1. An Overview of the Life Insurance Industry in India
UNIVERSITY PROJECT
“An Overview of the Life Insurance Industry in India”
Project Guide
PROF. SANDEEP CHOPDE
Project prepared by
Amit Baburao Bidaye
(Master in Financial Management)
MFM- III Year (2010-13), Semister –V
Roll No- 66
MET’S Institute of Management
Bandra (W) – Mumbai
Academic Year: 2012-2013
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2. An Overview of the Life Insurance Industry in India
Index
UNIVERSITY PROJECT......................................................................................................1
“An Overview of the Life Insurance Industry in India”.........................................................1
Project Guide..........................................................................................................................1
PROF. SANDEEP CHOPDE.................................................................................................1
Project prepared by.................................................................................................................1
Amit Baburao Bidaye.............................................................................................................1
(Master in Financial Management).........................................................................................1
MFM- III Year (2010-13), Semister –V.................................................................................1
Roll No- 66.............................................................................................................................1
MET’S Institute of Management............................................................................................1
Bandra (W) – Mumbai............................................................................................................1
Academic Year: 2012-2013....................................................................................................1
Executive Summary................................................................................................................3
Overview.................................................................................................................................5
History....................................................................................................................................5
The First Step…......................................................................................................................6
A Brief History of the Life Insurance Sector..........................................................................6
Insurance History in India .....................................................................................................7
Risk Management...................................................................................................................8
Definition of Life Insurance...................................................................................................9
Types of Insurance Companies ............................................................................................10
The Transition Of Life Insurance.........................................................................................11
The Insurance Regulatory and Development Authority (IRDA).........................................12
Life Insurance Market...........................................................................................................14
.............................................................................................................................................16
Industry Evolution................................................................................................................16
Bancassurance.......................................................................................................................19
Terminology Used................................................................................................................21
Law of Large number...........................................................................................................23
Three Principals in Insurance Industry.................................................................................24
Human Life Value................................................................................................................30
Life Insurance Products........................................................................................................31
Annuity ................................................................................................................................42
Riders ...................................................................................................................................44
Premiums .............................................................................................................................48
Underwriting.........................................................................................................................50
Financial Underwriting.........................................................................................................54
Life Insurance Accounting ..................................................................................................56
The Role of Portfolio Management:.....................................................................................58
Implications of Cost Management:.......................................................................................60
Organisational Structure .....................................................................................................61
Departments in a Life Office ............................................................................................65
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3. An Overview of the Life Insurance Industry in India
The Role of actuary in a Life Office.....................................................................................67
Macro Economic Scenario & Insurance Industry Prospects................................................69
Conclusion............................................................................................................................73
Bibliography.........................................................................................................................75
Executive Summary
In India, insurance has a deep-rooted history. It finds mention in the writings of
Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ).
The writings talk in terms of pooling of resources that could be re-distributed in
times of calamities such as fire, floods, epidemics and famine. This was probably a
pre-cursor to modern day insurance. Ancient Indian history has preserved the
earliest traces of insurance in the form of marine trade loans and carriers’
contracts. Insurance in India has evolved over time heavily drawing from other
countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment
of the Oriental Life Insurance Company in Calcutta. This Company however failed
in 1834. In 1829, the Madras Equitable had begun transacting life insurance
business in the Madras Presidency. 1870 saw the enactment of the British
Insurance Act and in the last three decades of the nineteenth century, the Bombay
Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the
Bombay Residency. This era, however, was dominated by foreign insurance offices
which did good business in India, namely Albert Life Assurance, Royal Insurance,
Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance
Companies in India. The Indian Life Assurance Companies Act, 1912 was the first
statutory measure to regulate life business. In 1928, the Indian Insurance
Companies Act was enacted to enable the Government to collect statistical
information about both life and non-life business transacted in India by Indian and
foreign insurers including provident insurance societies. In 1938, with a view to
protecting the interest of the Insurance public, the earlier legislation was
consolidated and amended by the Insurance Act, 1938 with comprehensive
provisions for effective control over the activities of insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However,
there were a large number of insurance companies and the level of competition
was high. There were also allegations of unfair trade practices. The Government of
India, therefore, decided to nationalize insurance business.
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4. An Overview of the Life Insurance Industry in India
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 had monopoly till the late 90s when
the Insurance sector was reopened to the private sector.
This millennium has seen insurance come a full circle in a journey extending to
nearly 200 years. The process of re-opening of the sector had begun in the early
1990s and the last decade and more has seen it been opened up substantially. In
1993, the Government set up a committee under the chairmanship of RN Malhotra,
former Governor of RBI, to propose recommendations for reforms in the insurance
sector.The objective was to complement the reforms initiated in the financial
sector. The committee submitted its report in 1994 wherein , among other things, it
recommended that the private sector be permitted to enter the insurance industry.
They stated that foreign companies be allowed to enter by floating Indian
companies, preferably a joint venture with Indian partners.
Following the recommendations of the Malhotra Committee report, 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.
The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the country’s
GDP. A well-developed and evolved insurance sector is a boon for economic
development as it provides long- term funds for infrastructure development at the
same time strengthening the risk taking ability of the country
IRDA regulations and norms for the allocation of funds need to have a
comprehensive look. In the phase of declining interest rates and rising inflation the
funds need to be applied in productive areas so as to generate high returns. Also in
terms of clients servicing areas such as premium payments, after sales service,
policy dispatch, redressal of grievances has to be amended. In the current scenario,
LIC has to provide flexible products suited to the customers requirements. Also a
proper and systematic risk management strategy needs to be adopted. After the
increase in terrorism and destructive events around the global world such as
September 11 attack on World Trade Centre, US – Taliban war, US – Iraq war etc...
An alternative to reinsurance such as asset backed securities is emerging out in the
developed economies. Catastrophe bonds are one of the alternatives for
reinsurance.
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5. An Overview of the Life Insurance Industry in India
Finally some policies such as pure term and pension schemes needs to be
addressed massively at both the urban and the rural segment so as to generate
high premium income which will help in the development and growth of the
economy.
Overview
The purpose of Insurance is to cover Risk and the means of its existence in turn is
Risk Management. All pervasive concepts, Risk Management is the bedrock of
growth, survival and stability for organizations where increasing awareness and
involvement of top management is evidenced in the process of establishing a "Risk
Management Framework".
With the opening up of the insurance industry to the private sector in India, a
plethora of opportunities with its attachment of 'Risk and Reward' has come across
for all those associated with the insurance industry and more specifically, the
insurance companies themselves.
Time and again, history has revealed that major events were bound to happen and
should and could have been avoided by means of an effective Risk Management
Framework. However, there will always be surprises, for Risk Management is a
'Continuum' where surprises add to the learning process and effectively reinforce
the framework. Certain events are beyond organizational control and
organizations can only take alternate mitigating steps, but cannot avoid the event.
Risks can be either transferred or retained. Either way, the objective is to minimize
the losses expected to arise from the risks. Insurance Companies being the key risk
transferees, who in turn retain based on risk appetite, have to exercise extreme due
diligence in their risk management practices and establish a strong Risk
Management Framework to ensure adequate solvency and their survival.
History
Almost 4500 years ago, in the ancient land of Babylonia, traders used to bear risk
of caravan trade by giving loans that had to be later repaid with interest when the
goods arrived safely. In 2100 BC, the code of Hammurabi granted legal status to
the practice. That, perhaps, was how insurance made its beginning.
Life Insurance had its origins in ancient Rome, where citizenes formed burial clubs
that would meet the funeral expense of its members as well as help survivors by
making some payments.
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6. An Overview of the Life Insurance Industry in India
In 1347, in Genoa, European maritime nations entered into the earliest known
insurance contract and decided to accept marine insurance as a practice.
The First Step…
Insurance as we know it today owes its existance to 17th century England. In fact, it
began taking shape in 1688 at a rather interesting place called Lloyd’s Coffe House
in London, where merchants, ship owners and underwriters met to discuss and
transact business. By the end of the 18th century, Lloyed’s had brewed enough
business to become one of the first modern insurance companies.
In India
Many may not be aware that the life insurance industry of India is as old as it is
in any other part of the world. Insurance in India can be tracked back to Vedas. For
instance, yogakshema, the name of Life Insurance Corporation of India’s corporate
headquarters, is derived from the Rig Veda. The term suggests that a form of
“community insurance “was prevalent around 1000 BC and practiced by the
Aryans. The history of life insurance in India dates back to 1818 when it was
conceived as a means to provide for English Widows. Interestingly in those days a
higher premium was charged for Indian lives than the non-Indian lives, as Indian
lives were considered more risky for coverage.
A Brief History of the Life Insurance Sector
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:
1912: The Indian Life Assurance Companies Act enacted as the first statue to
regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to enable the government to
collect satisfied information about both life and non life insurance business.
1938: Earlier legislation consolidated and amended to by the Insurance Act with
the objective of protecting the interests of the insuring public.
1956: 245 Indian and foreign insurers and provident societies taken over by the
central government and nationalized. LIC formed by an Act of parliament,
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7. An Overview of the Life Insurance Industry in India
viz. LIC Act, 1956 with a capital contribution of Rs. 5 corer from the
Government of India.
1968: The Insurance Act amended to regulate investment and set minimum
solvency margins and the Tariff Advisory Committee set up.
Insurance History in India
Insurance History in India
Registering the
Private Insurance
Amended Companies ,16 new
Insurance Act entrants
Bombay Mutual new
Assurance entrants
Society IRDA Act
1870 1912 1938 1956 2000 2002 2007
Insurance Act
LIC of India
5 new
entrants
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8. An Overview of the Life Insurance Industry in India
Risk Management
 Risk Management is a scientific approach to the problem of dealing with the
pure risks faced by the individuals and business.
 Risk management deals with insurable and uninsurable risk & the choice of
the appropriate techniques for dealing with them.
 The emphasis in risk management is on reducing the cost of handling risk
by whatever means that are considered most appropriate & insurance is one
of several alternatives for minimising the pure risk faced by the firm.
 The primary objective of risk management effort is to preserve the
operating effectiveness of the organisations; to make sure that it is not
prevented from attaining its goals by the losses arises from pure risk. The
second objective is the humanitarian goal of protecting employees from an
accident that might result in death or serious injury.
 Risk identification is the first important step in risk management.
 The next step is the analysis & measurement of risk to know the severity of
risk and its frequency.
 The next step is Risk Assessment in terms of frequency, its monetary cost &
human cost.
 Decision to deal with the risk could be any one of the following
 To retain the risk
 To deal with the risk through loss prevention
 To transfer the risk through insurance
 The last step in Risk management is evaluation & review based on
experience & business situation.
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9. An Overview of the Life Insurance Industry in India
Definition of Life Insurance
 “A contract that provides compensation for specific losses in exchange for a
periodic payment.”
 “An individual contract is known as an insurance policy, and the periodic
payment is known as an insurance premium.”
 “A system under which individuals, businesses, and other organizations or
entities, in exchange for payment of a sum of money (called a premium), are
guaranteed compensation for losses resulting from certain perils under
specified conditions in a contract.”
Hence Insurance is
 A sharing device
 Contribution of many used to share losses suffered by few
 Loss should occur as a result of natural calamities
 No gains to be made out of insurance.
The Insurance Act 1938 does not contain a definition of life insurance contract. But
section 2(11) of the Act defines life insurance business as follows.
“Life Insurance Business” means the business of effecting contracts of insurance
upon human life, including any contract whereby the payment of money is
assured on death (except death by accident only) or the happening of any
contingency dependent on human life, and any contract which is subject to
payment of premiums for a term dependent on human life and shall be deemed
to include—
a) The granting of disability and double or triple indemnity accident
benefits, if so provided in the contract of insurance.
b) The granting of annuities upon human life, and
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10. An Overview of the Life Insurance Industry in India
c) The granting of Superannuation allowance and annuities payable
out of any fund applicable solely to the relief and maintenance of
persons engaged or who have been engaged in any particular
profession, trade or employment or of the dependents of such
person.
Types of Insurance Companies
Insurance companies may be classified as:
• Life insurance companies -Sell life insurance, annuities and pensions
products.
• Non-life or general insurance companies -Sell other types of insurance.
In most countries, life and non-life insurers are subject to different regulatory
regimes and different tax and accounting rules.
The main reason for the distinction between the two types of company is that life,
annuity, and pension business is very long-term in nature — coverage for life
assurance or a pension can cover risks over many decades. By contrast, non-life
insurance covers usually a shorter period, such as one year.
Reinsurance Companies: Reinsurance companies are companies that sell policies
to other companies, so that those companies can protect themselves from huge
losses. Companies with a lot of fund have conquered the reinsurance market
today.
Captive Insurance Companies- Captive Insurance Companies are the insurance
companies that have been established for a particular reason for financing risk. In
short these Companies are an in house self insurance vehicle. They provide
coverage of risk that is neither available nor offered by usual insurance companies
in the market at reasonable price. They are also known as “insurance consultants”.
Like the mortgage brokers the insurance consultant companies are paid a fee by
the customers to buy the best insurance policy from the best company.
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11. An Overview of the Life Insurance Industry in India
The Transition Of Life Insurance
Effect of introducing competition
* Figures are of FY 07 – 08 Source: Life insurance Council
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12. An Overview of the Life Insurance Industry in India
The Insurance Regulatory and Development Authority (IRDA)
Reforms in insurance sector were initiated with passage of IRDA Bill in parliament
in Dec 1999.The IRDA since its incorporation as a statutory body in April 2000 has
fastidiously stuck to its schedule of framing regulations and registration private
sector insurance companies. The other decision taken simultaneously to support
insurance sector and in particular the life insurance companies was the launch of
IRDA’s online service for the issue and launch of renewal of licenses to the agents.
The approval of institutions for imparting training to the agents has also ensured
that insurance companies would have a trained workforce of insurance agents in
place to sell their products.
Duties, Powers and Functions of IRDA:
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.
(1) Subject to the provisions of this Act and any other law for the time being in
force, the Authority shall have the duty to regulate, promote and ensure orderly
growth of the insurance business and re-insurance business.
(2) Without prejudice to the generality of the provisions contained in sub-section 1,
the powers and functions of the Authority shall include, -
(a) Issue to the applicant a certificate of registration, renew, modify,
withdraw, suspend or cancel such registration.
(b) Protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policy holders, insurable interest,
settlement of insurance claim, surrender value of policy and other terms
and conditions of contracts of insurance.
(c) Specifying requisite qualifications, code of conduct and practical training
for intermediary or insurance intermediaries and agents.
(d) Specifying the code of conduct for surveyors and loss assessors.
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13. An Overview of the Life Insurance Industry in India
(e) Promoting efficiency in the conduct of insurance business.
(f) Promoting & regulating professional organizations connected with
insurance & re-insurance business.
(g) Levying fees and other charges for carrying out the purposes of this Act.
(h)Calling for information from, undertaking inspection of, conducting
enquiries and investigations including audit of the insurers, intermediaries,
insurance intermediaries and other organizations connected with the
insurance business.
(i)Control and regulation of the rates, advantages, terms and conditions that
may be offered by insurers in respect of general insurance business not so
controlled and regulated by the Tariff Advisory Committee under section
64U of the Insurance Act, 1938 (4 of 1938).
(j) Specifying the form and manner in which books of account shall be
maintained and statement of accounts shall be rendered by insurers and
other insurance intermediaries.
(k) Regulating investment of funds by insurance companies.
(l) Regulating maintenance of margin of solvency.
(m) Adjudication of disputes between insurers and intermediaries or
insurance intermediaries.
(n) Supervising the functioning of the Tariff Advisory Committee.
(o) Specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organizations referred
to in clause (f).
(p) Specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or social
sector and
(q) Exercising such other powers as may be prescribed
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