owned enterprise enjoys a dominant market. The
enterprise having a dominant position is not per se illegal
insurers.
but abuse is. The dominance of LIC is not deliberate rather
it is by virtue of the regulations that the market is deprived List of Life Insurers (as of Sept, 2008)
of a level playing field and market has an anti-competitive
Apart from Life Insurance Corporation, the public sector
environment. This sector is highly lucrative and therefore
increasing the FDI cap would be a step to enhance life insurer, there are 22 other private sector life insurers,
competition in this sector and also cover a large most of them joint ventures between Indian groups and
population. Exclusive networking, sovereign guarantee and global insurance giants.
entry barriers like limited FDI creates an anti-competitive Life Insurer in Public Sector
environment in market. 1. Life Insurance Corporation of India
Life Insurers in Private Sector
Competition in Life insurance sector of India 1. SBI Life Insurance
2. Metlife India Life Insurance
INTRODUCTION 3. ICICI Prudential Life Insurance
4. Bajaj Allianz Life
The topic basically revolves around the life insurance 5. Max New York Life Insurance
sector which has been recently opened for the private 6. Sahara Life Insurance
players. LIC has for a long period of time has enjoyed a 7. Tata AIG Life
dominant market of life insurance and the fact cannot be 8. HDFC Standard Life
denied that LIC has a pre accomplished market 9. Birla Sunlife
leadership which makes it difficult for the new players 10. Kotak Life Insurance
to compete. While the new players struggle to increase 11. Aviva Life Insurance
their market in India, LIC continue to leverage 12. Reliance Life Insurance Company Limited -
advantage of its old establishment and government Formerly known as AMP Sanmar LIC
support for maintaining its growth. Life Insurance is the 13. ING Vysya Life Insurance
fastest growing sector in India since 2000 as 14. Shriram Life Insurance
Government allowed Private players and FDI up to 26%. 15. Bharti AXA Life Insurance Co Ltd
Life Insurance in India was nationalised by 16. Future Generali Life Insurance Co Ltd
incorporating Life Insurance Corporation (LIC) in 1956. 17. IDBI Fortis Life Insurance
All private life insurance companies at that time were 18. AEGON Religare Life Insurance
taken over by LIC. 19. DLF Pramerica Life Insurance
20. CANARA HSBC Oriental Bank of Commerce
In 1993 the Government of Republic of India appointed LIFE INSURANCE
RN Malhotra Committee to lay down a road map for 21. India First Life insurance company limited
privatisation of the life insurance sector. 22. Star Union Dia-ichi Life Insurance Co. Ltd
These are few companies on the list. The total life
insurance market can be judged in terms of 2
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parameters- premium collected and number of new insurance, from tax exemption product to a tool for
policies underwritten. It can be seen that market share of mitigating risks and increasing savings. Thus it was
more than 70% is with LIC. Life insurance policy in recommended that the industry should be opened up to
India is growing rapidly ever since the sector opened up enhance competition and autonomy be given to
for the private and foreign players. The industry is in the insurance companies to improve their performance and
throes of competitive market forces. Unlike several enable them to act as independent companies with
industries like telecommunication and oil industry, economic motives. Thus the life insurance industry was
insurance is not a high capital cost industry. This liberalized with the aim of increasing contribution to the
industry is build up on a good will and on access of GDP and to the society.
distribution network.
Malhotra Committee‘s Recommendations
EVOLUTION OF LIFE INSURANCE IN INDIA
The committee submitted its report in January 1994
Life insurance traces its origins in India to the early recommending that private insurers be allowed to co-
nineteenth century when companies in India insured the exist along with government companies like LIC and
lives of Europeans living here. Eventually these GIC companies. This recommendation had been
companies began to cover Indians as well but required prompted by several factors such as need for greater
them to pay higher premiums. Regulations were passed deeper insurance coverage in the economy, and a much
to regulate the Indian insurers (but not the foreign a greater scale of mobilization of funds from the
companies providing insurance services in India) and to economy for infrastructural development. Liberalization
allow collection of information about insurance of the insurance sector is at least partly driven by fiscal
companies thus facilitating comparison amongst them. necessity of tapping the big reserve of savings in the
However the legislations became insignificant with time economy. Committee‘s recommendations were as
and the government nationalized the sector by follows:
combining all the 154 Indian private insurance 1) Raising the capital base of LIC and GIC up to Rs.
companies to give birth to one behemoth: the Life 200 crores, half retained by the government and
Insurance Corporation of India. Through this the rest sold to the public at large with suitable
Government strived to put an end to prevalent reservations for its employees.
malpractices such as poor Servicing standards along 2) Private sector is granted to enter insurance industry
with the appalling management of companies wherein with a minimum paid up capital of Rs. 100crores.
funds were simply being divested to all types of 3) Foreign insurance be allowed to enter by floating
securities without any valuation of the borrowers. The an Indian company preferably a joint venture with
Government took over the reins of the industry in its Indian partners.
own hands reasoning that insurance was a cooperative 4) Steps are initiated to set up a strong and effective
enterprise and should be within the purview of the state insurance regulatory in the form of a statutory
in order to provide improved services to the public at autonomous board on the lines of SEBI.
lower costs. It was also envisioned that the 5) Limited number of private companies to be
nationalization of this sector would lead to more allowed in the sector. But no firm is allowed in the
effective mobilization of funds to enable capital to be sector. But no firm is allowed to operate in both
allocated to development projects. Besides the charter of lines of insurance (life or non-life).
freedom also pleaded the control of the state on key 6) Tariff Advisory Committee (TAC) is delinked
industries such as banking and insurance. Thus the form GIC to function as a separate statuary body
industry was transformed from a competitive one to a under necessary supervision by the insurance
highly regulated monopoly. regulatory authority.
7) All insurance companies be treated on equal
In the last decade of the 20th century India watched footing and governed by the provisions of
history repeat itself. With the Government implementing insurance Act. No special dispensation is given to
the New Industrial Policy in 1991, the country government companies.
underwent a major wave of globalization. Strategic 8) Setting up of a strong and effective regulatory body
sectors such as the banking and the financial sector were with independent source for financing before
reformed. Time had come for the policymakers to allowing private companies into sector.
introspect the current policies in the Indian insurance
industry as well. Committees on insurance sector Government companies had to face competition to
reforms followed suit and it was found that India had private sector insurance companies not only in issuing
continued to be one of the least insured countries till the various range of insurance products but also in various
late 20th century. Experts emphasized that customer aspects in terms of customer service, channels of
service, insurance coverage, allocation of resources distribution, effective techniques of selling the products
needed to be improved within the industry. Also more etc. privatization of the insurance sector has opened the
innovative products were needed to suit varied customer doors to innovations in the way business can be
needs and to change opinion of people towards transacted.
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New age insurance companies are embarking on new insurance sector and cover a large population with life
concepts and more cost effective way of transacting insurance. For this, it is required to allow more Foreign
business. The idea is clear to cater to the maximum Direct Investment in insurance sector so that more funds
business at the least cost. While nationalized insurance are available with foreign players come in market and
companies have done a commendable job in extending the size of market grows. There is scope of higher
volume of the business opening up of insurance sector to capital infusion, the higher the growth of market
private players was a necessity in the context of possible. Despite the progress, India‘s insurance sector
liberalization of financial sector. If traditional remains very small compared with some of the major
infrastructural and semi-public goods industries such as emerging markets. India‘s share of global insurance
banking, airlines, telecom, power etc. have significant market is less than 1%. The insurance industry lags
private sector presence, continuing state monopoly in behind other economies in the baseline measure of
provision of insurance was indefensible and therefore, insurance penetration. Industry is now open to private
the privatization of insurance has been done as discussed players under the government mandate of a minimum
earlier. Its impact has to be seen in the form of creating capital
various opportunities and challenges.
of Rs.100 crore of which a maximum of 26% stake can
Opportunities be held by a foreign partner as equity.
1. Privatization of Insurance eliminated the
Global insurers are now permitted to set up and register
monopolistic business of Life Insurance
a domestic company in order to write business in India.
Corporation of India. It helps to introduce new
However, regulations stipulate that they have a capital
range of products which covered wide range of
base of at least US $ 20 million, and their investment in
risks.
such company is capped at 26 percent. Thus, to
2. It resulted in better customer services and help
participate in the market, they must form a joint venture
improve the variety and price of insurance
with an Indian partner that is able to invest the
products.
remaining funds.
3. The entry of new player has speed up the spread of
both life and general insurance. It will increase the
The equity investments limit is the same for global
insurance penetration and measure of density.
reinsures seeking to write business in India, but they are
4. Entry of private players will ensure the
required to put up a capital of approximately US$ 45
mobilization of funds that can be utilized for the
million in order to establish a domestic company. On the
purpose of infrastructure development.
5. The participation of commercial banks into other hand, no global reinsurer has established a
insurance business helped to mobilization of funds domestic company. Instead, most of the top international
reinsurance companies operate from their overseas
from the rural areas because of the availability of
offices by sharing the reinsurance risks picked up by the
vast branches of the banks.
GIC. A recent proposal has been put forward to increase
6. Most important not the least tremendous
foreign direct investment to 49 percent. In addition,
employment opportunities were created in the field
of insurance which is a burning problem of the global companies are pushing for the right to establish
presence day today issues. branch offices in India. These changes are likely to
substantially increase the presence of international
There is low penetration in the market and there is great insurers, reinsurers, and brokers in India.
opportunity of more players to participate in this field to
increase the life insurance market. Currently, FDI represents only Rs.827 crore of the
Rs.3179 crore capitalizations of private life insurance
LIC is a state owned enterprise. LIC emerged as a companies. FDI in insurance would increase the
dominant enterprise over a long period of time and in penetration of insurance in India, where the penetration
the 10 years of the opening of this sector, LIC has of insurance is abysmally low with insurance premium
retained large market share. Also the industry has not at about 3 percent of GDP against about 8 percent global
been able to cover much percentage of people in the average. This would be better through marketing effort
country. Out of approx. 3% of the population covered, by MNCs, better product innovation, consumer
LIC has a large percentage of people covered under it. It education etc. The ASSOCHAM President Sajjan Jindal
has been often said that state owned enterprise can have maintains that insurance sector in India has the
strong incentives to engage in anticompetitive activities capability of raising long term capital from the market as
that serve to expand the scale and scope of their it is the only avenue where people put in money for as
operative activities. long as 30 years even more. An increase in FDI in
insurance would
Entry barrier
indirectly be a boon for the Indian economy, the
Life insurance covers approx. 3% of the total Indian investments not withstanding but by making more
population. India needs that more players come in life
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people invest in long term funds to fuel the growth of given by IRDA regarding the individual single premium
the Indian economy, he feels. of several life insurers in December 20101:-
1. Bajaj Allianz - 77.26 crore
On 13th January, 2011, in a move to dent investor
2. ING vyasa - 2.58 crore
sentiment, the parliamentary standing committee on
3. Reliance Life - 80.26 crore
finance is set to reject government‘s move to further
4. SBI life - 248.54 crore
open the insurance sector. The Insurance Amendment
5. Tata AIG - 14.02 crore
Bill, tabled in parliament, had proposed to raise the
6. HDFC standard - 136.72 crore
foreign investment limit in the key financial sector to
7. ICICI prudential - 251.97 crore
49% from 26% fixed a decade ago. A majority of
8. Birla Sunlife - 9.73 crore
committee members felt that a higher foreign direct
9. Aviva - 21.57 crore
investment ceiling could affect domestic players.
10. Max New York - 25.15 crore
Though the government is not bound to accept the
11. Met Life - 33.86 crore
standing committee‘s recommendations, the suggestions
12. Shriram Life - 44.90 crore
will make its daunting and force it to cut deals with
13. IDBI federal - 21.11 crore
small groups in Lok Sabha to muster support for the
14. Star Union Dai-ichi - 44.98 crore
passage of the bill.
15. LIC - 1774.43 crore
FDI cap is the biggest entry barrier stopping the growth These are some top companies and there premium
of the life insurance market and narrowing down the collected in December 2010 which clearly depicts that
market size. With the opening up of market for foreign LIC has lucrative market dominance and other private
players the competition will get a boost and the service players have a small market share. Such figures explain
will reach out for masses increasing the size of market. that LIC is a dominant entity and can influence
competition in market negatively due to the regulation
With no profits or little profits to private players there is of the regulatory body and the government. Talking
a requirement of Capital Adequacy Ratio. As the market about the number of lives covered under group single
grows the market has to meet out the Capital adequacy premium upto December, 2010 for some major
norms. Capital infusion can be brought in terms of companies are as follows according to the data released
Foreign Direct Investment. And preventing FDI in India by IRDA on basis of data submitted by these insurance
is proving to be a hindrance in increasing the market companies:-
size
1. Bajaj Allianz - 105972
2. Reliance life - 508352
MARKET STRUCTURE 3. SBI Life - 239465
4. Tata AIG - 57543
It is important to understand the market structure of life 5. HDFC Standard - 175291
insurance sector. LIC as a dominant player has gained 6. ICICI Prudential - 1793883
an increase of 88%in new business premium income. 7. Kotak Mahindra - 359582
Despite of uncertain environment, total premium of Life 8. Max New York - 1495603
Insurance industry increase by 66% to Rs 62,361.34 9. Shriram Life - 216448
crore in first six months of the current fiscal from Rs 10. LIC - 27020588
39,046.59 crore in same period last fiscal. In 2010, life
insurance companies witnessed new business premium Apart from these companies like Aegon Religare and
collecting during first five months. According to LIC‘s Birla Sunlife has 959 and 995 lives covered upto
recent filing with IRDA the total value of its investments December 2010. This is evident in itself to prove my
from policy holders funds, as at June 30 2010, stood at pont that knowing or unknowingly but the regulation in
Rs 867,935 crore as agencies Rs. 717,002 crore on the insurance sector is giving an undue advantage to LIC
June,2009, the value of investments in equity share has and leading to unfair competition. The top 5 life
become 183,233 crore. Public sector Life Insurance insurance companies in India control 85% of the market-
Corporation of India (LIC) has clocked a robust 72.53 share while the remaining dozen are still struggling to
per cent jump in fresh premium collection in January setup their operation. If we see the entire market
2009 leaving behind major private sector players, most amongst private players only excluding LIC in life
of whom have posted negative growth in the month as insurance sector we would see there is hardly any
compared to January 2008. private player which has a grip over the market.

Data released by insurance sector regulator IRDA shows

that the first year premium of the life insurers for the
period of December, 2010 is again predominantly in
favour of LIC. Herein mentioned are some statistics

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could be more than 50 per cent for LIC. Reckoned

among the fastest growing industries, the Life Insurance
Industry of India has 23 license-holders running their
business in this sector. The Life Insurance Corporation
of India(LIC), which is the only player in the public
sector, contributes over 70% to the business. The
remaining area is covered by the 22 private sector

companies. In 2010, Life insurance companies

witnessed a 20 per cent jump in weighted new business
Fig :- market split up of private life insurers only premium collection during the first five months of the
excluding LIC financial year. According to data released by the
India has come a long way since the economic reforms Insurance Regulatory and Development Authority
in 1991, moving from the growth rates of 5% into the (IRDA), insurance companies garnered around US$ 7
orbit of 7-9% growth rates. This growth has been billion in weighted new business premium during April -
structurally driven by economic reforms, private August 2010, against US$ 5.5 billion in the
entrepreneurship and linkages to the global economic corresponding period last year. The year 2010, ushered
boom. A McKinsey study estimated that India is likely sweeping regulatory changes that altered the way
to emerge as the fifth largest consuming nation in the industry worked. It marked significant changes in
globe by 2025. Significant demographic changes over product profile of unit-linked insurance plans. The new
the next two decades should throw up major investment guidelines capped the overall charges and also imposed
opportunities for businesses as well as investors. Every a minimum prescribed return in order to offer a better
year, around Rs. 600,000 crores (Rs. 6 trillion) of deal to investors. It was the fastest set of regulatory
household savings is being invested into HH Financial changes ever seen in the shortest period of time.
assets. Around 18-20% of this income goes into
insurance. Proposed Direct Tax code, aimed at a State-owned Life Insurance Corporation of India (LIC)
substantial increase in income tax limit and product has emerged much stronger in the months following the
efficiency, could also lead to higher contribution to uncertainty over unit-linked insurance plans (Ulips). The
insurance. The Indian life insurance sector has been corporation has seen its market share spike to 73.4% by
witness to varied phases witnessing a slew of changes in end-June ‘10, from 60.79% during end-March ‘09. 2
the past year. Since 1999, when the government opened Despite of the entry of several private player, LIC has
up the insurance sector by allowing private companies to managed to grow its market share in new businesses by
solicit insurance and also allowing foreign direct recording the first-year premium of Rs 18,740 crore —
investment of up to 26%, the insurance sector has been an increase of 107% over the corresponding quarter last
characterized by a booming market. Hence 2010, was a year. As against this, the new business premium for the
landmark year in the history of the Indian insurance rest of the industry was Rs 12,884 crore. However, all
industry as it celebrated a decade since the entry of the private life insurance companies put together could
private sector into this business. generate a new business premium of only Rs 7,126 crore
— an increase of 28% over the year-ago period.
The figures show that LIC has gained market share in
spite of new companies coming in the market which Most of the premium came from single premium Ulips.
signifies the dominance of LIC in the market and the Some of the corporation‘s key Ulips are slated to close
ineffectiveness on its strengthened position in market. in August, as all insurance companies are expected to
50-60% of new biz premium will come from ULIPs. file new products that are compliant with the new
Private sector players posted only 12 per cent growth in guidelines. These numbers were divulged by TS
new business and collected Rs Vijayan, chairman, LIC while announcing business
results for 2009-2010. For 2009-2010, the corporation
38,399 crore premium. Among the private players, SBI recorded a total income of Rs 2,98,721 crore — an
Life emerged as the leading insurer, in terms of new increase of 49.2% over the previous year. This included
business. SBI Life collected Rs 7,041 crore in new premium income of Rs 1,85,985 crore, which was
business premium against Rs 6,334 crore collected by 18.3% higher than last year. this makes it obvious that
ICICI Prudential in 2009-10. Amongst all these, LIC the corporation was in better position today, because the
managed to increase its market share to 65 per cent in focus has been on increasing returns for policyholders
FY10 from 61 per cent in FY09. Of the new business by curtailing expenses and not on profits. According to
premium collected by the industry, around 50-60 per Mr Vijayan, the corporation would have to only tweak
cent will be from ULIPs. some of its Ulips to bring the charge structure in line
with the new regulations prescribed by the regulator.
While ULIPs will be around 75-80 per cent of the new However, LIC would need to do some restructuring to
business premiums for the private sector players, it reduce the impact of charges on those who exit their
policy after five years.
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At the end of the first quarter, LIC had made producers who could, with their existing facilities,
investments amounting to Rs 39,000 crore. Of which, an switch to the production of substitutes to the goods.3 In
investment of Rs 10,000 crore was pumped into equities. determining the relevant product market the SSNIP4 test
Mr Vijayan said that the corporation was targeting is used under which the question that is asked is that if
investments to the tune of Rs 2 lakh crore during the the price of the product were to rise by 5-10%, then
current year. Some of the life insurance companies in whatever products the consumer would switch to
India that reported positive growth in the financial year because of this rise would constitute the relevant product
2008-2009 are LIC, Met life, Kotak Mahindra. LIC market. This test however has a major drawback in
booked a gain of Rs957.35 crore as against Rs 844.63 determining the relevant market in abuse of dominance
crore the previous. Met Life benefits rose to Rs 14.52 instances because the primary bone of contention is
crore and Kotak Mahindra, which had booked a loss of defining a relevant market of the product in question.
71.87 crore previous year, saw its profit rising by 14.34 Disputes arise regarding what constitutes a relevant
crore. This in itself explains the dominance of LIC in the market. This renders difficult the scope of determining a
market of life insurance. relevant market in abuse of dominance cases because of
which subsequent steps to establish, first dominance and
While considering the performance of Indian Life then its abuse falls flat.
Insurance Sector in 2008-09, we cannot ignore some
down trends in this industry. The private players in this The relevant geographical market on the other hand
sector witnessed a loss of Rs 4,879 crore. In order to involves identification of a geographical area within
tackle the losses, the life insurance companies had to which competition takes places, which may be local,
infuse Rs 5, 956 crore. The Provisions of the national or international. Geographical limits of a firm
Competition Act,2002 The act is to prevent practices are primarily influenced by consumption, transportation
having adverse effect on competition, to promote and costs or perish ability of goods.5 For example, the high
sustain competition in market, to promote the interest of transportation cost of cement leads to its geographical
consumers and to ensure freedom of trade. The act market to be close to the manufacturing facility.6 The
brings in the importance of level playing field in the relevant geographic market is regarded as that part of the
market for all the players in a relevant sector. In this relevant market that identifies the physical regions in
sector only section 4 of the act is invoked. There is no which the firms might compete.
anti-competitive agreement or any such combination in
this sector but there seems to be a dominance of a state DOMINANT POSITION IN RELEVANT
owned LIC and the abuse of dominance is also felt after MARKET
looking at the macro structure of this sector. Section
4(2) clearly lays down the condition where an enterprise
Traditionally, dominance is defined in terms of the
is said to abuse its dominant position.
market of the enterprise, but besides that there are other
factors which determine dominance and these are market
Dominance under the provisions of competition act is
share of the enterprise, size and resources of the
not per se illegal rather the abuse of the dominant
enterprise, size and importance of competitors,
position is illegal. Dominant position means a position
economic power of the enterprise, vertical integration,
of strength, enjoyed by an enterprise, in the relevant
dependence of consumer on the enterprise, monopoly or
market, in India, which enables it toi. Operate
dominant position whether acquired as a result of any
independently of competitive forces prevailing in the
statute or by virtue of being a Government company or a
relevant market; or ii. Affect its competitors or
public sector undertaking, entry and exit barriers in the
consumers or the relevant market in its favour. Section 4
market, countervailing buying power, market structure
of the act enumerates about the abuse of dominance and
and size of the market, social obligations and
the conditions where an act of an enterprise shall lead to
contribution of enterprise towards economic
abuse of dominant position. The dominance is hence
development.7 Dominance is defined under section 4 of
proven from the relevant market. Dominance has to be
the Act and such a dominance has to be seen under
proven in light of the relevant market. The relevant
section 19(4). As mentioned earlier, to claim abuse of
market identifies the products or services which are
dominance through any of the known forms of abuse,
close substitutes for each other and they operate as a
dominance of that enterprise in the relevant market has
constraint on the conduct of the supplier. To determine
to be proven. In United Brands and United Brands
if an enterprise has a dominant position its relevant
Continental BV v Commission of the European
market must be defined. A relevant market has two
Communities8 the Courts examined the market share of
dimensions: product market and geographical market.
United Brands, the market share of its nearest
The relevant product market comprises of all products
competitors, extent of vertical integration of the
which are in competition with the product in question.
enterprise, its technological advantages and its
On the demand side a relevant product market includes
resources. After examining all of the above mentioned
all substitutes that the consumer could switch to if the
criteria the court concluded that United Brands was
price of the product in question were to increase and on
the supply side, the relevant market includes all
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dominant in the market. It is also necessary to examine players for reducing or doing away with the sovereign
entry barriers and entry costs. guarantee on LIC‘s policies,‖ said the committee in its
report of the LIC‘s (amendment) Bill 2009.In the bill the
Once the relevant market has been defined, establishing government had sought to replace the 100 per cent
whether a firm occupies a dominant position depends on sovereign guarantee by ―to the extent as the central
the market share of the firm and entry conditions. It is government may, by order from time to time. In 1956,
difficult to set limits at which the firms can be deemed when life insurance industry was nationalised,
to have market power. It is unlikely that a firm having a Parliament directed LIC to take the message of Life
market share of less than 35% would have the ability to insurance to every part of the country. It also directed
affect competition in the market. On the other hand a the government to guarantee the sums assured under all
firm having market share of more than 70%, such a firm policies issued as well as taken over by the
could be in a position to exercise market power, like in corporation(section 37 of LIC act).
the case of Microsoft which is a dominant firm in the
software industry having major market share. LIC has Some forces are lobbying vigorously for the withdrawal
undoubtedly a market share of more than 70% of the guarantee which will later twist the facts and
launch a publicity blitzkrieg, stating that it is a proof of
Dominance in market : LIC the Government‘s loss of confidence in the ability of the
corporation to survive competition, and succeed in
All this time, we find a dominant position being enjoyed impairing its image. The consequences that follow may
by state owned LIC in life insurance market. This has to affect millions of families
be substantiated to prove its dominance in the relevant
market. In India, LIC is the only state owned enterprise in the country.
working in life insurance sector. There are several
private players in this market but only one state owned LIC enjoys this dominance because it is obvious that
enterprise. To say that private players have some investors want a guarantee of their money irrespective of
catching up to do with LIC would be an understatement cycles of market. They know that it would be a safe play
of sorts. After all, given the massive head start the latter to invest in LIC as the government guarantee to bail out
has over the private insurers, coupled with its army of in case of any mishap. This denies the life insurance
agents that gives it enormous distribution leverage, its market from a level playing field to the competitors. The
strength is staggering, to say the least. Moreover, as the private players have been in the market for 10 years now
private players have been around for only for few years, but could not bring a big change in market share of life
it would not be possible for them to make a substantial insurance. People‘s trust is build up with LIC due to
dent in LIC‘s market-share either. A look at the business such sovereign guarantee. I do not deny the fact that LIC
underwritten by all the players, including LIC indicates has not used this benefit of sovereign guarantee but this
that LIC continues to be the dominant player in the life definitely helps them grow their market size because of
insurance business. Prior to the opening up of private the faith people lay in them being a state owned
participation in August 2000, the insurance sector was a enterprise.
government monopoly consisting of LIC and GIC with
its four subsidiaries. Now there are several new Life Not only the employees of LIC, but every member of the
insurance companies and General life insurance public should therefore appeal to the Government to
companies. LIC has huge investment and financial understand the game plan of these forces, lobbying for
strength. Owing its bigger size it has the best advantage the withdrawal of the Government guarantee to this
of pricing as well as getting better investment returns national institution. Sovereign guarantee reduces the
which can subsidise its original insurance product. sector from healthy competition and gives an undue
Therefore, Like SBI continues to be market leader advantage to LIC to attain the faith of people due to
despite of so many private banks coming, LIC is still the which other private players suffer a loss. Through the
big player. LIC is said to have a dominant position in LIC Act of 1956, government provides sovereign
insurance market and the factors leading to distortion in guarantee to LIC which comforts approximately 16
level playing field are as follows :- crore policy holders and its withdrawal would require an
amendment to the LIC Act,1956.
1. Sovereign Guarantee
2. Distribution network
LIC has sovereign guarantee from central government.
By sovereign guarantee, government gives the policy The distribution network is most important in insurance
holders of LIC a commitment that it will fulfill all the industry. Insurance is not a high cost industry like
promises made by the company. Private players and telecom sector. Therefore it is building its maket on
insurance regulator IRDA have been asking the goodwill and access on distribution network. We cannot
government to remove sovereign guarantee given to LIC deny that insurance are not bought, it is sold. The
to create a level playing field. ―The committee finds no industry covers approx. 3% of the population of our
merit in the demand of the private sector insurance country. The market has a great scope to grow. This can
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be better done by more innovative channels like a super spends Rs.116 crore in 2008 where as major players like
market, a bank, a post office, an ATM, departmental Bajaj Allianz and ICICI Prudential are Rs.17.7 cr and
store etc. these could be used to increase channels of 15.4 cr respectively. With more market share, it is
insurance. But such growth in channels shall increase obvious that LIC has better capacity to invest more on
advertisement which leads them to dominate the market
with time. Till than agents seem to be the most much more than other players.
important distribution channel in this industry. Agents
connect with people and influence them to buy any There is an exclusively distribution network which is
insurance policy. For the same such agents charge helping to build LICs core strength which needs to be
commission on the policies they get for the company. made accessible to give a level playing field to all
There is a fixed percentage of commission for which market players. Section 4(2) (c) of the act specifically
these agents work. It is important to mention that the mentions that an enterprise shall be deemed to abuse its
IRDA regulation which says that one agent can enrol dominant position if it indulges in practice resulting in
with only one insurance company. This leads to denial of market access in any manner. Here the market
narrowing down of exposure to customers to various access is denied through distribution network which is
products. When I go to a shop, I get all varieties to more exclusionary in nature.
choose from.
Also it is very important to mention that such
Similarly, agents are like a shop where consumer looks exclusionary behaviour makes agents charge a very
for options of insurance available. Such a policy leads to heavy commission which creates a pressure on
leveraging of distribution network. This plays as an customers, mis-sold and leads to poor service.
advantage for LIC. In life insurance, the LIC has two Customers are not well informed due to such a practice.
important elements in its favour which are as follows:- There is a robust agent network of LIC which needs to
broke by IRDA. IRDA needs to regulate such provision
The LIC has vast distribution network in the rural and and allow agents to sell all insurance because it is
semi rural urban areas. important that customer‘s get a variety from such
source. If agents are allowed to sell more than one
This would be hard to duplicate. One potential way to insurance, customers will get more informed and get
duplicate it could be increasing other distribution more exposure to market.
network like bancassurance.
3. Other factors
· Also, since LIC started with 100% of market share, it
will lose market share simply because of expansion of It has been reported several times through several
market itself and less because of loss of existing journals that every time the stock market falls sharply;
customers. government asks LIC to step in as a buyer to curtail the
fall in the market. Its investment decision is influenced
LIC has attempted to enlarge the distribution channels to by the government last year. LIC has to follow the
build a real marketing environment by involving guidelines of IRDA and there is a proper system to take
cooperatives and panchayats in its market areas. The investment decisions. There has been incidence where it
IRDA regulations on agent‘s recruitment, qualification seems that LIC gets offers from big companies as well
and training make the task easier for LIC (Locking in its to pump in money in market when they are in need of
agents). cash. This gives LIC a dominant position as it acts as a
saviour during crisis due to its surplus liquid cash
Distribution channel is an important stimulant of reserve. Nevertheless, it cannot be denied that LIC is a
competition in market. In India, An agent can work for government agency and is therefore trusted by a lot of
only one insurer. LIC has more than 10 lakh agents companies and has a lot of share in these companies.
which are supposedly to grow more in future which in Therefore it has a major role to play in influencing the
comparison to private players is mammoth. The new decisions of such companies and big market players.
players have comparatively few agents. The policy of
IRDA hinders distribution network. It leads to an ABUSE OF DOMINANCE BY LIC IN
exclusionary behaviour of distribution network. Such LIGHT OF THE
behaviour gives LIC a dominant position in the market.
As under section 4(2) (c), LIC seems to dominate the
I would like to explain the market factors influencing market by virtue of IRDA regulation through exclusive
decision to purchase insurance through some statistics. distribution network and sovereign guarantee. Due to
There are several factors which influence customers to such regulation the market access to other private
choose any life insurance like agents, advertisement, co- players is denied of a level playing field. The leveraging
workers, friends and family. It is important to mention of the network of agents gives a non -level playing field
here that agents cover 55% market factor influencing to the players from regulatory behaviour. Since we have
purchase of insurance. Also it is important that LIC
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determined that LIC is a dominant enterprise, it becomes resources in form of market and distribution
important to look in for prospects of abuse of its position network, the market is denied of a level playing
in light of the act. This is better done by inquiring the field for its players.
enterprise from section 19(4) of the act. LIC does not
abuse its dominant position but it cannot be denied that c) Size and importance of the competitors- It is
the market is deprived of level playing field. Abuse of evident from my research that LIC dominates
dominance is wrong in eyes of competition law which is market through exclusive network distribution.
prohibited under act and not dominance. Saying that LIC Other private players have comparatively weak
abuses its dominance would be an overstatement but we market. Some of the life insurance companies in
cannot deny that there is an anti-competitive India that reported positive growth in financial year
environment due to the sovereign guarantee and IRDA 2008-2009 are LIC, Met Life, Kotal Mahindra and
regulations relating to agents which leads to exclusive Shriram. LIC booked a gain of Rs.957.35 crore as
distribution network. According to section 4(2) (c), an against Rs 844.64 crore the previous year. Met Life
enterprise is said to abuse its dominant position if it benefit arose rose to Rs14.52 crore and Shriram
indulges in practices resulting in denial of market access profits were up by Rs8.11 crore. Kotak Mahindra,
(in any manner). LIC, not on its own but due to IRDA which had booked a loss of Rs 71.87 crore
regulation of locking agents to one insurer, has an previous year, saw its profits rising by 14.34 crore.
advantage of exclusive distribution network. It is an old However, the scenario was not the same for all the
enterprise with an agent counts over 11 lakh whereas companies. SBI Life, after reporting profits for 3
private players have not more than few lakhs agents on a years in a row, faced a loss of Rs 26.31 crore in
whole. The more number of agents getting enrolled in 2008-09. ICICI Prudential also incurred a record
IRDA choose to be agents of LIC because of their loss of Rs 779crore. While considering the
dominant position due to which they get an easy sell of performance of Indian Life Insurance sector in
insurance amongst customers and hence, more 2008-09, we cannot ignore some downward trends
commission. While, agents are the chief distribution the industry undergone. The private players in this
network, people will buy insurance from them. Hence, sector witnessed a loss of Rs 4,879 crore. In order
they should be allowed to sell all insurance so that to tackle the losses, he life insurance company
customers get a wider range of choice at once and other giants had to infuse Rs 5,956 crore. This shows
players get a level playing field. If the agents are more that the private players have small size and weak
with LIC and it has a huge market, people are left with market.
less option than to choose LIC.
d) Economic power of the enterprise including
Through the purview of competition act, it shall be commercial advantage over competitors- With
much easier to explain the dominance position of LIC in great strength of agents unlike other players in
market. According to section 19(4), the commission market, it is obvious that LIC has grown a great
shall enquire as to whether an enterprise enjoys a distribution network of agents helping it to enjoy a
dominant position or not under section 4 through dominant position. The total premium collected by
following factors:- LIC is 185,985 crores. This shows that LIC has a
huge economic built up and has undue advantage
a) Market share of the enterprise- with more than over other competitors. To add, the commission
70% of market share, it is obvious that LIC paid by LIC to its agents rose by 20.7% in financial
dominates the market even post liberalisation. year 2009- 2010 which shows that exclusive
There has not been much change in market since distribution network is benefitting LIC over other
then. The size of market has grown but the hold of players.
LIC and its consumers market still exist
dominantly. LIC sold 4.76% less, while private e) Vertical integration of the enterprise or sale or
companies saw a 20% decline in the number of service network of such enterprises- no such
policies sold.9 vertical integration seen ,

b) Size and resources of the enterprise- LIC is a large f) Dependence of consumers on the enterprise;- There
enterprise with more than 11 lakh agents as their is no doubt that consumer depends for buying such
dominant distribution network. LIC has also 8 zone service because of a distribution network. Agents
office, 100 divisional office, 2048 branch offices being the most important have a significant role to
and 26 banc assurance partners unlike other private play pre and post premium payment. When 11 lakh
players like ICICI with 2100 branch office, agents agents are registered with LIC and people have a
of 2 lakh and 18 banc assurance or Bajaj Allianz faith build in LIC, the consumers are largely
with 1200 branches, agents 2.5 lakhs. Resource of dependent on this enterprise for safety of their
LIC is way ahead of others due to IRDA regulation investments.
which the commission need to check to provide a
free and competitive market. Such availability of
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g) Monopoly or dominant position whether acquired conditions could lead to severe competition challenges
as a result of any statute or by virtue of being a in future. Also, hybrid products of mutual fund shall
government company of a public sector become popular in the coming future as it helps saving
undertaking or otherwise- Non level playing field tax and such schemes shall influence the market and
in this sector exists due to which LIC enjoys competition in subtle manner. There would be a
dominant position. It seems like LIC is first among nonlevel playing market condition not good for healthy
equals. There is no doubt that LIC being a state competitive market.
owned enterprise has a upper hand in the market
because of public trust build in them. The CONCLUSION AND SUGGESTION
government guarantees to public to safeguard their
money invested through insurance in LIC in case During the research, I came across several incidences
of any loss incurred by the company but the other making it evident that LIC is a dominant market player
players do not have such advantage due to which with more than 70% of market. 22 of the private insurers
their grip over market is not built up. This leads to had managed a higher growth at 7% against 2% in the
non-level playing field in the market against the previous period, but they cumulatively lost 6% market
principle of this act. share to the LIC, the only public sector insurer. 11The
majorly belongs to LIV with more than 70 % of market
h) Entry barriers including barriers such as regulatory share in respect to other private player market
barriers, financial risk, high capital cost of entry, Dominance may not be per se wrong under competition
marketing entry barriers, technical entry barriers, Act but abuse of dominance is wrong. With major
economies of scale, high cost of substitutable market share there seems a ground that the market does
goods and service for consumers- though none of not provide for a level playing field in the market. Level
the alternative channels as such are in position to playing field is to be provided for a fair competitive
replace the personal selling through the agents, the environment which the commission undertakes to do.
players have been vying with each other through a Sovereign guarantee of government to state owned LIC
combination of innovative channels in their is giving it an unfair advantage to build trust in
Endeavour to reduce the cost of distribution and customers due to which LIC has a major life insurance
satisfying customers. Alternative channels will market share. Also the exclusive distribution network
grow over a period of time. The distribution LIC prevents market from competition knowingly or
network is locking the growth of other players and unknowingly. Having a large number of agents cannot
giving the market a non-level playing field. be said to be an anti-competitive practice but such a
regulation has given an advantage to LIC as it has over
i) Countervailing buying power- there is no 11 lakh agents in comparison to other player is far more.
countervailing power as such Agents build a relation with customers and when one
agent is allowed to provide service of only one insurer it
j) Market structure and size of markets- Out of this provides the customer with less choice. More LIC agents
percentage more than 70% is dominated by LIC mean more selling of LIC products. People invest more
which shows the dominant position of LIC and the with a faith that their investment is guaranteed to come
non level playing field existent in the market back if not by LIC than by government. More
denying healthy competition in market. A rise of distribution network means more dominance of LIC in
almost 47% has been witnessed by LIC in its market. Commission needs to look into such a situation
average premium per policy.10 to give an open and level playing market to all players.
Such leveraging of distribution network shall lead to
k) Social obligation and social costs; anti-competitive eq As sovereign guarantee is key to
LIC‘s pre-eminent position in life insurance business,
l) Relative advantage, by way of the contribution to the Committee is of the view that this stature bestowed
the economic development, by enterprise enjoying on LIC by Parliament should not be diluted in any
a dominant position having or likely to have an manner under the pretext of providing a level playing
appreciable adverse effect on competition; field in insurance sector,‖ the report said.

m) Any other factor which commission consider SUGGESTION

relevant.
The commission needs to advocate competition in
Possibility of Abuse of Dominance. market.

There could be circumstances where LIC would try to The commission needs to enquire in detail about
get in tie in arrangements to leverage co financing of reasons behind such anti competitive behaviour of life
health sector or other sector to gain customers trust and insurance market.
market. LIC is a trend setter. Other players have to look
up to LIC for setting up standards. Such hypothetical
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The commission needs to advocate the government to IRDA regulation and also ask government to increase
remove such sovereign guarantee to give the life FDI cap from 26% to 49% to bring more players in
insurance a free market and level playing field. The market which would help more population to be covered
opinion given by the commission under section 49(1) from life insurance.
shall not be binding upon the central government in
formulating such policy. Under section 49(3) the REFERENCE:
commission shall also takes measures for the promotion
of competition advocacy, creating awareness and [1] Leanne,H., Anne, L. and Peter, C.(2001).
imparting training about competition issues. Relationship Marketing and Customer Loyalty in
a Retail Setting: A Dyadic Exploration. Journal
• The life insurance market will see a healthy of Marketing Management, 17, 287-319.
competition with the opening up of developing markets
to competition, there is a greater impetus to demand [2] Garbarino, E. and Johnson, M.S. (1999).The
growth and volumes would start dictating economic Different Roles of Satisfaction, Trust, and
sizes and pricing. This fuels mergers and acquisition and Commitment in Customer Relationship. Journal
makes survival of small sized firm difficult. Though life of Marketing,63(4),70-87.
insurance sector had not seen any merger and
acquisition as yet but in the near future, with the growth [3] Article, ‗An Analysis of the Evolution of
of the growth of market, such problems shall come up. Insurance in India‘ by Tapen Sinha, ING Chair
Professor, Instituto Tecnologico Autonomo de
• The commission cannot challenge the regulation for Mexico and Special Professor, University of
insurance as there is a separate body called IRDA Nottingham.
governing insurance sector, but the commission can
surely bring in picture the adverse effect of such [4] Bimaquest-Vol VIII, Issue I, pages 51-55
regulation on competition in market before the consumer
as well as the regulatory body to help market get a level [5] Insurance bill-2000, Govt. of India, October
playing field for all players. 2000.p.26

• There should be fair effort made by commission to [6] N JANARDHAN RAO, ―INDIA An emerging
enlarge the distribution network to provide a level superpower house,‖ published by ICFAI Press.
playing field to all players and also discourage
dominance of LIC due to exclusive distribution of [7] www.economictimes.com
network through agents.
[8] www.irdaindia.org
• Also , the commission can make a report on how the
market suffers from anti competitive practices due to
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