Life Insurance Corporation's Future Prospects

<< Previous

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.

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 reveals that new companies seldom displace 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 does to retain its competitive strength will determine its success in the future. For now, LIC seems to be taking a 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."

Questions for Discussion

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 agree with Bajpai's statement that service would not be a key feature to success in the post-IRDA era? If you were a new entrant in the Indian insurance market, what are the issues you would focus on?
3. 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.