Insurance

Chapter 16: Insurance
singhneeraj1995@yahoo.com

To understand:
1. Meaning and principles of insurance
2. Origin and development of insurance
3. Opening up of the insurance sector in India
4. Insurance Regulatory and Development Authority (IRDA)
5. Health Insurance
6. Insurance Intermediaries
7. Risk Management in Insurance
8. General Insurance
9. Reinsurance
10. Micro- insurance
11. General Insurance Corporation of India
12. Non- life Insurance sector
13. Life insurance
14. Life Insurance Corporation of India
15. Life Insurance Industry
Chapter Objectives

: A social device to reduce and eliminate risk
of loss to life and property
Principles:
: Principle of Uberrima fides
: Principle of Indemnity
: Doctrine of Subrogation
: Principle of Causa Proxima
: Principle of insurable interest

- About 4500 years ago in Babylonia
- First insurance contract entered into by
European maritime nations in 1347
- Lloyds – first modern insurance company
- First fire insurance company set up in
1967
- Oldest life insurance company : Society for
the Equitable Assurance of Lives and
Survivorship in 1756
- Mortality tables constructed in seventeenth
century

- Found in the Rigveda
- Practised by Aryans around 1000 BC
- Oriental Life insurance company – the first to be set up in India
- First Indian insurance company – the Bombay Mutual Life Assurance
Society set up in 1870
- Insurance Act enacted in 1570
- Life Insurance Companies Act promulgated in 1912
- Insurance Act, 1938 enacted for both life and non life
- By the mid 1950s : 154 Indian insurers, 16 foreign insurers and 75
provident fund societies
- LIC set up in 1956 by taking over 245 life insurance companies
- Nationalisation of general insurance in 1972
- R N Malhotra Committee set up in 1993
- Insurance sector thrown open to private sector in 2000

: Constituted on April 19, 2000
: IRDA Act enacted in 1999
:Objectives of IRDA
a. Policy holder protection
b. Healthy growth of the insurance market
:Constituted the Insurance Advisory Committee and issued
regulations in areas of:
Registration of insurers
Conduct of insurers
Solvency of reinsurance business
lLicensing
Code of conduct of intermediaries

Steps taken to protect the interest of policy holders
- Notified the regulations in 2002
- Specified the file and use procedure
- Constitution of a cell to look into public grievances
- Customers consulted for policy decisions
- Consumer representative on Insurance company‟s board
- Disclosure of Information
- Introduced Third Party Administrators
- Brokers licensed as intermediaries
- Ombudsman in Insurance

- Minimum capital of Rs.100 crore for a
stand-alone health insurance business
- Companies offer riders
- Third Party Administrators (TPAs) are
distributors

Agents
Surveyors and Loss Assessors
Brokers
Third party Administrators
Bancassurance
Alternate channels: Direct marketing
Automobile manufacturer tie ups
Forex dealers
Work site marketing
Internet
Departmental stores/ Retailers of white goods
Marine Cargo Insurance through clearing and forwarding agents/
transporters/ carrier companies

 The various contexts in which the term risk is used in the
insurance industry are given below.
 a. It is used to describe the property or person insured. For
e.g. a
 cotton ginning and pressing factory is a bad risk.
 b. It is also used to refer to a peril like fire, earthquake or
death.
 For e.g. rash driving increases the risk of accidental death.
 c. Again risk is also used to refer to hazard, which is a
situation
 that may give rise to a loss. For e.g. accumulation of
 inflammable material in a process block is „risky‟.

 Peril is the event or occurrence that leads to a loss. Thus fire, vehicular
accident, breakdown of machinery and natural calamities like cyclone or
landslides are perils that cause a loss.
 Hazard on the other hand is a condition or situation that increases the
probability of loss. In other words hazard increases the chances of a peril
striking thus increasing the probability of loss. Hazard is classified into two
broad categories as mentioned below.
 a. Physical Hazard refers to a physical condition that increases the chance of
loss like storage of inflammable material near an electric transformer in an
industry or driving vehicles with worn out brake liners.
 b. Moral Hazard refers to a situation where the insured out of dishonesty or
recklessness increases the chances or aggravates the amount of loss. This is
a situation encountered in most classes of non-life insurance and can start
from inflation of loss and go up to staging of accidents in order to fructify a
claim.

 Lack of incentive for the insured to control
losses because of existence of insurance
that guarantees complete financial
protection against all losses, is another
dimension of moral hazard. This
phenomenon, in modern literature is often
referred to as morale hazard. As opposed to
moral hazard, there is no express element
of dishonesty or fraud involved but only an
unconscious and subtle indifference
towards loss control, that can creep in
because of insurance.

 a. Financial Risks. debt financing results in financial risks.
 b. Interest Risks. Fluctuations in interest rates in addition to affecting the
availability of debt capital also affects the present value of the debt already
contracted and thereby the profitability of the debtor organization. This is
called interest risk.
 c. Credit Risks. This risk arises in the counter party‟s willingness and ability
to perform the contractual obligation. order to overcome this risk the lender
(or the vendor) charges some “premium” in terms of higher interest (in case
of loan) or higher price of goods (in case of sale on credit).
 d. Price Risks. The risk posed by upward or downward movements in price of
raw material purchased or the finished goods sold by an organization is
called the price risk.
 e. Operational Risks. Operations comprise of the day-to-day activities of the
organization in terms of production, processes and procedures in accordance
with the strategy, channel and culture of the organizations. Disruptions in
operational flow due to failure of internal systems or natural calamities
results in financial losses due to operational risks. These risks are more
sensitive for service intensive industries like banking, insurance and telecom.

 f. Market Risks. An organization generally
invests funds in securities including equity
market. The changes in the value of an
organization‟s investment portfolio as a
result of securities market behavior is called
market risk. Thus a particular investment
position or portfolio is likely to yield gains
or losses within a particular range known as
Value at Risk. This VaR is the paramount
indicator of market risk.

 a) Dynamic and Static Risks. The risks that
change their dimension with a change in
economic scenario are dynamic risks.
Unemployment, inflation, poverty, etc. are
dynamic risks. The risks that are indifferent
to economy like natural disasters and fire
accidents are static risks. Static risks are
easily insurable since they are independent
of economic factors and thus are easier to
rate.

- Risk emanating from both internal and external environment
- Unanticipated changes such as:
changes in demographic structure
information explosion
volatility in financial markets
deregulation in insurance industry
volatility risks in reinsurance markets
rapid growth of financial services
regulatory changes
de-tariffing of premium structures

Risk management strategies:
Diversification of assets and liabilities
Selective underwriting
Hedging in derivatives market
Risk adjusted pricing targets
Setting up underwriting risk classification
Reinsurance

- For short- term coverage
- Nationalised on January 1, 1973
- At present four nationalised and nine private sector general
insurance companies
- GIC now an Indian reinsurer
- Products : Fire Insurance
Motor Insurance
Marine Cargo Insurance
Marine Hull Insurance
Non Traditional/Rural Insurance
Weather insurance

- Statutory body created under the Insurance
Act, 1938
- Looks into pricing of non-life insurance
products
- Marine, hull insurance detariffed from April
1, 2005
- Motor insurance to be detariffed from
January 2007
- Tariff regime to be gradually phased out

- Ratio of free capital to be the total
business done by a company. A solvency
ratio of 1.5 times the normal requirements
- A minimum solvency margin of Rs.50 crore
(Rs.100 crore in the case of a reinsurer ) or
a sum equivalent of 20% of net premium
income or a sum equivalent to 30% of net
incurred claims whichever is higher.

- Primary insurer transfers a part or all of the risks
to another insurer
- Uses: To increase the company‟s underwriting
capacity
: To spread risks
: To obtain advice and assistance
: To stabilise profits
: To provide protection against catastrophic
losses
: To retire from the business

Types : Facultative and Treaty
Reinsurance Treaties:
Quota share treaty
Surplus share treaty
Excess of loss treaty
Reinsurance pool
GIC – the official Reinsurer

Insurance to the poor
Draft regulations:
Term and endowment insurance : minimum
sum assured Rs.10,000 and a maximum of
Rs.50,000
Health insurance : Maximum sum assured
Rs.15,000

- Commenced business in Jan 1, 1973 for
superintending, controlling and carrying on the
business of general insurance
- In November 2000, notified as the Indian
Reinsurer
- All domestic insurers to cede 20% of the gross
direct premium in India
- Offers crop insurance- now transferred to
Agricultural Insurance Company of India
- Its four subsidiaries now function as board-
managed companies

- A long term contract which provides a sense
of security to the assured and his family
- Satisfies five needs : Dying young, living too
long, disability, care for children and wealth
generation
- Total players 14 ( 1 public sector and 13
private sector)

Endowment plan
Money back plan
Whole life policies
Term Insurance policies
Pension Plans
Unit-linked insurance plans

- Safeguards the insured‟s family against an
untimely death
- Means of compulsory savings
- Source of income during old age
- Helps in meeting certain periodic financial
needs
- Improves life of the insured‟s family
- Takes care of disabilities
- Brings in tax benefits u / s 88 of the
Income Tax Act

- To maintain an excess of value of its
assets over the amount of its liabilities of
not less than Rs.50 crore ( Rs.100 crore in
the case of a reinsurer )
OR
-A sum equivalent not exceeding 5% of the
mathematical reserves & a percentage not
exceeding 1% of the sum at risk for the
policies on which the sum at risk is not
negative which ever is the highest.

Set up on Sept 1, 1956 by nationalising 154
Indian insurers, 16 foreign insurers and 75
provident funds
Objectives:
Spreading life insurance
Mobilising savings
Deploying funds effectively
Strong distribution net work consisting of 7
zonal offices, 100 divisional offices, 2048
branch offices and 8.5 lakh agents

Subsidiaries: LIC (International) EC
Overseas Ventures
LIC Mutual fund
Products : Individual Plans
Group Schemes
Social Security Group
Insurance
Schemes
Pension Plans
Market leader : Share of over 90% in policies sold and
80% in premium levels

THANK YOU………

Insurance

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