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Introduction

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INTRODUCTION

Life Insurance:

Life Insurance could be defined as a policy that will pay a specified sum to beneficiaries

upon the death of the insured. It is an agreement that guarantees the payment of a stated

amount of monetary benefits upon the death of the insured. Life Insurance could be said

as protection against the death of the insured in the form of payment to a designated

beneficiary, typically a family member or business.

It is basically risk insurance intended as protection against the financial

consequences of the death of the insured person which takes the form of payment of a

previously agreed lump sum or pension to a beneficiary, if the insured person dies during

the term of insurance. In the case of pure life insurance, without any endowment

insurance component, no payments are due if the insured person survives the term of

insurance.

In big terms Life Insurance is a contract agreement between the certificate holder

and the insurance company, providing a specified sum to beneficiaries upon the death of

the insured. It is a coverage that pays out a set amount of money to specified beneficiaries

upon the death of the individual who is insured. It is a policy that will pay a specified

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sum to beneficiaries upon the death of the insured. There are many types of life

insurance, including whole life, term life, universal life, etc. It is an insurance relating to

a risk depending on human life. This includes contracts providing payment on the insured

person's death, endowments providing payment either on survival to a specified date or

on earlier death and annuities which are paid throughout the annuitant's lifetime but cease

on death.

According to an article on site life-line.org Life insurance is the foundation of a

sound financial plan. It provides financial security for your family by protecting your

financial resources, such as your present and future income, against the uncertainties of

life.

More specifically, life insurance provides cash to the family after death. This cash

(the death benefit) replaces the income one would have provided and can meet many

important financial needs. It can help pay the mortgage, run the household, send kids to

college, and ensure that dependents are not burdened with debt. The proceeds from a life

insurance policy could mean that the family won't have to sell assets to pay outstanding

bills or taxes. And also that there is no federal income tax on life insurance benefits.

Most people with dependents need life insurance. While there's no substitute for

evaluating specific situation, one rule of thumb is to buy life insurance equivalent to five

to ten times ones annual gross income. To determine how much, if any, life insurance one

needs, then start by gathering all personal financial information and estimating what the

family will need after one is gone, including ongoing expenses (such as day care, tuition,

or retirement) and immediate expenses at the time of death (like medical bills, burial

costs, and estate taxes). The family also may need funds to help them readjust: perhaps to

finance a move, or pay expenses while job hunting. Choosing a life insurance product is

an important decision, but it can be complicated. As with any major purchase, it is

important that one should understand his or her family's needs.

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Type of Insurance companies

Insurance companies may be classified into two groups:

Life insurance companies, which sell life insurance, annuities and pensions

products.

Non-life, General, or Property/Casualty insurance companies, which sell other

types of insurance.

General insurance companies can be further divided into these sub categories.

Standard Lines

Excess Lines

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 cover usually covers a shorter period, such as one year.

In the United States, standard line insurance companies are "mainstream" insurers. These

are the companies that typically insure autos, homes or businesses. They use pattern or"cookie-cutter" policies without variation from one person to the next. They usually have

lower premiums than excess lines and can sell directly to individuals. They are regulated

by state laws that can restrict the amount they can charge for insurance policies.

Excess line insurance companies (also known as Excess and Surplus) typically insure

risks not covered by the standard lines market. They are broadly referred as being all

insurance placed with non-admitted insurers. Non-admitted insurers are not licensed in

the states where the risks are located. These companies have more flexibility and canreact faster than standard insurance companies because they are not required to file rates

and forms as the "admitted" carriers do. However, they still have substantial regulatory

requirements placed upon them. State laws generally require insurance placed with

surplus line agents and brokers not to be available through standard licensed insurers.

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Insurance companies are generally classified as either mutual or stock companies. Mutual

companies are owned by the policyholders, while stockholders (who may or may not own

policies) own stock insurance companies. Demutualization of mutual insurers to form

stock companies, as well as the formation of a hybrid known as a mutual holding

company, became common in some countries, such as the United States, in the late 20th

century.

Other possible forms for an insurance company include reciprocals, in which

policyholders 'reciprocate' in sharing risks, and Lloyd's organizations.

Insurance companies are rated by various agencies such as A. M. Best. The ratings

include the company's financial strength, which measures its ability to pay claims. It also

rates financial instruments issued by the insurance company, such as bonds, notes, and

securitization products.

Reinsurance companies are insurance companies that sell policies to other insurance

companies, allowing them to reduce their risks and protect themselves from very large

losses. The reinsurance market is dominated by a few very large companies, with huge

reserves. A reinsurer may also be a direct writer of insurance risks as well.

Captive insurance companies may be defined as limited-purpose insurance companies

established with the specific objective of financing risks emanating from their parentgroup or groups. This definition can sometimes be extended to include some of the risks

of the parent company's customers. In short, it is an in-house self-insurance vehicle.

Captives may take the form of a "pure" entity (which is a 100% subsidiary of the self-

insured parent company); of a "mutual" captive (which insures the collective risks of

members of an industry); and of an "association" captive (which self-insures individual

risks of the members of a professional, commercial or industrial association). Captives

represent commercial, economic and tax advantages to their sponsors because of the

reductions in costs they help create and for the ease of insurance risk management and

the flexibility for cash flows they generate. Additionally, they may provide coverage of

risks which is neither available nor offered in the traditional insurance market at

reasonable prices.

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The types of risk that a captive can underwrite for their parents include property damage,

public and product liability, professional indemnity, employee benefits, employers'

liability, motor and medical aid expenses. The captive's exposure to such risks may be

limited by the use of reinsurance.

Captives are becoming an increasingly important component of the risk management and

risk financing strategy of their parent. This can be understood against the following

background:

Heavy and increasing premium costs in almost every line of coverage;

Difficulties in insuring certain types of fortuitous risk;

Differential coverage standards in various parts of the world;

Rating structures which reflect market trends rather than individual loss

experience;

Insufficient credit for deductibles and/or loss control efforts.

There are also companies known as 'insurance consultants'. Like a mortgage broker, these

companies are paid a fee by the customer to shop around for the best insurance policy

amongst many companies. Similar to an insurance consultant, an 'insurance broker' also

shops around for the best insurance policy amongst many companies. However, with

insurance brokers, the fee is usually paid in the form of commission from the insurer that

is selected rather than directly from the client.

Neither insurance consultants nor insurance brokers are insurance companies and no risks

are transferred to them in insurance transactions. Third party administrators are

companies that perform underwriting and sometimes claim handling services for

insurance companies. These companies often have special expertise that the insurance

companies do not have.

The financial stability and strength of an insurance company should be a major

consideration when buying an insurance contract. An insurance premium paid currently

provides coverage for losses that might arise many years in the future. For that reason,

the viability of the insurance carrier is very important. In recent years, a number of

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insurance companies have become insolvent, leaving their policyholders with no

coverage (or coverage only from a government-backed insurance pool or other

arrangement with less attractive payouts for losses). A number of independent rating

agencies provide information and rate the financial viability of insurance companies.

Global insurance industry

Global insurance premiums grew by 3.4% in 2010 to reach $4.3 trillion. For the first time

in the past three decades, premium income declined in inflation-adjusted terms, with non-

life premiums falling by 0.8% and life premiums falling by 3.5%. The insurance industry

is exposed to the global economic downturn on the assets side by the decline in returns on

investments and on the liabilities side by a rise in claims. So far the extent of losses on

both sides has been limited although investment returns fell sharply following the

bankruptcy of Lehman Brothers and bailout of AIG in September 2008. The financial

crisis has shown that the insurance sector is sufficiently capitalised. The vast majority of

insurance companies had enough capital to absorb losses and only a small number turned

to government for support.

Advanced economies account for the bulk of global insurance. With premium income of

$1,753bn, Europe was the most important region in 2008, followed by North America

$1,346bn and Asia $933bn. The top four countries generated more than a half of

premiums. The US and Japan alone accounted for 40% of world insurance, much higher

than their 7% share of the global population. Emerging markets accounted for over 85%

of the worlds population but generated only around 10% of premiums. Their markets are

however growing at a quicker pace.

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PRINCIPALSOFINSURANCE

Insurance involves pooling funds from many insured entities (known as exposures) in

order to pay for relatively uncommon but severely devastating losses which can occur to

these entities. The insured entities are therefore protected from risk for a fee, with the fee

being dependent upon the frequency and severity of the event occurring. In order to be

insurable, the risk insured against must meet certain characteristics in order to be

an insurable risk. Insurance is a commercial enterprise and a major part of the financial

services industry, but individual entities can also self-insure through saving money for

possible future losses.

Insurability

Risks which can be insured by private companies typically share seven common

characteristics.

1. Large number of similar exposure units. Since insurance operates through

pooling resources, the majority of insurance policies are provided for individual

members of large classes, allowing insurers to benefit from the law of large

numbers in which predicted losses are similar to the actual losses. Exceptions

include Lloyd's of London, which is famous for insuring the life or health of

actors, actresses and sports figures. However, all exposures will have particular

differences, which may lead to different rates.

2. Definite Loss. The loss takes place at a known time, in a known place, and from a

known cause. The classic example is death of an insured person on a life

insurance policy. Fire, automobile accidents, and worker injuries may all easily

meet this criterion. Other types of losses may only be definite in theory.

Occupational disease, for instance, may involve prolonged exposure to injurious

conditions where no specific time, place or cause is identifiable. Ideally, the time,

place and cause of a loss should be clear enough that a reasonable person, with

sufficient information, could objectively verify all three elements.

3. Accidental Loss. The event that constitutes the trigger of a claim should be

fortuitous, or at least outside the control of the beneficiary of the insurance. The

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loss should be pure, in the sense that it results from an event for which there is

only the opportunity for cost. Events that contain speculative elements, such as

ordinary business risks, are generally not considered insurable.

4. Large Loss. The size of the loss must be meaningful from the perspective of the

insured. Insurance premiums need to cover both the expected cost of losses, plus

the cost of issuing and administering the policy, adjusting losses, and supplying

the capital needed to reasonably assure that the insurer will be able to pay claims.

For small losses these latter costs may be several times the size of the expected

cost of losses. There is little point in paying such costs unless the protection

offered has real value to a buyer.

5. Affordable Premium. If the likelihood of an insured event is so high, or the cost

of the event so large, that the resulting premium is large relative to the amount of

protection offered, it is not likely that anyone will buy insurance, even if on offer.

Further, as the accounting profession formally recognizes in financial accounting

standards, the premium cannot be so large that there is not a reasonable chance of

a significant loss to the insurer. If there is no such chance of loss, the transaction

may have the form of insurance, but not the substance. (See the U.S. Financial

Accounting Standards Boardstandard number 113)

6. Calculable Loss. There are two elements that must be at least estimable, if not

formally calculable: the probability of loss, and the attendant cost. Probability of

loss is generally an empirical exercise, while cost has more to do with the ability

of a reasonable person in possession of a copy of the insurance policy and a proof

of loss associated with a claim presented under that policy to make a reasonably

definite and objective evaluation of the amount of the loss recoverable as a result

of the claim.

7. Limited risk of catastrophically large losses. Insurable losses are

ideally independent and non-catastrophic, meaning that the one losses do not

happen all at once and individual losses are not severe enough to bankrupt the

insurer; insurers may prefer to limit their exposure to a loss from a single event to

some small portion of their capital base, on the order of 5 percent. Capital

constrains insurers' ability to sell earthquake insurance as well as wind insurance

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in hurricane zones. In the U.S., flood riskis insured by the federal government. In

commercial fire insurance it is possible to find single properties whose total

exposed value is well in excess of any individual insurers capital constraint.

Such properties are generally shared among several insurers, or are insured by a

single insurer who syndicates the risk into the reinsurance market.

Legal

When a company insures an individual entity, there are basic legal requirements. Several

commonly cited legal principles of insurance include: [3]

1. Indemnity the insurance company indemnifies, or compensates the insured in

the case of certain losses only up to the insured's interest

2. Insurable interest the insured typically must directly suffer from the loss

3. Utmost good faith the insured and the insurer are bound by a good faith bond

of honesty and fairness

4. Contribution insurers which have similar obligations to the insured contribute

in the indemnification, according to some method

5. Subrogation the insurance company acquires legal rights to pursue recoveries

on behalf of the insured; for example, the insurer may sue those liable for

insured's loss

6. Causa Proxima or Proximate Cause the cause of loss (the "peril") must be

covered under the insuring agreement of the policy, and dominant cause must not

be excluded

Indemnification

To "indemnify" means to make whole again, or to be put in the position that one was in,

to the extent possible, prior to the happening of a specified event or peril. Accordingly,life insurance is generally not considered to be indemnity insurance, but rather

"contingent" insurance (i.e., a claim arises on the occurrence of a specified event). There

are generally two types of insurance contracts that seek to indemnify an insured:

1. An "indemnity" policy and

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2. A "pay on behalf" or "on behalf of"[4] policy.

The difference is significant on paper, but rarely material in practice.

An "indemnity" policy will never pay claims until the insured has paid out of pocket to

some third party; for example, a visitor to your home slips on a floor that you left wet and

sues you for $10,000 and wins. Under an "indemnity" policy the homeowner would have

to come up with the $10,000 to pay for the visitor's fall and then would be "indemnified"

by the insurance carrier for the out of pocket costs (the $10,000)[4][5]

Under the same situation, a "pay on behalf" policy, the insurance carrier would pay the

claim and the insured (the homeowner) would not be out of pocket for anything. Most

modern liability insurance is written on the basis of "pay on behalf" language .

An entity seeking to transfer risk (an individual, corporation, or association of any type,

etc.) becomes the 'insured' party once risk is assumed by an 'insurer', the insuring party,

by means of a contract, called an insurance 'policy'. Generally, an insurance contract

includes, at a minimum, the following elements: the parties (the insurer, the insured, the

beneficiaries), the premium, the period of coverage, the particular loss event covered, the

amount of coverage (i.e., the amount to be paid to the insured or beneficiary in the event

of a loss), and exclusions (events not covered). An insured is thus said to be

"indemnified" against the loss covered in the policy.

When insured parties experience a loss for a specified peril, the coverage entitles the

policyholder to make a 'claim' against the insurer for the covered amount of loss as

specified by the policy. The fee paid by the insured to the insurer for assuming the risk is

called the 'premium'. Insurance premiums from many insurers are used to fund accounts

reserved for later payment of claimsin theory for a relatively few claimantsand

foroverhead costs. So long as an insurer maintains adequate funds set aside for

anticipated losses (i.e., reserves), the remaining margin is an insurer'sprofit.

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Insurers business model

Underwriting and investing

The business model can be reduced to a simple equation: Profit = earned premium +

investment income - incurred loss - underwriting expenses

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to insure and

decide how much in premiums to charge for accepting those risks;

2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the underwriting of policies.

Using a wide assortment of data, insurers predict the likelihood that a claim will be made

against their policies and price products accordingly. To this end, insurers use actuarial

science to quantify the risks they are willing to assume and the premium they will charge

to assume them. Data is analyzed to fairly accurately project the rate of future claims

based on a given risk. Actuarial science uses statistics and probability to analyze the risksassociated with the range of perils covered, and these scientific principles are used to

determine an insurer's overall exposure. Upon termination of a given policy, the amount

of premium collected and the investment gains thereon minus the amount paid out in

claims is the insurer's underwriting profit on that policy. Of course, from the insurer's

perspective, some policies are "winners" (i.e., the insurer pays out less in claims and

expenses than it receives in premiums and investment income) and some are "losers"

(i.e., the insurer pays out more in claims and expenses than it receives in premiums and

investment income); insurance companies essentially use actuarial science to attempt to

underwrite enough "winning" policies to pay out on the "losers" while still maintaining

profitability.

An insurer's underwriting performance is measured in its combined ratio which is the

ratio of losses and expenses to premiums. A combined ratio of less than 100 percent

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indicates underwriting profitability, while anything over 100 indicates an underwriting

loss. A company with a combined ratio over 100% may nevertheless remain profitable

due to investment earnings.

Insurance companies earn investmentprofits on float. Float or available reserve isthe amount of money, at hand at any given moment that an insurer has collected in

insurance premiums but has not paid out in claims. Insurers start investing insurance

premiums as soon as they are collected and continue to earn interest or other income on

them until claims are paid out. TheAssociation of British Insurers (gathering 400

insurance companies and 94% of UK insurance services) has almost 20% of the

investments in the London Stock Exchange.

In the United States, the underwriting loss ofproperty and casualty insurance companies

was $142.3 billion in the five years ending 2003. But overall profit for the same period

was $68.4 billion, as the result of float. Some insurance industry insiders, most

notably Hank Greenberg, do not believe that it is forever possible to sustain a profit from

float without an underwriting profit as well, but this opinion is not universally held.

Naturally, the float method is difficult to carry out in an economically depressed

period. Bear markets do cause insurers to shift away from investments and to toughen up

their underwriting standards. So a poor economy generally means high insurance

premiums. This tendency to swing between profitable and unprofitable periods over time

is commonly known as the "underwriting" orinsurance cycle.

Property and casualty insurers currently make the most money from their auto insurance

line of business. Generally better statistics are available on auto losses and underwriting

on this line of business has benefited greatly from advances in computing. Additionally,

property losses in the United States, due to unpredictable natural catastrophes, have

exacerbated this trend.

Claims

Claims and loss handling is the materialized utility of insurance; it is the actual "product"

paid for, though one hopes it will never need to be used. Claims may be filed by insureds

directly with the insurer or through brokers or agents. The insurer may require that the

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claim be filed on its own proprietary forms, or may accept claims on a standard industry

form such as those produced by ACORD.

Insurance company claims departments employ a large number ofclaims

adjusters supported by a staff ofrecords management and data entry clerks. Incomingclaims are classified based on severity and are assigned to adjusters whose settlement

authority varies with their knowledge and experience. The adjuster undertakes a thorough

investigation of each claim, usually in close cooperation with the insured, determines if

coverage is available under the terms of the insurance contract, and if so, the reasonable

monetary value of the claim, and authorizes payment. Adjusting liability insurance claims

is particularly difficult because there is a third party involved, the plaintiff, who is under

no contractual obligation to cooperate with the insurer and may in fact regard the insurer

as a deep pocket. The adjuster must obtain legal counsel for the insured (either inside

"house" counsel or outside "panel" counsel), monitor litigation that may take years to

complete, and appear in person or over the telephone with settlement authority at a

mandatory settlement conference when requested by the judge.

If a claims adjuster suspects underinsurance, the condition of average may come into play

to limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of

customer satisfaction, administrative handling expenses, and claims overpayment

leakages. As part of this balancing act, fraudulent insurance practices are a major

business risk that must be managed and overcome. Disputes between insurers and

insureds over the validity of claims or claims handling practices occasionally escalate

into litigation; see insurance bad faith.

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Types of Life Insurance

Generally fall into two categories:

1. Term Insurance

2. Permanent Insurance

Term Life Insurance

Term Life Insurance is a type of insurance policy whereby the insured pays a fixed sum

for a period of time. This sum remains constant. The premium charged is very nominal.

The Policy holders normally survive even after its expiry unless they are affected by fataldisease or injured in an accident. This policy does not cost much. Once the policy expires

the insured is also at liberty to renew the same but he will have to pay the revised rates of

premium. Such a change could sometimes be too high. This is one of the drawbacks of

this policy. But for this factor, it is economical and highly recommended for the salaried

youth and middle men. Whole term insurance policy is another classification in term life

insurance. In a whole term insurance the insured pays the fixed amount throughout his

life.

The different categories of term life insurance policy are as follows:-

Group Term Life Insurance

This type of insurance is taken by the employer for his employees. The employer either

pays the premiums from his kitty or by deducting the appropriate amount from the salary

of individual employees. This policy provides lot of benefits but it cannot be relied solely

to meet your insurance needs. This type of insurance is gaining significance in the

developing countries.

Level term Life Insurance

This type of insurance requires you to select a particular period and pay premiums for the

selected period. The policy automatically matures on the attainment of the selected

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period. Once you select the term say 5 10 or 15 years you cannot revoke it. This type of

insurance is ideal for those people who are not able to make long term financial plans.

Permanent insurance

Permanent Life Insurance is an expensive Policy. This Policy cannot be stopped on any

occasion as long as the premiums are paid regularly and you don't want to end the policy.

In a permanent Life Insurance policy you pay premiums for an indefinite period

irrespective of the fact they exceed the amount to be distributed to your dependents in

case of death.

Such surplus will be deposited by the company in a separate account. They will yield

higher returns if the company performs well. A share of the profits is periodically

dispatched to you. You have the option of raising loans out of those funds or accumulate

them back in the account. In case you decide to end the policy you will paid back with

the surrender value .If the insurer decides to retain the profits made from your investment

with him then you are not required to pay income tax for that amount. There is a

possibility like, when you withdraw certain amount of money within the given limit you

need not pay income tax for that amount. But when you deposit money in the bank you

have to pay income tax irrespective of the fact you utilize it or not.

If the insurer decides to retain the profits made from your investment with him then you

are not required to pay income tax for that amount. There is a possibility like, when you

withdraw certain amount of money within the given limit you need not pay income tax

for that amount. But when you deposit money in the bank you have to pay income tax

irrespective of the fact you utilize it or not.

It is however advised not to choose permanent insurance if your motive is solely

investments and tax exemptions. In that case it is advised to invest in some form of cheap

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investments and make use of other financial instruments for saving tax because the basic

objective of insurance is neither investment nor tax exemption.

Important features of Insurance:

State insurance departments regulate the type of investments companies are

permitted to make;

Investment profiles of companies differ depending on what type of insurance

they underwrite;

Each state enforces laws to protect consumers against unfair discrimination in

the provision of insurance;

Consumers who do not qualify for property insurance in the private marketmay obtain it through insurance industry operated plans;

The insurance industry does not benefit from federal deposit insurance. Insurance

companies pay for insolvencies in the industry through a system of state Guaranty

Funds.

Advantages & Disadvantages of Life Insurance

Life insurance, too many, is a necessary evil. Many policyholders swear by it to protect

their families from loss of income and hefty debt obligations in the event of their

untimely death. With several types of life insurance on the market, generally speaking,

two varieties still remain the most popular: term and whole life, or "cash value" life

insurance. Both varieties have pros and cons.

Identification

Cash value life insurance are policies where in which premiums are used to pay for the

cost of insurance, while a portion is placed into attached investment vehicles that grow

over time. Some popular cash value life insurance products include variable life, whole

life, universal life and paid-up insurance. Despite minor differences, these insurance

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plans are essentially the same. All cash value life insurance policies contain a death

benefit and a cash account that's added to when a client makes a premium payment.

Term life insurance is significantly different than its cash value counterpart. Term life

insurance does not contain a cash value account. Premiums are used solely to pay for the

cost of coverage. These premiums maintain the level of coverage for a specific "term." At

the end of a policy's term, a new policy must be purchased.

Benefits

Both cash value life and term life insurance have their benefits. The most significant

benefit of cash value life insurance is its ability to offer coverage for the entire life of the

policyholder. Many people take advantage of buying this type of insurance when they are

young when they need it most. Cash value accounts may also be borrowed against or

drawn from during the life of the policy. Policyholders are also not required to pay taxes

on any interest or earnings attached to cash value accounts.

Individuals and corporations also benefit from term life insurance. The biggest advantage

of term life is the often very cheap premiums, especially when a person is young and

healthy. It is possible, in many situations, to purchase significantly large face value

amounts for monthly costs of $20 to $30. Term life is good for covering obligations that

will eventually end, such as mortgages, automobile loans and educational needs.

Warning

With the benefits of both cash value and term life insurance come a few disadvantages.

The most significant disadvantage of cash value life insurance is the often inconsistency

in premiums. Most cash value policies contain required premiums that can increase over

time. This can make the policy quite expensive for someone on a budget who wishes to

purchase enough coverage to benefit his family in the event of his death.

Although many policies contain riders in which dividends from cash accounts can be

used to pay premiums, such an instance almost always results in taking funds away from

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the cash value or investment account. There is also never a guarantee that sufficient funds

will be available to cover missed premiums in the event a policyholder falls short.

There are also several disadvantages of term insurance, the first being that it is not

permanent. Although a policyholder may enjoy extremely cheap premiums when she isyoung, term products expire after a certain number of years, or when the insured reaches

a certain age. When a policy expires, a new one must be purchased. This means that a

person must qualify for a new program based on her current age and health in order for

coverage to continue. This almost always results in much higher premiums or

Uninsurability. Some term insurance does, however, contain "re-up" or "renewal" options

that may not require proof of that the customer is insurable to continue coverage.

Misconceptions

When we think of life insurance, we think of a death benefit being paid to a beneficiary

upon the death of a policyholder. Although this is true, it is important to know that with

some insurance, especially many cash value policies, it's often not that simple.

With many cash value life policies, only a single payout is made upon a policyholder's

death, regardless of what the cash value account is worth when he dies. For example, if

an individual owns a whole life policy with a death benefit of $100,000 and a cash value

account worth $25,000, it is common for beneficiaries to expect a payout of $125,000.

This is commonly not the case. In this example, a beneficiary would commonly only

receive a total of $100,000. Because the cash value account is worth $25,000, the

insurance company would only pay $75,000 as a death benefit, with the other $25,000

coming from the cash value account. With some products, however, beneficiaries are, in

fact, entitled to receive death benefits in addition to cash value accounts when their loved

one dies. However, usually an amount equal to the policy's face value is paid upon death.It is important to know this information before purchasing cash value life insurance.

Considerations

It is recommended that you consult with an experienced insurance agent before buying

life insurance. It is important to find a life product that is tailored to the specific needs of

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the individual policyholder and his family. For example, an individual may only need to

protect his family from large mortgage obligations for 10 or 15 years. If an individual

wishes to be covered by a policy for the remainder of his life, then a cash value policy

may be in order.

Research also shows that using life insurance policies as investment vehicles is not a wise

move. Long term, it is much more profitable to buy term insurance and take advantage of

low premiums and invest in mutual funds or stocks that are not attached to insurance

policies.

Effects on Society

Insurance can have various effects on society through the way that it changes who bears

the cost of losses and damage. It can increase fraud. On the other hand, it can help

societies and individuals prepare for catastrophes and mitigate the effects of catastrophes

on both households and societies.

Insurance can influence the probability of losses through moral hazard,insurance fraud,

and preventive steps by the insurance company. Insurance scholars have typically

used morale hazard to refer to the increased loss due to unintentional carelessness and

moral hazard to refer to increased risk due to intentional carelessness or indifference.

[6] Insurers attempt to address carelessness through inspections, policy provisions

requiring certain types of maintenance, and possible discounts for loss mitigation efforts.

While in theory insurers could encourage investment in loss reduction, some

commentators have argued that in practice insurers had historically not aggressively

pursued loss control measures - particularly to prevent disaster losses such as hurricanes -

because of concerns over rate reductions and legal battles. However, beginning around

1996 insurers began to take a more active role in loss mitigation throughbuilding codes.

Insurance and its Benefit to Society

A benefit society or mutual aid society is an organization or voluntary association formed

to provide mutual aid, benefit or insurance for relief from sundry difficulties. Such

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organizations may be formally organized with charters and established customs, or may

arise ad hoc to meet unique needs of a particular time and place.

Benefit societies can be organized around a shared ethnic background, religion,

occupation, geographical region or other basis. Benefits may include money or assistancefor sickness, retirement, education, birth of a baby, funeral and medical expenses,

unemployment. Often benefit societies provide a social or educational framework for

members and their families to support each other and contribute to the wider community.

Examples of benefit societies include trade unions, friendly societies, credit unions, self-

help groups, landsmanshaftn, immigrant hometown societies, Fraternal organizations

such as Freemasons and Oddfellows and many others. Peter Kropotkin posited early in

the 20th century that mutual aid affiliations predate human culture and are as much a

factor in evolution as is survival of the fittest.

A benefit society can be characterized by-

Members having equivalent opportunity for a say in the organization

Members having potentially equivalent benefits.

Aid would go to those in need (strong helping the weak)

Collection fund for payment of benefits

Educating others about a group's interest

Preserving cultural traditions

Mutual defense

Many of the features of benefit organizations today have been assimilated into

organizations that rely on the corporate and political structures of our time. Insurance

companies, religious charities, credit unions and democratic governments now performmany of the same functions that were once the purview of ethnic or culturally affiliated

mutual benefit associations.

But new technologies have provided yet more new opportunities for humanity to support

itself through mutual aid. Recent authors have described the networked affiliations that

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produce collaborative projects such as Wikipedia as mutual aid societies. In

modern Asia rotating credit associations organized within communities or workplaces

were widespread through the early 20th century and continue in our time. [1]Habitat for

Humanity in the United States is a leading example of shared credit and labor pooled to

help low-income people afford adequate housing.

In post-disaster reactions, formal benefit societies of our time often lend aid to others

outside their immediate membership, while ad hoc benefit associations form among

neighbours or refugees. Ad hoc mutual aid associations have been seen organized among

strangers facing shared challenges at such disparate settings as the Woodstock Music and

Arts Festival in New York in 1969, during the Beijing Tiananmen square protests of

1989,for neighbourhood defence during the Los Angeles Riots of 1992,and work of the

organization Common Ground Collective which formed in New Orleans afterHurricane

Katrina in 2005. The Rainbow Family organizes gatherings in National Forests of

the United States each year around age old models of ad hoc mutual aid.

Controversies

Religious concerns

Muslim scholars have varying opinions about insurance. Insurance policies that earn

interest are generally considered to be a form ofriba (usury) and some consider even

policies that do not earn interest to be a form ofgharar(speculation). Some argue

thatghararis not present due to the actuarial science behind the underwriting.

Jewish rabbinical scholars also have expressed reservations regarding insurance as an

avoidance of God's will but most find it acceptable in moderation.

Some Christians believe insurance represents a lack of faith and there is a long history of

resistance to commercial insurance in Anabaptist communities (Mennonites,Amish, Hutt

rites, Brethren in Christ) but many participate in community-based self-insurance

programs that spread risk within their communities.

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Insurance insulates too much

By creating a "security blanket" for its insureds, an insurance company may

inadvertently find that its insureds may not be as risk-averse as they might otherwise be

(since, by definition, the insured has transferred the risk to the insurer), a concept known

as moral hazard. To reduce their own financial exposure, insurance companies have

contractual clauses that mitigate their obligation to provide coverage if the insured

engages in behavior that grossly magnifies their risk of loss or liability.

For example, life insurance companies may require higher premiums or deny coverage

altogether to people who work in hazardous occupations or engage in dangerous sports.

Liability insurance providers do not provide coverage for liability arising from intentional

torts committed by or at the direction of the insured. Even if a provider were so irrational

as to want to provide such coverage, it is against the public policy of most countries to

allow such insurance to exist, and thus it is usually illegal.

Complexity of insurance policy contracts

Insurance policies can be complex and some policyholders may not understand all the

fees and coverages included in a policy. As a result, people may buy policies on

unfavorable terms. In response to these issues, many countries have enacted detailed

statutory and regulatory regimes governing every aspect of the insurance business,including minimum standards for policies and the ways in which they may be

advertised and sold.

For example, most insurance policies in the English language today have been carefully

drafted inplain English; the industry learned the hard way that many courts will not

enforce policies against insureds when the judges themselves cannot understand what

the policies are saying.

Many institutional insurance purchasers buy insurance through an insurance broker.

While on the surface it appears the broker represents the buyer (not the insurance

company), and typically counsels the buyer on appropriate coverage and policy

limitations, it should be noted that in the vast majority of cases a broker's compensation

comes in the form of a commission as a percentage of the insurance premium, creating a

conflict of interest in that the broker's financial interest is tilted towards encouraging an

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insured to purchase more insurance than might be necessary at a higher price. A broker

generally holds contracts with many insurers, thereby allowing the broker to "shop"

the market for the best rates and coverage possible.

Insurance may also be purchased through an agent. Unlike a broker, who represents thepolicyholder, an agent represents the insurance company from whom the policyholder

buys. An agent can represent more than one company.

An independent insurance consultant advises insureds on a fee-for-service retainer,

similar to an attorney, and thus offers completely independent advice, free of the

financial conflict of interest of brokers and/or agents. However, such a consultant must

still work through brokers and/or agents in order to secure coverage for their clients.

Redlining

Redlining is the practice of denying insurance coverage in specific geographic areas,

supposedly because of a high likelihood of loss, while the alleged motivation is unlawful

discrimination. Racial profiling orredlining has a long history in the property insurance

industry in the United States. From a review of industry underwriting and marketing

materials, court documents, and research by government agencies, industry and

community groups, and academics, it is clear that race has long affected and continues to

affect the policies and practices of the insurance industry.

In July, 2007, The Federal Trade Commission released a report presenting the results of a

study concerning credit-based insurance scores and automobile insurance. The study

found that these scores are effective predictors of the claims that consumers will file.

All states have provisions in their rate regulation laws or in their fair trade practice acts

that prohibit unfair discrimination, often called redlining, in setting rates and making

insurance available.

In determining premiums and premium rate structures, insurers consider quantifiable

factors, including location, credit scores, gender, occupation, marital status,

and education level. However, the use of such factors is often considered to be unfair or

unlawfully discriminatory, and the reaction against this practice has in some instances led

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to political disputes about the ways in which insurers determine premiums and regulatory

intervention to limit the factors used.

An insurance underwriter's job is to evaluate a given risk as to the likelihood that a loss

will occur. Any factor that causes a greater likelihood of loss should theoretically becharged a higher rate. This basic principle of insurance must be followed if insurance

companies are to remain solvent. Thus, "discrimination" against (i.e., negative differential

treatment of) potential insureds in the risk evaluation and premium-setting process is a

necessary by-product of the fundamentals of insurance underwriting. For instance,

insurers charge older people significantly higher premiums than they charge younger

people for term life insurance. Older people are thus treated differently than younger

people (i.e., a distinction is made, discrimination occurs). The rationale for the

differential treatment goes to the heart of the risk a life insurer takes: Old people are

likely to die sooner than young people, so the risk of loss (the insured's death) is greater

in any given period of time and therefore the risk premium must be higher to cover the

greater risk. However, treating insureds differently when there is no actuarially sound

reason for doing so is unlawful discrimination.

What is often missing from the debate is that prohibiting the use of legitimate, actuarially

sound factors means that an insufficient amount is being charged for a given risk, and

there is thus a deficit in the system. The failure to address the deficit may mean

insolvency and hardship for all of a company's insureds. The options for addressing the

deficit seem to be the following: Charge the deficit to the other policyholders or charge it

to the government (i.e., externalize outside of the company to society at large).

Insurance patents

New assurance products can now be protected from copying with a business method

patent in the United States.

A recent example of a new insurance product that is patented is Usage Based auto

insurance. Early versions were independently invented and patented by a major U.S. auto

insurance company, Progressive Auto Insurance (U.S. Patent 5,797,134) and a Spanish

independent inventor, Salvador Minguijon Perez (EP patent 0700009).

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Many independent inventors are in favor of patenting new insurance products since it

gives them protection from big companies when they bring their new insurance products

to market. Independent inventors account for 70% of the new U.S. patent applications in

this area.

Many insurance executives are opposed to patenting insurance products because it creates

a new risk for them. The Hartford insurance company, for example, recently had to pay

$80 million to an independent inventor, Bancorp Services, in order to settle a patent

infringement and theft of trade secret lawsuit for a type of corporate owned life insurance

product invented and patented by Bancorp.

There are currently about 150 new patent applications on insurance inventions filed per

year in the United States. The rate at which patents have issued has steadily risen from 15

in 2002 to 44 in 2010.

Inventors can now have their insurance U.S. patent applications reviewed by the public in

the Peer to Patentprogram. The first insurance patent application to be posted

was US2009005522 Risk Assessment Company. It was posted on March 6, 2009. This

patent application describes a method for increasing the ease of changing insurance

companies.

The insurance industry and rent seeking

Certain insurance products and practices have been described as rent seekingby

critics. That is, some insurance products or practices are useful primarily because of legal

benefits, such as reducing taxes, as opposed to providing protection against risks of

adverse events. Under United States tax law, for example, most owners ofvariable

annuities and variable life insurance can invest their premium payments in the stock

market and defer or eliminate paying any taxes on their investments until withdrawals are

made. Sometimes this tax deferral is the only reason people use these products. Anotherexample is the legal infrastructure which allows life insurance to be held in an irrevocable

trust which is used to pay an estate tax while the proceeds themselves are immune from

the estate tax.

BENEFITS OF LIFE INSURANCE

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Life insurance, especially tailored to meet the financial needs of customers.

Need for Life Insurance

Today, there is no shortage of investment options for a person to choose from. Modernday investments include gold, property, fixed income instruments, mutual funds and of

course, life insurance. Given the plethora of choices, it becomes imperative to make the

right choice when investing your hard-earned money. Life insurance is a unique

investment that helps you to meet your dual needs - saving for life's important goals, and

protecting your assets.

Let us look at these unique benefits of life insurance in detail:-

Asset Protection

From an investor's point of view, an investment can play two roles - asset appreciation or

asset protection. While most financial instruments have the underlying benefit of asset

appreciation, life insurance is unique in that it gives the customer the reassurance of asset

protection, along with a strong element of asset appreciation.

The core benefit oflife insurance is that the financial interests of ones family remain

protected from circumstances such as loss of income due to critical illness or death of the

policyholder. Simultaneously, insurance products also have a strong inbuilt wealth

creation proposition. The customer therefore benefits on two counts and life insurance

occupies a unique space in the landscape of investment options available to a customer.

Goal based savings

Each of us has some goals in life for which we need to save. For a young, newly married

couple, it could be buying a house. Once, they decide to start a family, the goal changes

to planning for the education or marriage of their children. As one grows older, planning

for one's retirement will begin to take precedence.

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Clearly, as your life stage and therefore your financial goals change, the instrument in

which you invest should offer corresponding benefits pertinent to the new life stage.

Life insurance is the only investment option that offers specific products tailor made for

different life stages. It thus ensures that the benefits offered to the customer reflect the

needs of the customer at that particular life stage, and hence ensures that the financial

goals of that life stage are met.

Life Stage

Primary Need Life Insurance Product

Young & Single Asset creation Wealth creation plans

Young & Justmarried

Asset creation & protectionWealth creation and mortgageprotection plans

Married with kidsChildren's education, Assetcreation and protection

Education insurance, mortgageprotection & wealth creation plans

Middle aged withgrown up kids

Planning for retirement &asset protection

Retirement solutions & mortgageprotection

Across all life-

stagesHealth plans Health Insurance

1. Superior to Any Other Savings Plan:

Unlike any other saving plan, a life insurance policy affords full protection

against risk of death. In the event of death of a policyholder, the insurance company

makes available the full sum assured to the policyholders near and dear ones. In

comparison, any other saving plan would amount to the total saving accumulated till date.

If the death occurs prematurely, such savings can be much lesser than the sum assured.

Evidently, the potential financial loss to the family of the policyholder is sizable.

2. Encourages and Forces Thrift:

A savings deposit can be easily withdrawn. The payment of life insurance

premiums, however, is considered sacrosanct and is viewed with the same seriousness as

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the payment of interest on a mortgage. Thus, a life insurance policy in effect brings about

compulsory savings.

3. Easy Settlement and Protection against Creditors:

A life insurance policy is the only financial instrument the proceeds of which can

be protected against the claims of a creditor of the assured by effecting a valid

assignment of the policy.

4. Administering the Legacy for Beneficiaries:

Speculative or unwise expenses quickly cause the proceeds to be squandered.

Several policies have foreseen this possibility and provide for payments over a period of

years or in a combination of installments and lump sum amounts.

5. Ready Marketability and Suitability for Quick Borrowing:

A life insurance policy can, after a certain time period (generally three years), be

surrender for a cash value. The policy is also acceptable as a security for a commercial

loan, for example, a student loan. It is particularly advisable for housing loans when an

acceptable LIC policy may also cause the lending institution to give loan at lower interest

rates.

6. Disability Benefits:

Death is only the hazard that is insured; many policies also include disability

benefits. Typically, these provide for waiver of future premiums and payments of

monthly installments spread over certain time period.

7. Accidental Death Benefits:

Many policies can also provide for an extra sum to be paid (typically equal to the

sum assured) if death occurs as a result of accident.

8. Tax Relief:

Under the Indian Income Tax Act, the following tax relief is available:

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(a) 20% of the premium paid can be deducted from your total income tax liability.

(b) 100% of the premium paid is deductible from your total taxable income. When

these benefits are factored in, it is found that most policies offer returns that are

comparable/or even better than other saving modes such as PPF, NSC etc. Moreover, the

cost of insurance is a very negligible.

Working of Insurance Business

Insurance companies receive premium from a large number of people buying

insurance. The more customers an insurer has, the lower the premiums can be, and theless likely that insurer is to take a loss that wipes everyone out.

Insurance is fundamental to every aspect of modern life and commerce.

INSURANCE AS AN INVESTMENT TOOL:

Insurance invests in the economy. Insurance provides funds to help businesses

grow and create jobs. Premium funds that are not immediately needed are lent to

government and businesses. Lending to municipalities, in the form of bonds, provides

local governments across the United States with the means to build, maintain and repair

municipal infrastructure schools, roads, bridges, sewers, airports.. Funds are also lent

to businesses, providing them with the means to purchase buildings, equipment and

supplies. Along with housing interests, the insurance industry is probably the most active

voluntary investor in low- and moderate-income communities, particularly those located

in urban areas. Compared to less-developed countries, the developed countries enjoy a

higher standard of living, partly because these funds are available from insurance

companies.

Support the provision of credit

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Insurance provides support for credit. Even though mortgage lenders approve an

applicant for a home loan based on the applicants credit worthiness, most lenders also

require that the dwelling be covered by homeowners insurance. Likewise, a business

applying for a loan to purchase inventory might be required to show that the inventory is

insured before the loan is granted.

Reduces anxiety

Insurance also reduces anxiety because the insured knows insurance will provide

indemnification if a covered loss occurs. By shouldering the burden of unexpected or

catastrophic losses, insurance helps businesses avoid bankruptcy and keeps workers

employed and local economies healthy. It also contributes to a stable society where

people can plan for the future without an undue fear of catastrophic loss.

Insurance and Risk Management Planning

Insurance and Risk Management Planning is the process of identifying the source

and extent of an individuals risk of financial, physical, and personal loss, and developing

strategies to manage exposure to risk and minimize the probability and amount of

potential loss.

Insurance and Risk Management Planning in the Context of Personal Financial

Planning

In personal financial planning (PFP), risk management and insurance planning

results in clients who are aware of the range of significant risks to their financial well-

being and who are adequately and properly protected from the loss that could result fromthose risks. Periodic reviews help clients understand that life changes, such as a job

change or divorce, affect risk management and insurance coverage.

Risk Management Strategies

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Risk Management is much broader than the purchase of insurance policies, involving

strategies such as:

Riskavoidanceis just that, avoiding the risk associated with a specific task, activityor project. Often, following the review of a contract, it is determined that a project is

just too risky. The client may decide not to bid the work at all, or remove that element

of the work from their bid, sometimes using an alternate deduct to delineate the

exclusion. Risk avoidance is strictly a business decision, and sometimes a very good

strategy if construction documents are unclear, ambiguous or incomplete.

Risk Abatement is the process of combining loss prevention or loss control to

minimize a risk. This risk management strategy serves to reduce the loss potential anddecrease the frequency or severity of the loss. Risk abatement is preferably used in

conjunction with other risk management strategies, since using this risk management

method alone will not totally eliminate the risk.

Risk Retention is a good strategy only when it is impossible to transfer the risk. Or,

based on an evaluation of the economic loss exposure, it is determined that the

diminutive value placed on the risk can be safely absorbed. Another consideration in

retaining a risk is when the probability of loss is so high that to transfer the risk, it

would cost almost as much as the cost of the worst loss that could ever occur, i.e., if

there is a high probability of loss, it may be best to retain the risk in lieu of

transferring it.

Risk Transfer is the shifting of the risk burden from one party to another. This can

be done several ways, but is usually done through conventional insurance as a risk

transfer mechanism, and through the use of contract indemnification provisions.

Risk Allocation is the sharing of the risk burden with other parties. This is usually

based on a business decision when a client realizes that the cost of doing a project is

too large and needs to spread the economic risk with another firm. Also, when a client

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lacks a specific competency that is a requirement of the contract, e.g., design

capability for a design-build project. A typical example of using a risk allocation

strategy is in the formation of a joint venture.

Insurance as a Risk Management Strategy

Insurance is just one aspectbut a very critical aspectof risk management

planning. A key aspect of insurance planning understands what is available from

insurance companies to assist in offsetting the economic losses associated with a

particular risk. From this point you can assist your clients to inventory what risks are to

be protected, identify gaps in coverage, evaluate alternative insurance policies, and select

and acquire the appropriate policies.

How Insurance Companies Work

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Unlike banks, insurance companies are chartered to provide insurance. They

generally do not extend credit and are often precluded from doing so by law and

regulation. Because property/casualty policies are short-term usually one-year state insurance laws require most property/casualty investments to be short-term and

highly liquid. Legally permissible investments include cash, mutual funds, Treasury

bills and notes, mortgage-backed securities, specified types of debt securities, and

preferred stock. Generally, property and casualty insurers cannot invest in real estate,

other than their own buildings and property.

To illustrate the short-term nature of property/casualty investments, consider

that in an average year, out of $100 paid in homeowners premiums, the industrypays out $74 in claims. 3 The remainder goes to agent commissions, administrative

expenses, operating costs, and, in good years, policyholder protection funds 4 which

protect against future catastrophic loss. When catastrophes strike, such as fires,

hurricanes, or earthquakes a greater percentage of premiums will be paid out in

claims. Over time, customers receive back the vast majority of premiums in claims

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payments. The billions of dollars paid by the industry in claims is itself

"reinvestment" in the local community when disaster strikes. This reinvestment not

only benefits policyholders, it benefits the people who rebuild the structure after the

tornado, fix the car damaged by hail or sell the appliances and cabinets needed to

repair the kitchen damaged by fire. Life insurance companies primarily issue life

insurance policies and annuities. Policyholder premiums are invested in compliance

with state insurance laws for the benefit of policyholders to ensure that the company

can meet its obligations under the terms of the policies. As they do for

property/casualty companies, state insurance laws establish the types and amounts of

permissible investments for life companies.

Legally permissible investments include cash, mutual funds, Treasury bills

and notes, mortgage-backed securities, corporate stock and other types of equity and

debt securities, loans, and real estate. Reflecting the long-term nature of a life

insurance policy, life insurance companies generally are permitted longer-term

investments than those permitted for property/casualty companies.

How Insurance is regulated

Insurance regulation is conducted by each state through its department of

insurance, run by a commissioner or director who may be elected, or appointed by

the governor. Insurance departments are charged with regulating the safety and

soundness of insurance companies and consumer protection. Primarily the home

state regulator, who leads safety and soundness examinations and reviews

investments and the adequacy of policy reserves, conducts safety and soundness

regulation. Each state regulator must license any company that wants to do business

in his or her state, and review and approve rates and policy forms to be used by any

licensed company. Unlike banks and thrifts, most insurance companies have no

geographic community. Insurance companies must be "domiciled" in a single state

and are primarily regulated by the home state regulator. They must be licensed in

every state in which they do business. However, there may be no connection between

a companys physical location and its home state or other states in which it is

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licensed. For example, an insurance company may be domiciled in Illinois, have its

headquarters in California, and be licensed for business in 40 states. In the case of

automobile insurance, the company likely would have claims offices and perhaps

agents in each of the states in which it is licensed. In the case of more specialized

coverage such as directors and officers liability insurance, a company may not have

a physical presence in any of its licensed states.

In a competitive environment, some insurance company failures will

inevitably occur. However, unlike banks, thrifts and credit unions, the insurance

industry does not have a government-backed fund to handle insolvency. Instead,

each state has a life insurance guaranty fund and a property/casualty insurance

company guaranty fund. The guaranty funds ensure that the insolvent company is

retired from the market in an orderly manner that gives maximum protection to the

public.

Development of Insurance in India

A thriving insurance sector is of vital importance to every modern economy. Firstbecause it encourages the savings habit, second because it provides a safety net to rural

and urban enterprises and productive individuals. And perhaps most importantly it

generates long-term investible funds for infrastructure building. The nature of the

insurance business is such that the cash inflow of insurance companies is constant while

the payout is deferred and contingency related.

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This characteristic of their business makes insurance companies the biggest

investors in long-gestation infrastructure development projects in all developed and

aspiring nations. This is the most compelling reason why private sector (and foreign)

companies which will spread the insurance habit in the societal and consumer interest are

urgently required in this vital sector of the economy.

With the nation's infrastructure in a state of imminent collapse, India couldn't have

afforded to be lumbered with sub-optimally performing monopoly insurance companies

and therefore the passage of the Insurance Regulatory & Development Authority Bill on

December 2, 1999 heralds an era of cautious optimism where stakes are high for all

parties concerned. For the Govt. of India, Foreign Direct Investment (FDI) must pour in

as anticipated; for foreign insurers, investments must start yielding returns and for the

domestic insurance industry - their market penetration should remain intact. On the

fringe, the customer is pondering whether all the hype created on liberalization will

actually benefit him.

The IRDA Bill provides for the establishment of an authority to protect the

interests of the holders of insurance policies, to regulate, promote and insure orderly

growth of the insurance industry and amend the Insurance Act, 1938, the Life Insurance

Act, 1956 and the General Insurance Business (Nationalization) Act, 1972. The bill

allows foreign equity stake in domestic private insurance companies to a maximum of 26

per cent of the total paid-up capital and seeks to provide statutory status to the insurance

regulator. Before privatization, insurance business in India was pegged at $ 6.6 Billion

whereas industry leaders expected at that time that privatization will increase it to $ 40

Billion within next 3-5 years.

HISTORYOFTHE INSURANCESECTOR

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

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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 th

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