Current status of existing economy

The acceleration in the agriculture sector may be seen from the increased food grains production. Real GDP growth originating from Industry sector was lower at 8.1 per cent in 2007-08 than 9.2 per cent observed in 2006-07. The deceleration was mainly on account of decline in manufacturing activities from a growth of 12 per cent in 2006-07 to 8.8 per cent in 2007-08. While there has been a marginal increase in the growth of electricity, gas and water supply, there has been a decline in the Mining and quarrying segment consumer durables which recorded a negative growth of 1 per cent in 2007-08 as against 9.2 percent. The Infrastructure sector which gained momentum during 2006- 07 decelerated significantly during 2007-08.The micro and small enterprises (MSE) continues to play an important role in Indias industrial growth and exports, besides providing substantial employment opportunities. In the recent years, the MSE sector has consistently registered higher growth in comparison with the overall industrial growth. If you compare insurance growth, we can see it growing as a result of increase in household disposable income, compulsory rd motor 3 party liability, introduction of new products and channels of distribution and penetration of private insurance companies in uncovered markets. Life insurance business in India grew by 14.2 per cent in US Dollar terms, while non-life insurance business grew by 5.6 % in year 2008.Introduction of new products and channels of distribution and penetration of private insurance companies in uncovered markets are the major contributing factors. However, profitability of insurance companies in the non-life business was affected due to Detariffication and consequent reduction in premium rates. The global outlook for 2008 remains grim for both life and nonlife insurance business. While uncertainty in capital and stock market is likely to moderate, lower demand for unit-linked life insurance products and slowdown in economic activities are expected to dampen the premium growth in non-life market. Let us look at total assets of life insurance and compare the same with other private life insurance companies.

Total Assets of Life Insurance Companies as on 30th Sept.08 Category Linked Non linked Total LIC 73400 683500 756900 Pvt Companies 74700 25900 100600 Total 148100 709400 857500

It has been observed that more is invested in non linked market. Witnessing the financial crises across the globe and melt down in the stock markets, the investors may turn the other way and many would like to invest their surpluses in safe and traditional financial instruments rather than take risks. The preference will be shifted away from ULIPs and life insurers may have to design traditional products with good incentives.

TRENDS IN LIFE INSURANCE BUSINESS:

Premium of life insurers for the quarter ended December 2008 ( amount in crores) Category Non linked Total Linked Total Riders(Linked + Non linked) Grand Total 2007 137.0021 398.3962 36.86 535.39 2008 203.29 319.2286 46.54 522.523 Growth 48.00% -20.00% 26.00% -2.00%

There has been a huge decline in the amount of premium underwritten by life insurance business in unit linked products. This has been due to volatility and slump in stock markets. Linked business has shown a 20% decline in the amount of premium underwritten during the quarter where as non linked business has shown an overall increase of 48%. Let us have a look at the Indian Economy as a whole and the indicators with respect to 10th and 11th plans.

Indian Economy : Some Indicators in 10th and 11th plans

Average of the 10th plan 200203 to 06-07 1st Year of 11th plan 2007-08 2nd year of 11th plan 2008-09 3rd year of 11th plan 2008-09

Category India's Growth Rates in GDP (1999-2000 Prices) (Factor Cost) Growth Indicators Industrial GDP growth (1999-2000 prices) Agricultural GDP growth (1999-2000 prices) Internal Balance Indicators

7.7

7.1

9.2 2.3

8.1 4.9

4.8 2.6

Gross domestic Saving(% of GDP 1999-2000 Series) Gross Domestic Investment(% of GDP 1999-2000 Series) Fiscal Deficit(% of GDP 1999-2000 series) Rate of inflation External Balance Indicators Export Growth (US $) Import Growth (US $) Debt Service Ratio

31.4

37.7

4.4 5

2.7 4.7

5.5

23.6 29.5 10.5

28.9 35.2 5.4

17.1 31.5

Source : Reserve Bank of India, Finance Ministry, Central Statistical Organization The Fiscal Deficit for 2008-09 & 2009-10 are based on the Budget 2009-10 Document, Ministry of Finance Indias GDP is 7.1 in year 2008-09 as compared to 9 which was in the year 2007-08. There has been a decrease in growth due to current recession scenario and downfall in the economy. Fiscal deficit has increased and it has been observed that % of import growth is more than export growth. One of the possible reasons behind a progressively-widening trade deficit could be a decline in exports accompanied by an increase in imports. But it has not been so in Indias case. Exports grew by 28.9 percent in 2007-08, which was higher than their growth of 23.6 percent in 2006-07. But the import growth of 35.2 percent in 2007-08 was far higher than the 29.5 percent growth in the previous year. Year 2008-09 we see a decline in imports and exports but the percentage of decline in exports is almost 50% but % of decline in imports is meager. So the rise in trade deficit can be attributed to a much faster rise in imports compared with exports.

Monetary and fiscal policy:

Monetary policy: Monetary policy is the process by which the government, central bank, or monetary authority of a country controls (i) the supply of money, (ii) availability of money, and (iii) cost of money or rate of interest, in order to attain a set of objectives oriented towards the growth and stability of the economy. If we compare fiscal policy to monetary policy we can say that, Fiscal policy can be contrasted with the other main type of economic policy i.e. monetary policy, which attempts to stabilize the economy by controlling interest rates and the supply of money. Fiscal policy refers to overall effect of the budget outcome on economic activity. India has been facing fiscal deficit from past many years. Let us now see the fiscal deficit from 1997-98 to 2008-09. Fiscal Deficit (in %) -3.61 -5.31 -5.5 -5.03 -5.21 -5.06 -5.34 -4.29 -3.19 -2.32 -2.9 -2.81

Year 1997-98 1998-99 1999-00 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09

It has been observed that though fiscal deficit is decreasing, our economy is still facing a deficit and not surplus. The interim th budget which was announced on 16 Feb projected fiscal deficit to be 6% of the GDP as against earlier set target of 2.5%. Fiscal deficit is a situation when the government expenditure exceeds its revenue. The rising fiscal deficit is a matter of concern; however the government had announced two fiscal stimulus packages in order to boost the economy. The first package includes measures such as higher public spending, easing liquidity for further lending at lower interest rates, boosting the slumped sale of commercial vehicles and access to easy availability of credit for the export sector, housing and small industries. The RBI has been reducing its policy rates to boost liquidity and has thereby induced more than Rs. 3, 20,000 crore into the banking system. Following its move, the government has also asked PSU banks to increase their credit targets for the current fiscal so as to ensure optimal disbursement of credit at lower cost. The fiscal package along with RBI cutting rates is expected to increase the flow of funds to the struggling housing sector. In the second stimulus package, the cabinet has relaxed the external commercial borrowings (ECB) norms. Both RBI and the Government have decided to remove all-in-cost' ceilings on such borrowing. In order to facilitate access to funds for the housing sector, the development of integrated townships' would be permitted as an eligible end-use of the ECB. The relaxation of ECB norms is a positive step as corporate can access borrowings outside India. Under this new package, the FII limit in rupee denomination would be increased from USD 6 billion to USD 15 billion.

However if we see the Foreign Direct Investment, we can see that there is a substantial growth i.e. of 75%. The table of FDI is given below. FDI Equity Inflows During Calendar Year 2008: Calendar Year 2008 (Jan-Dec) Jan-08 Feb-08 Mar-08 Apr-08 May-08 Jun-08 Jul-08 Aug-08 Sep-08 Oct-08 Nov-08 Year 2008 (upto Nov 2008) Year 2007 (upto Nov 2007) Difference % growth over last year Amount of FDI inflows (in Rs Cr) 6960 22529 17932 15005 16563 10244 9627 9995 11676 7284 5305 128541 73590 54951 74.67183041

There has been increase in FDI % growth to almost 75 % and its mainly from countries like Mauritius, Singapore, USA, UK, Netherlands, Japan, Germany, Cyprus, France and UAE with Mauritius having the highest % to total FDI inflows in terms of Rupees which is almost 44%. As economic environment and capital markets are expected to stabilize in medium term, life insurance is projected to resume its strong performance. In the industrialized countries, the need for old-age provision will continue to fuel sales of pension and annuity products. In many emerging markets, the potential for significant market expansion in tandem with higher disposable income and a relatively young population will drive sales for both savings and protection products in the years to come. Insurance Penetration: Following table shows relationship between Gross Domestic Product and gross Direct Premium. Years 2002 - 03 2003 - 04 2004 - 05 2005 - 06 2006 - 07 Growth of Gross Domestic Product 3.5% 8.5% 7.5% 9.0% 9.3% Growth of Gross Direct Premium 20.8% 9.1% 14.6% 15.1% 20.8%

It has been observed that both GDP and Gross Premium has shown a positive trend in its growth. Trend of Gross premium underwritten by Life Insurance Companies from 2001-2002 to Feb 2008-09. 2008-09 (upto Feb 09) 43883.24 583.28 2234.74 2210.3 5925.36 1056.11 901.61 4348.42 3679.27 1596.02 883.87 2920.5 612.04 104.44 280.87 245.07 80.34 223.36 222.18 22.91 1.48 1.69 72017.10

Insurance Companies LIC ING Vysya HDFC Std.Life Birla Sunlife ICICI Prulife Kotak Mahindra Tata AIG SBI Life Bajaj Allianz Max Newyork Metlife Reliance Life (earlier known as ANP Sanmar) Aviva Sahara Shriram Life Bharti AXA Future Generali IDBI Fortis Canara HSBC OBC Life Aegon Religare DLF Pramerica Star Union Daiichi Total

2001-02 49821.91 4.19 33.46 28.26 116.38 7.58 21.14 14.69 7.14 38.95 0.48 0.28 0 0 0 0 0 0 0 0 0 0 50094.46

2002-03 54628.49 21.16 148.83 143.92 417.62 40.32 71.77 72.39 69.17 96.59 7.91 6.47 13.47 0 0 0 0 0 0 0 0 0 55738.11

2003-04 63167.60 88.51 297.76 537.54 989.28 150.72 253.53 225.67 220.80 215.25 28.73 31.06 81.50 0 0 0 0 0 0 0 0 0 66287.93

2004-05 75127.29 338.8581 686.6346 915.4724 2363.8172 466.1638 497.0386 601.1845 1001.6752 413.4269 81.5323 106.5526 253.4164 1.7356 0 0 0 0 0 0 0 0 82854.80

2005-06 90792.2236 425.3776 1569.9126 1259.6767 4261.0465 621.8519 880.1938 1075.3219 3133.5778 788.1255 205.9908 224.2059 600.268 27.663 10.3259 0 0 0 0 0 0 0 105875.76

2006-07 127822.8409 707.2026 2855.8656 1776.7052 7912.9879 971.5141 1367.1833 2928.4856 5309.9971 1500.2802 492.7117 1004.6584 1147.2254 51.0047 185.1523 7.7761 0 0 0 0 0 0 156041.59

2007-08 59182.2 704.67 2679.61 1965.01 8305.84 1106.62 967.78 4792.86 6491.72 1594.21 826.79 2752.76 1059.08 112.27 309.87 113.11 2.54 11.9 0 0 0 0 92978.84

LIC which is Public sector still dominates the life market in spite of opening of insurance sector and liberalization. Gross premium has shown a positive growth upto growth 2006-07 post which it showed a decreasing trend. This was due to decline in sales of ULIP products which had a huge market share.

Company Royal Sundaram Tata-AIG Reliance General IFFCO-Tokio ICICI-lombard Bajaj Allianz HDFC ERGO General Cholamandalam Future Generali $ Universal Sompo # Shriram General @ Bharti AXA General @ New India National United India Oriental Total ECGC

2001-02 71.13 78.46 77.46 70.51 27.11 141.96 0.00 0.00 0.00 0.00 0.00 0.00 3512.33 2365.46 2654.96 2446.48 11445.86 338.52

2002-03 184.44 233.93 185.68 213.33 203.48 296.48 9.49 14.79 0.00 0.00 0.00 0.00 3921.24 2863.58 2968.06 2803.41 13897.91 374.78

2003-04 258.02 353.32 161.06 295.64 506.72 476.31 111.67 96.68 0.00 0.00 0.00 0.00 4045.69 3417.00 3038.06 2832.11 15592.27 445.13

2004-05 331.50 468.87 161.68 507.39 885.17 852.75 177.78 170.11 0.00 0.00 0.00 0.00 4207.03 3824.98 2951.83 3038.23 17577.31 517.95

2005-06 459.35 612.39 162.33 896.11 1592.00 1284.57 205.77 222.21 0.00 0.00 0.00 0.00 4791.51 3523.67 3154.78 3527.13 20431.80

2006-07 600.03 741.56 912.23 1150.32 3003.45 1804.60 190.16 314.59 0.00 0.00 0.00 0.00 5024.15 3810.88 3509.95 3940.53 25002.45

2007-08 695.16 813.39 1946.42 1235.83 3344.69 2404.34 216.58 563.67 10.64 0.48 0.00 0.00 5274.14 4030.80 3738.94 3855.61 28130.68

2008-09 upto Feb 09 728.10 813.19 1776.64 1257.71 3255.56 2407.50 298.43 643.97 170.45 19.35 107.38 20.74 4982.24 3867.90 3808.08 3564.55 27721.79

$-commenced operations in Nov 2007 Commenced operations in Feb 2008 @ commenced operations in July 2008 Gross premium underwritten by non life insurance companies has shown an increasing trend. This was due to favorable regulatory norms, customer awareness, Detariffication process, better marketing channels etc. Per capita Income and consumption can be attributed in purchasing insurance products.
Per Capita Income and Consumption ( in 1999-2000 prices) Income Consumption In Rs Growth In Rs Growth IX plan Average 19245 3.40% 12392 3.00% X plan Average 24156 6.20% 14677 4.30% 2002-03 20996 2.20% 13352 1.10% 2003-04 22413 6.80% 13918 4.20% 2004-05 23890 6.60% 14413 3.60% 2005-06 25696 7.60% 15422 7.00% 2006-07 27784 8.10% 16279 5.60% 2007-08 29786 7.20% 17145 5.30%

Source: Planning and commission.

Income is taken as GDP at market price Consumption is private final consumption expenditure Per capita is obtained by dividing these by total population. Economic growth, and in particular the growth in per capita income, is a broad quantitative indicator of the progress made in improving public welfare. Per capita consumption is another quantitative indicator that is useful for judging welfare improvement. Hence it is important to look at changes in per capita income and expenditure. The pace of economic improvement has moved up considerably during the last five years (including 2007-08). The rate of growth of per capita income as measured by per capita GDP at market prices grew by an annual average rate of 3.1 per cent during the 12- year period, 1980-81 to 1991-92. It accelerated marginally to 3.7 per cent per annum during the next 11 years, 1992-93 to 2002-03. Since then there has been a sharp acceleration in the growth of per capita income, almost doubling to an average of 7.2 per cent per annum (2003-04 to 2007-08). This means that average income would now double in a decade, thus we can see that growth rate of per capita income in 200708 is projected as 7.2%.Per capita private final consumption expenditure has increased in line with per capita income. The growth of per capita consumption accelerated from an average of 2.2 per cent per year during the 12 years from 1980-81 to 1991-92 to 2.6 per cent per year during the next 11 years following the reforms of the 1990s. The growth rate has almost doubled during the subsequent five years from 2003-04 to 2007-08, with the current years growth expected to be 5.3 per cent which is marginally higher than the five year average. The average growth of consumption is slower than the average growth of income, primarily because of rising saving rates, though rising tax collection rates can also widen the gap. Due to rise in saving rates and customer awareness, a small portion of the income saved is contributed towards premium payments. Let us have a look at key Macroeconomic ratios which forms a percent to GDP. Macroeconomic ratios include consumption, investment, savings etc which affects the growth of an economy. Key Macroeconomic Ratios (Per Cent to GDP) Indicators at factor cost 2006-07 GDP(percent growth) 9.6 Consumption Expenditure 66.1 Investment 35.5 Savings 34.3 Source: RBI,CSO Parameter 2006-07 Premium/GDP(life Insurance) 4.1 Insurance per Capita(inUSD)(life Insurance) 33 Source: RBI,IRDA

2007-08 9 65.5 39 37.7 2007-08 4 40.4

Factor cost is cost of factors of production where land, labor and capital are referred to as factors of production. Hence it can be observed that due to rise in savings there has been a subsequent rise in per capita expenditure with regards to life insurance policies.

India vis-a-vis rest of the world.

Life Insurance Premium Underwritten: in $ million 2007. Country Premiums USA 621,993.10 UK 260,696.70 Japan [1] 234,696.9 France [1] 194,908.3 Germany [1] 146,865.6 Italy 84,093.90 South Korea 80,812.50 China [1] 66,224.4 Canada 60,262.60 Australia 52,480.80 Taiwan [2] 48,069.5 India 37,737.70 Netherlands 36,185.70 South Africa [1] 35,015.8 Switzerland 34,064.80 Spain 31,145.10 Belgium 29,997.50 Ireland 24,646.70 Sweden [1] 23,961.2 Hong Kong [1] 22,563.6 Russia 15,723.50 Denmark 15,095.90 Brazil 14,721.00 Portugal [1] 12,702.8 Norway 11,447.70 Austria 9,863.10 Mexico 9,597.90 Poland [1] 9,507.0 Malaysia [1] 5,749.1 Thailand [1] 5,726.2 Singapore 4,756.10 Puerto Rico [1] 4,465.3 Israel 4,243.60 Finland [1] 3,962.2 Chile 3,903.80 Venezuela 3,446.50 Greece 3,423.00 Indonesia [2] 3,344.2 Hungary 2,783.30 Czech 2,666.90 Republic 41 Argentina 1,926.10 42 Colombia 1,855.10 43 Philippines 1,684.90 44 New Zealand [2] 1,291.2 45 Turkey 1,279.40 46 Slovakia [1] 1,166.9 47 Slovenia 833.9 48 Luxembourg 751.2 49 Morocco [1] 715.8 50 Trinidad & [2] 674.2 Tobago Source: Axco Information Services. Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40

Premium figures are for Gross Premium Underwritten which includes Accident and health care premiums written by life insurers. [1] Preliminary Figures [2] Prior Figures India Ranks 12 as compared to China which ranks 8 in terms of life insurance premiums underwritten during year 2007. Non Life Insurance Premium Underwritten: in $ million 2007.
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 Country USA UK Germany France Japan Netherlands Italy Spain South Korea Canada China Australia Brazil Switzerland Russia Belgium Austria Sweden Denmark Norway Mexico Turkey Poland India Portugal Ireland Czech Republic South Africa Finland Argentina Venezuela Ukraine Taiwan Israel Greece Malaysia Thailand Iran Hong Kong Puerto Rico United Arab Emirates Romania Hungary Colombia New Zealand Chile Premiums 487,788.40 88,164.20 [1] 75,006.8 [1] 72,543.1 [1] 70,404.8 [1] 67,478.8 51,568.60 43,683.00 34,409.60 32,667.50 [1] 26,260.1 20,558.00 20,500.80 17,733.70 14,127.80 11,961.70 11,770.60 [1] 10,287.8 9,653.90 7,898.20 7,549.20 6,928.10 [1] 6,358.2 6,023.20 [1] 5,849.4 5,489.20 5.247.8 [1] 4,586.3 [1] 4,451.8 4,172.60 3,870.30 3,553.90 [2] 3,507.7 3,075.00 2,990.20 [1] 2,921.9 [1] 2,915.9 2,686.60 [1] 2,459.8 [1] 2,364.5 [2] 2,358.4 2,292.90 2,286.30 2,253.70 [2] 1,955.9 1,951.10
th

47 48 49 50

Indonesia Singapore Luxembourg Saudi Arabia

[2] 1,889.7 1,739.70 1,387.30 1,386.10

Source: Axco Insurance Information Services. Premium figures are for gross premiums written Include accident and health care premiums written by non life insurers [1] Preliminary figures [2] Prior figures India ranks far behind China in terms of non life premium underwritten. Indias ranking is 24 as compared to China which th ranks 11 as compared to rest of the world. Total Market Gross Premium Underwritten: in $ million 2007
Rank 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 USA UK Japan France Germany Italy South Korea Netherlands Canada China Spain Australia Switzerland Taiwan India Belgium South Africa Brazil Sweden Ireland Russia Hong Kong Denmark Austria Norway Portugal Mexico Poland Malaysia Thailand Finland Turkey CzechRepublic Country Premiums 1,109,781.50 348,860.90 [1]305,101.7 [1]267,451.4 [1]221,872.4 135,662.50 115,222.10 [1]103,664.4 92,930.10 [1] 92,484.5 74,828.10 73,038.80 51,798.50 [2] 51,577.2 43,760.90 41,959.20 [1] 39,602.0 35,221.80 [1] 34,249.0 30,135.90 29,851.30 [1] 25,023.4 24,749.80 21,633.70 19,345.90 [1] 18,552.1 17,147.10 [1] 15,865.3 [1] 8,670.9 [1] 8,641.9 [1] 8,414.1 8,207.50 7,914.70
th

34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Israel Venezuela Puerto Rico Singapore Greece Argentina Chile Indonesia Hungary Colombia Ukraine NewZealand Romania Iran UAE Slovenia Slovakia

7,318.70 7,226.80 [1] 6,829.8 6,495.80 6,413.20 6,098.60 5,854.90 [2] 5,233.9 5,069.60 4,108.80 3,565.90 [2] 3,247.0 2,943.30 2,862.10 [2] 2,808.1 2,592.40 [1] 2,335.8

Source: Axco Insurance Information Services. Premium figures are for gross premiums written. Include accident and health care premiums written by life, non-life and specialist health care insurers. [1] Preliminary figure [2] Prior figure India is ranking 15 as compared to the rest of the world. If ranking of emerging economies are considered for e.g. China, Brazil, Mexico and South Africa, India ranks 15 with China th th th th ranking 10 , Brazil ranking 19 , Mexico 28 and South Africa 18 . Many developed economies are targeting the emerging economies Total Premium Volume in USD in 2007
th th

Country India-12 China Brazil Mexico South Africa

*- Estimated + Provisional

Comparing India with emerging economies Change (in%) year Share in 2007 world inflation Market Yr Yr adjusted 2007 Ranking 2007 2006 54375* 40334 13 1.34 15 92487+ 70737 19.02 2.28 10 38786* 30365 10.32 0.96 19 17416+ 15178 10.66 0.43 28 42676* 40743 1.88 1.05 18

Source: Swiss Re Sigma

The global growth performance in non-life business varied between industrialized countries and emerging markets. While industrialized countries showed a negative growth of 0.3 per cent, the emerging markets exhibited a robust growth of 10.2 per

cent in the non-life insurance business on account of strong economic developments and introduction of mandatory cover in areas such as motor, third party liability and health. India and China reported strong performance in both .In many emerging markets, the potential for significant market expansion in tandem with higher disposable income and a relatively young population, will drive sales for both savings and protection products in the years to come. Life Insurance markets grew by 13% in 2007 down from a record 18% in 2006. Africa slowed the most to 3.4% in 2007 as against 22% in 2006. Strong GDP growth continued to stimulate the success of non life insurance sector in the emerging markets. Compulsory rd insurance for e.g. motor 3 party liability in India and China and health insurance in middle east are one of the for driving insurance growth in the emerging markets. Insurance penetration of the emerging markets averaged 1.5% in life and 1.35 in non life insurance.

Comparison between India and China: Life insurance premiums in China grew strongly by 19% in yr 2007 as against 8.7% in 2006. This was due to growth in household and personal income and increasing efforts by insurers to penetrate different segments of the market. In India, growth of life business slowed form exceptionally strong pace of 39.1% in 2006 to 14.2% in year 2007. The private sector companies continued to gain market share with new products and distribution channels. There was a steady growth in insurance premium in the non life segment at 10% which was mainly due to growth reported by private non life companies. Profitability was hampered due to reduction in premium rates resulting from Detariffication. The full impact has been felt since Jan 2008 when all pricing restrictions were removed. There has been an intense price competition along with economic uncertainty which is related to weakening of external environment. For China, the outlook is mixed- premium growth has continued to derive support from the strong economy and Olympic Games but natural calamities like severe snowstorm in early 2008 has resulted in negative impact on insurers profit.