![KANPUR<br />FINANCIAL INSTITUTIONS AND MARKETS<br />TERM PAPER ON <br />(INSURANCE SECTOR)<br />SUBMITTED TO:SUBMITTED BY:<br />Prof. SUDHANSHU PANDIYAMBA(FC) IInd SEM.<br />GROUP 6th<br />SACHIN VERMA<br />ANAMIKA MISHRA <br />VIKAS VERMA<br />JITENDRA KANAUJIA<br />PANKAJ SINGH<br />*ACKNOWLEDGEMENT*<br />On the event of the completion of this project, we take the opportunity to express my deep sense of gratitude toward all those people without whose guidance, inspiration and timely help this project would have never seen the light of day. Any accomplishment requires the efforts of many people and this project is no different.<br />We find great pleasure in expressing my project guide Professor Mr. SUDHANSHU PANDIYA whose guidance and inspiration right from the conceptualization to the finishing stage proved to be very essential and valuable in the completion of the project. We would also like to acknowledge for their valuable time, data and information, which they have provided. This played a key role in the project. Lastly, we would like to thank all my classmates and friends for their valuable suggestions and guidance for the project work.<br />CONTENTS<br />1. Introduction<br />2. Origin of insurance <br />3. Brief Overview of Insurance Industry<br />4. Concept of insurance<br />5. Insurance industry Classification<br />6.4Is of insurance services<br />7. Working of insurance<br />8. LIC<br />9. Investments of LIC in various Sectors<br />10. LIC products and plans<br />11. Major players of Life Insurance Companies<br />12. General Insurance Corporation<br />13. IRDA<br />14. Current trends in insurance sector<br />INTRODUCTION<br />The Government of India (GoI) opened the insurance sector to private players on October 24. 2000, thusunraveling a new chapter in this field. This new policy of GOI is an outcome of India’s policy of<br />liberalization and also the result of its obligation as a signatory to the WTO to conform to its principles and guidelines relating to the reduction of barriers to trade in services. This epoch-making decision has ushered in a new era that has transgressed four decades of complete control by the public sector over the insurance sector (life insurance was nationalized in 1956 by merging 245 private insurance companies to form the life Insurance Corporation Of India (LIC), while general insurance was nationalized with the formation of general Insurance Corporation (GIC) in 1972). This decision of the GOI has been accompanied by a set of laws and regulations governing this domain. Accordingly the Insurance Regulatory and Development Authority Act 1999 (The IRDA Act) was enacted with the predominant aim of setting up an autonomous body known as the Insurance Regulatory and Development Authority (the<br />IRDA) to regulate, promote and ensure orderly growth of the insurance industry. The influx of new players in both life and non-life sectors has made the insurance market a consumers paradise. All new players are striving to introduce innovative products. Where the old players (LIC and GIC) have a first mover advantage and have a wide spread network, the new players are banking on their innovative products and superior services to surge them ahead. It is too soon to say which of the new players will succeed and which of them will perish. But the opening up of the sector is a step that will be beneficial both to the insured as well as the insurer.<br />ORIGIN OF INSURANCE<br />Whenever there is uncertainty there is risk. We do not have any control over uncertainties which involves financial losses. The risk may be certain events like death, pension, retirement or uncertain events like theft, fire, accident, etc. Insurance is a financial service for collecting the savings of the public and providing them with risk coverage. It comes under service sector and while marketing this service due care is taken in quality product and customer satisfaction. The main function of the Insurance is to provide protection against the possible chances of generating losses. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.<br />BRIEF HISTORY OF THE INSURANCE SECTOR<br />The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are:<br />1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.<br />1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.<br />1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.<br />1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.<br />Some of the important milestones in the general insurance business in India are:<br />1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.<br />1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.<br />1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.<br />1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies’ viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. And the United India Insurance Company Ltd. GIC incorporated as a company.<br />INSURANCE SECTOR<br />The opening up of Insurance sector was a part of the on going liberalization in the financial sector of India. The changing face of the financial sector and the entry of several companies in the field of life and non life Insurance segment are one of the key results of these liberalization efforts. Insurance business by way of generating premium income adds significantly to be the GDP. Over the past three years, more than thirty companies have expressed interest in doing<br />business in India. The IRDA (Insurance Regulatory Development Authority) is the regulatory authority, which looks over all related aspects of the insurance business. The provisions of the IRDA bill acknowledge many issues related to insurance sector. The IRDA bill provides guidance for three levels of players - Insurance Company, Insurance brokers and Insurance agent. Life Insurance sector is one of the key areas where enormous business potential exists. In India currently the life insurance premium as a percentage of GDP is 1.3 % against, 5.2 per cent in the US.<br />General Insurance is another segment, which has been growing at a faster pace. But as per the current comparative statistics, the general insurance premium has been lower than life insurance. General Insurance premium as a percentage of GDP was a mere 0.5 'per cent in 1996. In the General Insurance Business , General Insurance Corporation (GIC) and its four subsidiaries viz. New India Insurance, Oriental Insurance, National Insurance and United India Insurance, are doing major business. The General Insurance Industry has been growing at a rate of 19 percent per year.<br />The entry of several private insurance companies, particularly international insurance companies, through joint ventures, will speed up the process of insurance mobilization. The competition will unleash new schemes and benefits, which will give consumers a better Chance to save as well as insure. The regulatory system in India is relatively new and takes some more time to make the Insurance sector a perfectly competitive one. Insurance Regulatory Authority of India issued regulations on 15 subjects which included appointed. Actuary, actuarial report, Insurance agents, solvency margins, reinsurance registration of Insurers, and obligation of insurers to rural and social sector, investment and accounting procedure. The reform in Insurance in India is guided by factors like availability of a variety of products at a competitive price, improvement in the quality of customer services etc. Also the employment opportunities in the Insurance sector wil1 increase as major players set their business plans in India. The policy of the government to open up the financial sector and the Insurance sector is expected to bring greater FDI inflow into the country. The increase in the investment limit in this vital sector has generated considerable business interests among the foreign Insurance companiesquot;
Their entry wil1 certainly change the Insurance sector considerably.<br />THE CONCEPT OF INSURANCE<br />quot;
Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event.quot;
<br />Insurance is a protection against financial loss arising on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. A loss is paid out of the premiums collected from the insuring public and the Insurance Companies act as trustees to the amount collected. For Example, in a Life Policy, by paying a premium to the Insurer, the family of the insured person receives a fixed compensation on the death of the insured. Similarly, in a car insurance, in the event of the car meeting with an accident, the insured receives the compensation to the extent of damage. It is a system by which the losses suffered by a few are spread over many, exposed to similar risks. Insurance is a mechanism for transferring risk and reducing risk by having a large number of individuals who share in the financial losses of the group. Risk inhibitsaction and is highly subjective on an individual basis. Insurance objectifies risk. People trade the possibility of financial loss for the relative certainty of the premium paid and reimbursement for loss. Insurance frees people to take action even in the face of possible financial loss. Thus, insurance provides utility even if no loss ever occurs.<br />Some people believe insurance is similar to gambling or opening a savings account. Neither is true. When you place a bet, you create a risk and you have the chance of losing all or making more than your wager. Insurance companies write policies for pure not speculative risks and indemnify you when you have a covered loss. In the insurance industry, the word quot;
indemnifyquot;
means you cannot be put in a better position than you were before the loss. The definition of insurance can be made from two points:<br />,[object Object]](https://image.slidesharecdn.com/insurancesectortermpaper-100908121818-phpapp02/85/Insurance-sector-term-paper-1-320.jpg)
![Contractual definition.FUNCTIONAL DEFINITION<br />Insurance is a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to insure themselves against the risk.<br />GENERAL DEFINITION<br />Insurance has been defined to be that in which a sum of money as a premium is paid in consideration of the insurer’s incurring the risk of paying a large sum upon a given contingency. In the words of John Magee, “Insurance is a plan by themselves which large number of people associate and transfer to the shoulders of all, risks that attach to individuals.”<br />FUNDAMENTAL DEFINITION<br />In the words of D.S. Hansell, “Insurance accumulated contributions of all parties participating in the scheme.”<br />CONTRACTUAL DEFINITION<br />In the words of justice Tindall, “Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”<br />BASIC INSURANCE TERMINOLOGIES<br />Insured<br />The person known as the policyholder, a person with insurance coverage.<br />Insurer<br />A company licensed to transact the business of insurance and issue insurance policies.<br />Policy<br />It's the written contract between an insurance company and its insured. It defines what the company agrees to cover for what period of time and describes the obligations and responsibilities of the insured.<br />Premium<br />It's the amount of money a policyholder pays for insurance protection.<br />Claim<br />It's the notice to the insurance company that under the terms of a policy, a loss maybe covered.<br />Indemnity<br />Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.<br />Agent<br />A licensed person or organization who sells insurance and represents the insurance company to the policyholder.<br />Broker<br />An organization or person paid by the policy holder to look for insurance on their behalf.<br />Deductible<br />It's the amount of the loss which the insured is responsible to pay before the insurance company pays the benefits.<br />Expiration Date<br />This is the date on which the policy ends.<br />Grace Period<br />A period (usually 30 or 31 days) following each insurance premium due date, other than the first due date, during which an overdue premium may be paid. All provisions of the policy remain in force throughout this period.<br />Limit<br />It's the maximum amount paid by the insurance company under the terms of a policy.<br />Underwriting<br />The process of classifying applicants for insurance by identifying characteristics such as age, gender, health, occupation and hobbies. People with similar characteristics are grouped together and are charged a premium based on the group's level of risk.<br />INSURANCE INDUSTRY CLASSIFICATION<br />Insurance has been classified into:<br />Life Insurance<br />General Insurance or Non-Life insurance<br />LIFE INSURANCE<br />Life insurance is a written contract between the insured and the insurer, that provides for the payment of the insured sum on the date of the maturity of the contract or on the unfortunate death of the insured, whichever occurs earlier.<br />NON LIFE INSURANCE<br />General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance.<br />There are various broad categories of non-life or general Insurance as follows:<br />HEALTH INSURANCE:<br />Just like one looks to safeguard ones wealth, these policies ensure guarding the insurer's health against any calamities that may cause long term harm to one’s life and even hamper ones earning ability for a<br />lifetime. Some examples of this type of policy are mediclaim policy, personal accident, group accident, traffic accident, etc.<br />AUTOMOBILE INSURANCE:<br />Auto Policy is required to be taken to cover the risks that arise to the owner, vehicle and third party. This includes the Compulsory Vehicle Policy (In India, by the Motor Vehicles Act, every car owner is required<br />to covered against Act risks) and the Comprehensive Vehicle Policy.<br />FIRE INSURANCE:<br />This policy is required to be taken to prevent any loss of profits property from incidental fire. Eg: fire insurance and fire consequential loss policy.<br />4 I’S OF INSURANCE SERVICE<br />The 4 I’s refers to the different dimensions/ characteristics of any service. Unlike pure product, services have its own characteristics and its related problems. So the service provider needs to deal with these problems accordingly. The service provider has to design different strategies according the varying feature of the service. These 4 I’s not only represent the characteristics of different services but also the problems and advantages attached to it.<br />These 4 I’s can be broadly classified as:<br />• Intangibility<br />• Inconsistency<br />• Inseparability<br />• Inventory<br />,[object Object],Insurance is a guarantee against risk and neither the risk nor the guarantee is tangible. Hence, insurance rightly come under services, which are intangible. Efforts have been made by the insurance companies to make insurance tangible to some extent by including letters and forms.<br />,[object Object],Service quality is often inconsistent. This is because service personnel have different capabilities, which vary in performance from day to day. This problem of inconsistency in service quality can be reduced through standardization, training and mechanization.<br />,[object Object],Services are produced and consumed simultaneously. Consumers cannot and do not separate the deliverer of the service from the service itself. Interaction between consumer and the service provider varies based on whether consumer must be physically present to receive the service.<br />,[object Object],No inventory can be maintained for services. Inventory carrying costs are more subjective and lead to idle production capacity. When the service is available but there is no demand, cost rises as, cost of paying the people and overhead remains constant even though the people are not required to provide services due to lack of demand. In the insurance sector however, commission is paid to the agents on each policy that they sell. Hence, not much inventory cost is wasted on idle inventory. As the cost of agents is directly proportionate to the policy sold.<br />WORKING OF INSURANCE<br />MAJOR PLAYERS OF LIFE INSURANCE COMPANIES<br />Sl. No.InsurersForeign PartnersRegn. No.Date of RegistrationYear of OperationHDFC Standard Life Insurance Co. Ltd.Standard Life Assurance, UK10123.10.20002000-01Max New York Life Insurance Co. Ltd.New York Life, USA10415.11.20002000-01ICICI-Prudential Life Insurance Co. Ltd.Prudential , UK10524.11.20002000-01Om Kotak Life Insurance Co. Ltd.Old Mutual, South Africa10710.01.20012001-02Birla Sun Life Insurance Co. Ltd.Sun Life, Canada10931.01.20012000-01Tata-AIG Life Insurance Co. Ltd.American International Assurance Co., USA11012.02.20012000-01SBI Life Insurance Co. Ltd.BNP Paribas Assurance SA, France11129.03.20012001-02ING Vysya Life Insurance Co. Ltd.ING Insurance International B.V., Netherlands11402.08.20012001-02Allianz Bajaj Life Insurance Co. Ltd.Allianz, Germany11603.08.20012001-02Metlife India Insurance Co. Ltd.Metlife International Holdings Ltd., USA11706.08.20012001-02Reliance Life Insurance Co. Ltd. (Earlier AMP Sanmar Life Insurance Co. from 3.1.2002 to 29.9.2005)---12103.01.20022001-02AVIVAAviva International Holdings Ltd., UK12214.05.20022002-03Sahara Life Insurance Co. Ltd.---12706.02.20042004-05Shriram Life Insurance Co. Ltd.Sanlam, South Africa12817.11.20052005-06Bharti AXA Life Insurance Co. Ltd.AXA Holdings, France13014.07.20062006-07Future Generali India Life Insurance Company Ltd. Generali, Italy13304.09.20072007-08IDBI Fortis Life Insurance Company Ltd. Fortis, Netherlands13519.12.20072007-08Canara HSBC OBC Life Insurance Company Ltd. HSBC, UK13608.05.20082008-09AegonReligare Life Insurance Company Ltd.Religare, Netherlands13827.06.20082008-09DLF Pramerica Life Insurance Co. Ltd.Prudential of America, USA14027.06.20082008-09Star Union Dai-ichiDai-ichi Mutual Life Insurance, Japan14226.12.20082008-09IndiaFirst life insurance companyLegal & General Middle East Limited, UK14305.11.20092009-10Life Insurance Corporation of India---51201.09.19561956-57<br />LIC OF INDIA<br />Life Insurance Corporation of India (LIC) was formed in September 1956 by an Act of Parliament, LIC Act 1956 with a contribution of Rs. 50 million. <br />The then Finance Minister Mr. C. D. Deshmukh while piloting the bill for nationalization outlined the objectives of LIC thus:<br />“To conduct the business with utmost economy with the spirit of trusteeship; to charge premium no higher than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for the policy holders consistent with safety of capital; to render prompt and efficient service to policy holders thereby making Insurance widely popular”.<br />Presently the LIC has a network of seven zones; 100 divisions and 2,048 branches, personnel exceed seven lakhs employees and over six lakhs agents. <br />Vision: A trans-nationally competitive financial conglomerate of significance to societies and Pride of India. <br />Mission: To explore and enhance the quality of the life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development. <br />Values: Caring and Courtesy, Initiatives and Innovation, Integrity and Transparency, Quality and Returns, Participation and Relationship, and Trustworthiness and Reliability<br />Culture: Agility (quickness), Adaptability, Collaboration, Commitment, Discipline, Empowerment, Sensitivity, and Excellence.<br />OBJECTIVES<br />Spread Life Insurance widely and in particular to the rural areas.<br />Maximise mobilization of people’s savings by making insurance-linked savings adequately attractive.<br />Deployment of funds to the best of advantage of the investors as well as the community as whole, keeping in view national priorities and obligations of attractive return.<br />Conduct of business at most economy and with the full realisation that the money belongs to the policyholders.<br />Act as trustee of the insured public in their individual and collective capacities.<br />Meet the various life insurance needs of the community that would arise in the changing social and economic environment.<br />Involve all people working in the Corporation to the best of their capability in furthering the interests of public by providing efficient service with courtesy.<br />Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objectives.<br />,[object Object],LIC PRODUCTS contd…<br />TOTAL INVESTMENT OF LIC IN INFRASTRUCTURE<br />TOTAL INVESTMENT OF LIC IN VARIOUS SECTORS<br />GENERAL INSURANCE CORPORATION OF INDIA (GIC)<br />The General Insurance business in India was nationalized with effect from 1.1.1973 by the General Insurance Business (Nationalization) Act, 1972 and a Government company known as General Insurance Corporation of India was formed. 107 Indian and foreign insurers which were operating in the country prior to nationalization, were grouped into four operating companies namely<br />1. National Insurance Company Ltd.<br />2. Oriental Insurance Company Ltd.<br />3. New India Assurance Company Ltd.<br />4. United India Insurance Company Ltd.<br />The Government of India subscribed to the capital of GIC. GIC, in turn, subscribed to the capital of the above four companies. All the four companies are government companies registered under the Companies Act.<br />All the above four subsidiaries of GIC operate all over the country competing with one another and underwriting various classes of general insurance business except for aviation insurance of national airlines and crop insurance which is handled by the GIC<br />GIC and its subsidiaries have representation either directly or through branches in 18 countries and through associate/ locally incorporated subsidiaries in 14 other countries. A subsidiary company of GIC India International Pvt. Ltd. is operating in Singapore and their joint venture company, Kenindia Assurance Company Ltd. in Kenya. On the whole, the foreign operations of the general insurance industry have been profitable.<br />GIC was converted into India's national reinsurer from December, 2000 and all the subsidiaries working under the GIC umbrella were restructured as independent insurance companies. Indian Parliament has cleared a Bill on July 30,2002 delinking the four subsidiaries from GIC. A separate Bill has been approved by Parliament to allow brokers, cooperatives and intermediaries in the sector.<br />Currently insurance companies- both private and public has to cede 20 percent of its reinsurance with GIC. GIC is planning to increase reinsurance premium by 20 percent which works out at Rs. 3000 cr. GIC is actively considering entry into overseas markets including West Asia, South-east Asia and SAARC region.<br />TYPES AND STRUCTURE OF BUSINESS<br />General insurance policies are not financial claims.<br />There is no guarantee of renewal of policy on the same terms or on any terms.<br />The contract is short-term contract.<br />The general insurance companies do not collect savings.<br />Policy claims are unpredictable.<br />Assets are held in relatively liquid form.<br />GIC meets the requirements of industrial, manufacturing, commercial, services, household, and agricultural sectors through wide range of 115 products, granting insurance coverage. <br />GIC has been promoting insurance cover in the field of livestock, poultry, sericulture, horticulture, pump sets, and personal accidents. <br />Classification of General Insurance Business<br />Marine, (relatively less importance to India)<br />Fire, (Major business but its share is coming down) and <br />Miscellaneous(grown substantially) theft, loss, damage, etc. <br />Other Policies (non-traditional schemes)<br />Manages Comprehensive Crop Insurance Scheme introduced by the Central Govt. in 1985.<br />INVESTMENT POLICY OF GIC<br />Central Govt. securities being not less than 20%<br />State Govt. securities and other government guaranteed securities, including (1) above, being not less than 30%<br />Loans to HUDCO/DDA/GIC-HF and to state govts. For housing and firefighting equipment, not less than15%<br />Market sector not more than 55%<br />REGULATORY AUTHORITY<br />INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY<br />IRDA is formed as an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry. With the Insurance Regulatory and Development Act, the focus shifted to the following:<br />,[object Object]](data:image/gif;base64,R0lGODlhAQABAIAAAAAAAP///yH5BAEAAAAALAAAAAABAAEAAAIBRAA7)
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- 3. Policyholders' funds will be invested in the social sector and infrastructure. The percentage may be specified by the IRDA and such regulations will apply to all insurers operating in the country;
- 4. Insurers will be expected to undertake a certain percentage of business in the rural or social sector and provide policies to persons residing in rural areas, workers in the unorganized and informal economically back;
- 6. Profile of Indian Insurance Companies by IRDA.
- 7. Different statistics from http://www.rbi.org.in
- 8. Different Survey on Insurance sector conducted by IIRC.
- 9. Journals published by Insurance Regulatory & Development Authority.
- 10. Management of financial institutions by R.M. Srivastava