The Indian Insurance Industry

Traditionally Indian Insurance market had had a fair share of competition. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC thus had an absolute monopoly till the late 90s when the Insurance sector was reopened to the private sector. Today there are 23 life insurance companies operating in the country
In this paper we will study the advent of the private players into the insurance market and the change in the insurance market from monopoly to an oligopolistic one. For the sake of simplicity in taking forward our discussion on this change let’s assume the current insurance market being dominated by two players: 1. LIC – Nationalized Insurer 2. Rest of the insurers (ROI) - All 22 private insurers excluding LIC
Both the insurers are providing the identical products i.e. life insurance policies. Further let’s assume that they incur ‘Zero’ marginal costs. Thus the various costs incurred by them being only the fixed costs. The duopoly market is thus constructed for the insurance market as illustrated below.
Cournot solution

D
Q
0
P*
Q*

P1
P2
Q1
Q2
Q*
L
K
C
E
F
MR LIC
MR ROI

Before the nationalization of the life insurance sector, LIC was the only seller in the market. The demand for insurance products is represented by DQ. Since it is a monopolists market, LIC will, in order to maximize profit, sell at OQ1 units such that the MR equals Zero MC. The price charged was OP1per unit and the profit was OQ1CP1
In 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. Thus the Rest of the insurers [ROI] entered the market thinking that the LIC will always have OQ1. They viewed the segment CQ on the demand curve as the target segment and the MR curve as MRROI. Thus the rest of the insurers maximized their profits by selling Q1Q2 at the price OP2.
At this point ROI’s anticipated profit is Q1Q2KP2. But LIC’s anticipated profit falls from OQ1CP1 to OQ1KP2.
LIC in turn expects ROI always to market Q1Q2=Q2Q units of insurance policies. According to this belief OQ2 represents total market available to LIC. Thus the best LIC could do is to reduce its market share market OQ2/2 units. Thus the market price rises accordingly and ROI sees more available market now and increases the output to ½(OQ-OQ2/2). This adjustments allows both LIC and ROI to settle for an output of OQ-(OQ-OQ2/2)/2 i.e. OQ/3.
Thus LIC sells OQ* units and POI sells Q*Q* units at a market price OP*. LIC’s profits thus is OQ*LP* and ROI’s profits as Q*Q*EL. The total Oligopoly profit is OP*EL
However if the prices are equal to Marginal Cost (Zero), OQ unit would be sold and the profits would be zero i.e. the perfect competition market would prevail.
Thus under monopoly, profit would be OQ/2 and profits OQ1CP1. However the duopoly output is 2OQ/3 of perfectly competitive market (Perfect competition output = OQ) but is larger than the monopoly output. The duopoly price is 2/3rd the monopoly price. The duopoly profit is 2/3rd of potential monopoly profit.
Thus it would be wise to conclude that the increase in the number of sellers (a shift towards perfect competition) leads to a greater penetration of products into the market at more affordable process to the buyers.