ASSIGNMENT
ON
INSURANCE INDUSTRY
(PRIVATE)
Submitted to
Prof. JAYAMOHAN NAIR
Submitted by
SWARNALATHA.K
I Sem. MBA
ICM IMK, Poojappura
ABSTRACT
Insurance Industry provides protection against financial losses resulting from a variety of perils. By purchasing insurance policies, individuals and businesses can receive reimbursement for losses due to uncertainty. The insurance industry consists mainly of insurance carriers (insurers) and insurance agencies and brokerages. In general, insurance carriers are large companies that provide insurance and assume the risks covered by the policy.
Insurance of any type is all about managing risk. It is as a social device to reduce or eliminate risk of life and property. Insurance may be classified into four viz, Life, Fire, Marine and Miscellaneous Insurance.
Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has completed a full circle from being an open competitive market to nationalization and back to a liberalized market again. With largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India.
This analysis on the Insurance industry covers the topics Principles of Insurance, Functions, Various Insurance Policies, Players in the Industry, Contribution of the industry to the economy and the Future or Trend of the industry.
CONTENTS
TOPIC
PAGE NO.
1. INSURANCE
• Meaning
• Definition
• Types of Insurance
3
3
4
2. HISTORY OF INDIAN INSURANCE
5
3. PRINCIPLES OF INSURANCE
8
4. FUNCTIONS OF INSURANCE
9
5. INSURANCE POLICIES
12
6. PLAYERS IN INDIAN INSURANCE SECTOR
13
7. EMPLOYMENT
15
8. CONTRIBUTION TO GROWTH
17
9. FUTURE OF INSURANCE SECTOR
18
10. CONCLUSION
19
INSURANCE
Meaning
Insurance may be described as a social device to reduce or eliminate risk of life and property. Under the plan of insurance, a large number of people associate themselves by sharing risk, attached to individual.
Definition
Insurance may be defined as “a contract, whereby one person in consideration of a certain sum known as premium agrees to pay on the happening of an event or on the expiry of a period a sum of money or to compensate the loss to the other.”
It is a contract whereby, in return for the payment of premium by the insured, the insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen events.
The risk, which can be insured against include fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may be insured against at a premium commensurate with the risk involved.
Types of Insurance
Insurance business is divided into four classes:
1. Life Insurance
2. Fire Insurance
3. Marine Insurance
4. Miscellaneous Insurance.
The Life Insurers transact life insurance business while General Insurers transact the rest.
HISTORY OF INDIAN INSURANCE
The history of the Life insurance sector in India dates back to 1818, when the Oriental Life Insurance Company was formed 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 statute to regulate the life insurance business.
• 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
• 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, viz. LIC Act, 1956, with a capital contribution of Rs.5crore 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.
Some of the important milestones in the general insurance business in India are:
• 1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.
• 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.
• 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.
• 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 company 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.
The insurance sector has opened up for private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999. A large number of companies are competing under both life and general Insurance. The FDI in this sector is 26% and the proposals have to be cleared by IRDA established to protect the interest of holder of Insurance policy and act as a regulator and facilitator in the industry.
Various types of policies and instruments are coming up in the market to attract more customers. Most of the population of India is not insured, hence there is a lot of scope in this sector and a number of companies are planning to enter the sector.
INDIAN INSURANCE: SECTOR REFORM
Formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance sector. The aim of the Malhotra Committee was to assess the functionality of the Indian insurance sector. This committee was also in charge of recommending the future path of insurance in India.
The Malhotra Committee attempted to improve various aspects of the insurance sector, making them more appropriate and effective for the Indian market.
The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body.
The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial policy changes in the insurance sector of India. It led to the formation of the Insurance Regulatory and Development Authority (IRDA) in 2000.
The goals of the IRDA are to safeguard the interests of insurance policyholders, as well as to initiate different policy measures to help sustain growth in the Indian insurance sector.
PRINCIPLES OF INSURANCE
1. Insurable Interest
Insurable interest means that the person opting for insurance must have pecuniary interest in the property he is going to get insured and will suffer financial loss on the occurrence of the insured event. This is one of the essential requirements of any insurance contract.
2. Principle of Utmost Good faith (Uberrimae Fidei)
Like in other contracts, the insurance contract must be based on good faith. If the insurance contract is obtained by way of fraud or misrepresentation it is void.
3. Material Facts Disclosure
In the Insurance contract, the proposer is required to disclose to the insurer all the material facts in respect of the proposed insurance. This duty of disclosing the material facts also includes those material facts which he is supposed to know.
4. Principle of Indemnity
According to this principle, the insurance contract should be such that in case of loss due to the eventualities mentioned in the contract, the insured should be neither better off nor worse off after receiving the insured amount. The main object of this principle is to ensure that the insured is not able to use this contract for speculation or gambling.
FUNCTIONS OF INSURANCE
The functions of Insurance can be classified as:
1. Primary Functions
2. Secondary Functions
3. Other Functions
The primary functions of insurance include the following:
• Provide Protection - The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk.
• Collective bearing of risk - Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.
• Assessment of risk - Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.
• Provide Certainty - Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.
The secondary functions of insurance include the following:
• Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc.
• Small capital to cover larger risks - Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.
• Contributes towards the development of larger industries Insurance provides development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.
The other functions of insurance include the following:
• Means of savings and investment - Insurance serves as savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance.
• Source of earning foreign exchange - Insurance is an international business. The country can earn foreign exchange by way of issue of marine insurance policies and various other ways.
• Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.
HOW DOES INSURANCE WORK?
Insurance is a technique wherein a number of people, who are exposed to similar risk, participate in the scheme and contribute in the shape of periodic premiums. Such premiums are received by the insurer who is able to pay out of the premiums received by him, for the losses of some of those who have participated in the scheme.
INSURANCE POLICIES
The Indian insurance companies offer a comprehensive range of insurance plans. The most common types include: Term life policies, Endowment policies, Joint life policies, Whole life policies, Loan cover term assurance policies, Unit-linked insurance plans, Group insurance policies, Pension plans, and Annuities. General insurance plans are also available to cover Motor insurance, Home insurance, Travel insurance and Health insurance.
Due to the growing demand for insurance, more and more insurance companies are now emerging in the Indian insurance sector. With the opening up of the economy, several international leaders in the insurance sector are trying to venture into the India insurance industry.
PLAYERS IN INDIAN INSURANCE SECTOR
Insurance companies play a key role in India's financial sector. With India's population becoming more affluent and globalized, insurance is growing rapidly. This increasing market is creating considerable competition among Indian insurance companies in an industry that 20 years ago was relatively small.
Till 01.04.2000, Insurance industry in India comprised mainly of only 2 state insurers namely:
Life Insurers
• Life Insurance Corporation of India (LIC)
General Insurers
• General Insurance Corporation of India (GIC) (with effect from December, 2000, it has been made a National Re-insurer)
GIC had four subsidiary companies, namely:
1. The Oriental Insurance Company Limited
2. The New India Assurance Company Limited,
3. National Insurance Company Limited
4. United India Insurance Company Limited.
To date, India's Insurance Regulatory and Development Authority (IRDA), has granted registration to 12 Private life insurance companies and 9 Private General insurance companies.
Private Life Insurers
• Allianz Bajaj Life Insurance Company Limited
• Birla Sun-Life Insurance Company Limited
• HDFC Standard Life Insurance Co. Limited
• ICICI Prudential Life Insurance Co. Limited
• ING Vysya Life Insurance Company Limited
• Max New York Life Insurance Co. Limited
• MetLife Insurance Company Limited
• Om Kotak Mahindra Life Insurance Co. Ltd.
• SBI Life Insurance Company Limited
• TATA AIG Life Insurance Company Limited
• AMP Sanmar Assurance Company Limited
• Dabur CGU Life Insurance Co. Pvt. Limited
Private General Insurers
• Bajaj Allianz General Insurance Co. Limited
• ICICI Lombard General Insurance Co. Ltd.
• IFFCO-Tokio General Insurance Co. Ltd.
• Reliance General Insurance Co. Limited
• Royal Sundaram Alliance Insurance Co. Ltd.
• TATA AIG General Insurance Co. Limited
• Cholamandalam General Insurance Co. Ltd.
• Export Credit Guarantee Corporation
• HDFC Chubb General Insurance Co. Ltd
EMPLOYMENT
The insurance industry had about 2.3 million wage and salary jobs in 2006. Insurance carriers accounted for 62 percent of jobs, while insurance agencies, brokerages, and providers of other insurance-related services accounted for 38 percent of jobs.
The majority of establishments in the insurance industry were small; however, a few large establishments accounted for many of the jobs in this industry. Insurance carriers tend to be large establishments, often employing 250 or more workers, whereas agencies and brokerages tend to be much smaller, frequently employing fewer than 20 workers.
Many insurance carriers’ home and regional offices are situated near large urban centers. Insurance workers who deal directly with the public are located throughout the country. Almost all of those working in sales work out of local company offices or independent agencies. Many others in the industry work for independent firms in small cities and towns throughout the country.
CONTRIBUTION TO GROWTH
The Indian Insurance sector is having a dream run. Today people have become very conscious about their future and so they are spending nearly 6 times on life insurance than they did before. The number of life insurance policies in India is the largest in the world and this sector contributes nearly 4 % in the GDP. The Indian insurance companies recorded a growth nearly 20% in premium in dollar terms, compared to the world market growth rate of only 3%.
Currently, the Indian insurance sector size is estimated at Rs.500 billion.
On account of intense marketing strategies adopted by private insurance players, the market share of state owned insurance companies like GIC, LIC and others have come down to 70% in last 4-5 years from over 97%.
The private insurance players despite the sector is still regulated has been offering Rate of Return (RoR) to its policy holders which is estimated at about 35% as against 20% of domestic insurance companies.
Private insurance companies offer many policies and the premium amount as well as the maturity period is much competitive as against those of government insurance companies. The private sector insurance players have started exploring the rural markets in which until recently, the state owned companies had the monopoly.
FUTURE OF THE INSURANCE SECTOR
Indian insurance sector is likely to register unprecedented growth of 200% and attain a size of Rs.2000 billion by 2011 from current level of Rs.500 billion.
The domestic insurance industry in India is estimated to be around US$ 60.5 billion by 2010, of which US$ 35 billion will come from rural and semi-urban areas. The life insurance market is expected to grow to US$ 35 billion while non-life insurance market will touch an estimated US$ 25 billion. The entry of foreign players has attracted an FDI of US$ 543 million.
The life insurance market premiums is like to be around US$100 billion by 2012, and its contribution to GDP is likely to rise by 6%.
A private sector insurance business will achieve a growth rate of 140% as a result of aggressive marketing technique being adopted by them against 35-40% growth rate of state owned insurance companies.
In rural markets, the share of private insurance players would increase substantially as these have been able to generate a faith among their rural consumers.
CONCLUSION
Since the Insurance sector has opened up for Private Insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999, large number of companies are competing under both Life and General Insurance. Various types of policies and instruments are also coming up in the market to attract customers. To date IRDA has granted registration to 12 Private Life insurance companies and 9 Private General insurance companies, but a lot more insurance companies are emerging in the market.
Today the Indian insurance sector is having a dream run. The number of insurance policies in India is the largest in the world and it contributed 4% to the GDP. Currently the Indian insurance sector size is estimated at Rs.500 billion and is expected to attain a size of Rs.2000 billion by 2011.
The Private sector insurance business is expected to achieve a growth of 140%. Thus it can be clearly viewed that the Private sector insurance business will have a very good market in the future. The share of these private insurance players would increase in rural market also as they have been able to generate a faith among their rural customers. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. Thus Insurance sector can enable investments in infrastructure development to sustain economic growth of the country.
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