It is due to globalization, deregulation and
also terrorist attacks; that the insurance industry is undergoing a massive
change and the metamorphosis has been noteworthy in the last few decades.
Clearing
basics
Before we begin the analysis of Indian insurance industry, let us clear some basics on insurance.
- In the words of
a layman, insurance means managing risk. For instance, in life insurance
segment, the insurance company tries to manage mortality (death) rates among
the wide array of clients.
- The insurance
company works in a manner by collecting premiums from policy holders,
investing the money (usually in low risk investments), and then
reimbursing this same money once the person passes away or the policy
matures. The greater the probability for a person to have a shorter life
span than the average mark, the higher premium that person has to pay. The
case is the same for all other types of insurance, including automobile,
health and property.
- Ownership of
insurance companies is of two types:
- Shareholder
ownership
- Policyholder
ownership
Types
of Insurance
- Life Insurance -
Insurance guaranteeing a specific sum of money to a designated beneficiary
upon the death of the insured, or to the insured if he or she lives beyond
a certain age.
- Health Insurance
- Insurance against expenses incurred through illness of the insured.
- Liability
Insurance - This insures property such as automobiles, property and
professional/business mishaps.
Challenges
facing Insurance Industry
- Threat of New
Entrants:
The insurance industry has been budding with new entrants every other day.
Therefore the companies should carve out niche areas such that the threat
of new entrants might not be a hindrance. There is also a chance that the
big players might squeeze the small new entrants.
- Power of
Suppliers:
Those who are supplying the capital are not that big a threat. For
instance, if someone as a very talented insurance underwriter is presently
working for a small insurance company, there exists a chance that any big
player willing to enter the insurance industry might entice that person
off.
- Power of Buyers: No individual
is a big threat to the insurance industry and big corporate houses have a
lot more negotiating capability with the insurance companies. Big
corporate clients like airlines and pharmaceutical companies pay millions
of dollars every year in premiums.
- Availability of
Substitutes:
There exist a lot of substitutes in the insurance industry. Majorly, the
large insurance companies provide similar kinds of services – be it auto,
home, commercial, health or life insurance.
How to
choose an insurance company?
There are many factors to probe into when an
investor chose an insurance company.
- The consumers as
well as the investors should only focus on the insurer's financial
strength and capability to meet ongoing responsibilities to its
policyholders.
- The fundamentals
of the insurance company should be strong and should not indicate a poor
investment opportunity as this might also deter growth.