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DISSERTATION PROJECT REPORT ONA COMPARATIVE ANALYSIS OF LIFE INSURANCE CORPORATION AND PRIVATE INSURANCE COMPANIES

Report submitted in partial fulfillment of the requirements for Post Graduate in Management

PROJECT GUIDE: Prof. Usha Kiran Rai FMS BHU

SUBMITTED BY: Shashank Tripathi MBA IV Sem (Finance) FMS BHU


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CONTENTSØ Acknowledgement Ø Introduction § Concept of Insurance § Global Insurance Industry § Performance of Indian Industry § Insurance sector reforms in India § New avenues for growth of the Insurance industry Ø Research Methodology § Research Objectives § ResearchDesign § Research Process § Limitations of the Study § Significance of the study Ø Analysis and Interpretation Ø Findings & Conclusions Ø References

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ACKNOWLEDGEMENTI must acknowledge my indebtedness to various personalities, but for whom, thisproject could not have seen the light of the day.

I am profoundly grateful to Prof. Usha Kiran Rai, Faculty of Management Studies, BHU who agreed to become my mentor and guide for the project and gave me the opportunity to work on this project. I am also grateful, for her support and guida

nce throughout this project with valuable information and giving me a better insight of the things, without which the successful culmination of this project would not have been possible. Not only did she inspired me throughout the progressof the project, but, also motivated me to get an insight into the field of my work.

I would also like to extent my immense gratitude to Prof. A. K. Agrawal, and respected Dean Prof. Deepak Barman, Faculty of Management Studies, BHU who allowedme to choose the topic for my Dissertation.

Shashank Tripathi

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CHAPTER 1 INTRODUCTION

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1. CONCEPT OF INSURANCE :Life has always been an uncertain thing. To be secure against unpleasant possibilities, always requires the utmost resourcefulness and foresight on the part ofman. To pray or to pay for protection is the spirit of the humanity. Man has been accustomed to pray God for protection and security from time immemorial. In modern days Insurance Companies want him to pay for protection and security. The insurance man says "God helps those who help themselves"; probably he is correct.

Too many people in this country are not in employment; and work for too many no longer guarantees income security. Several millions are part-time, self employed and low-earning workers living under pitiable circumstances where there is nosecurity cover against risk. Further the inherent changing employment risks, the prospect of continual change in the work place with its attendant threats of unemployment and low pay especially after the adoption of New Economic Policy andthe imminent life cycle risks - a new source of insecurity which includes the changing demands of family life, separation, divorce and elderly dependents are tormenting the society. Risk has become central to one's life. It is within this background life insurance policy has been introduced by the insurance companies covering risks at various levels. Life insurance coverage is against disablementor in the event of death of the insured, economic support for the dependents. It

is a measure of social security to livelihood for the insured or dependents. This is to make the right to life meaningful, worth living and right to livelihood a means for sustenance. Therefore, it goes without saying that an appropriate life insurance policy within the paying capacity and means of the insured to paypremium is one of the social security measures envisaged under the Indian Constitution. Hence, right to social security, protection of the family, economic empowerment to the poor and disadvantaged are integral part of the right to life and dignity of the person guaranteed in the constitution. Man finds his security in income (money) which enables him to buy food, clothing, shelter and other necessities of life. A person has to earn income not only for himself but also for his dependents, viz., wife and children. He has to provide legally for his familyneeds, and so he has to keep aside something regularly for a rainy day and for his old age. This fundamental need for security for self and dependents proved to

be the mother of invention of the institution of life insurance.

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What is Insurance :The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through theefforts of the owner. The asset is valuable to the owner, because he expects toget some benefit from it. The benefit may be an income or some thing else. It is a benefit because it meets some of his needs. In the case of a factory or a cow, the product generated by is sold and income generated. In the case of a motor

car, it provides comfort and convenience in transportation. There is no direct income. Every asset is expected to last for a certain period of time during which it will perform. After that, the benefit may not be available. There is a life-time for a machine in a factory or a cow or a motor car. None of them will lastfor ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute is made available. Thus, he makes sure that the value or income is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional. In that case, the owner and those deriving benefits from there, would be deprived of the benefit and the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations. Insurance, in law and econo

mics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk ofa potential loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising andcontrolling risk, has evolved as a discrete field of study and practice.

Origin of InsurancePRACTICE OF INSURANCE IN INDIA: 1818-1956 It is claimed that insurance was practiced in India even in Vedic times in one form or the other. The Sanskrit term "Yogakshema" in the Rigveda meant some kind of insurance, which was practiced by the Aryans in India nearly 3000 years ago. During the Mughal period insurance too

k firm roots. There are even references to the cover against war risks. Losses due to the passage of royal troops through farms were compensated by the State as a gesture of goodwill. The year 1818 is an epoch -making year in the history of our country. The first Life Insurance Company on India soil appears to have been started in this year. A group of Europeans pioneered the establishment of theOriental Life Insurance Society to afford relief to the distressed relatives ofEuropean. The venture was not quite successful but the company was reformed in 1829.The renewed Company also got into trouble in 1833 when Agency House of Calcutta, partners of the same, fell.6


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Prince Dwarkanath Tagore was the only solvent partner & the sole responsibilityfor carrying on the institution developed on him. Meanwhile, early in Janury1834, the Government made up its mind to establish a Public Insurance Company & a Committee was set up for this purpose .A number of foreign Insurance Companies then operating in the country viewed this move with alarm. They set up Committees of their own enquire into their individual affairs. Dwarkanath Tagore, too, had a Committee appointed to look into the affairs of the Oriental. As a result, anot

her company was born out of the previous one in the name of "New Oriental Company" In the reorganization of the "Oriental" in the year 1834, two other gentlemen were associated. One was Ramtanu Lahiri and the other Rustamjee Cowasjee. The latter was another prominent figure of the business world. Rustamjee entered insurance business in 1828, he was already known to the community and the Government as a wealthy Parsi merchant. Rustamjee's connection with insurance also started with "Laudable Societies", but he was later on associated with Companies like "Sun Life Office (1834) ", New Oriental (1835),Universal Life (1835) , New Laudable (1840) , and Indian Laudable (1841) . He was also on the Committee of the Union Insurance Company which was formed by a group of five persons. This Company was issuing policies covering river-risks only. He was intimately connected withthe Committee of Insurance Offices in Calcutta. Rustamjee Cowasjee & Dwarkanath

Tagore was probably the first Indians to join in partnership business with the Europeans & in the field of insurance they were pioneers on this side of the country. Apart from Calcutta, several enterprising people in Bombay started in 1823the "Bombay Life" Assurance Company. The company went into liquidation soon andcould not revive. In 1829, the "Madras Equitable "was formed. It finally ceasedto function in 1921 due to financial difficulties after the First World War. The effort to set up a public insurance company at the government level also went in vain, mainly from objection of private operators. Majority of the early attempts to form insurance offices were in the province of Bengal. This was due to its political & economic importance at that time. The contribution of Raja Ram Mohan Roy, one of the greatest social reformers of India, to the development of life insurance is very great. He was deeply concerned about the sad plight of desperate widows and helpless orphans.

OVERSEAS INSURERS Initially, when Life Offices were established in large numbers in Britain, some of them ventured to issue sterling policies to the British residents in India. Premiums collected here were credited to England largely for British beneficiaries. Business seems to have been brisk and profitable and was usually under short term policies. Insurance mortality tables and insufficient mortality data of Englishmen in India made the premiums heavy-heavier than at home. Insurance was denied to the "natives" even if they wanted it- for their lives were always considered risky and sometimes valueless. When Indian lives were accepted as a very special case, the extras charged were still heavier. Prominent amongst the companies which came to India around this period was the "Medical Invalid and General" incorporated in London in 1841. As more areas were annexed andthe7


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ruling power, with vested interests in developing trade, took charge , the "Medical" extended its area of operation, established large connections, absorbed the" Agra Life" and in 1835, took over the "New Oriental". P.M. Tate, the then manager of the "Medical", was a keen businessman, widely liked, influential and shrewd. With W.F. Ferguson, who was the manager of the "New Oriental" before amalgamation, he commenced very active operations which were temporarily affected by the 1857 "Mutiny". The Universal Life Insurance Company established in England in

1836 opened its Indian Branch in 1840 and enjoyed a long period of successful operations until it was taken over by the "North British" in May 1901. Insurance exceeding Rs. 10 crores were issued in India during this period. Another EnglishCompany operating in India at that time was the Colonial Life Assurance Company. It was established in 1846 under the auspices of the Standard Life Assurance Company. The original prospectus of this company declared its purpose as "extending to the Colonies of Great Britain and to Indian the full benefit of Life Assurance". It appointed agents with local boards which were first established on Calcutta, Bombay, Madras and Colombo. Later on this company was taken over by the "Standard Life" and made valuable contribution to investigations into the mortality experience of assured lives in India. Eventually it ceased its operations in India in 1938. It is difficult to say which was the oldest Life Policy in India,

but the oldest known appears to be one sold by the Royal Insurance (which commenced business in India in 1845) on the life was to Cursetjee Furdonjee on 6th January 1848, no reference to any earlier policy being available. In the year 1853, the Liver pool and London and Globe Insurance Company established in England in 1836, commenced business in India. Sir Charles Forbes was its first agent, succeeded by M/s. Forbes, Forbes and Campbell. It accepted only European lives and commenced insuring Indian lives only after 1929.This too, was mainly to oblige good agents of the Company for classes other than life business. The North British and Mercantile was the next company to appear on the Indian scene. It started fire insurance business in the year 1861 and life business 1864. The London Assurance started life business in 1864, limited principally to European lives and closed down its life department when the Life Assurance Companies Act 1912 made submission of returns compulsory. On 3rd December, 1870, seven earnest men of Bomb

ay with just seven rupees for initial expenses gave shape to a plan of offeringinsurance to the public without the risk of ruin and the "Bombay Mutual Life Assurance Society" came into existence. This was followed by the Oriental Life Assurance Company in1874, the Bharat in 1896 and the Empire of India in 1897. THE BIRTH OF INDIAN INSURERS With the advent of the 20th century, the glorious renaissance of swadeshi days dawned. At the same time, well- to do Indians realized the potentiality of Indian Insurance business. The Swadeshi movement of 1905-1907 gave rise to more insurance companies. The United India in Madras, National Indian and National Insurance in Calcutta and the Co-operative Assurance at Lahore were established in 1906. In 1907, Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko House of the great poet Rabindranath Tagore, in Calcutta. The Indian Mercantile (1907) was started in Bombay,

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General Assurance (1908) at Ajmer and the Swadeshi Life (Later Bombay Life) in Bombay in 1908. The end of the First World War (1914-18) witnessed an influx of insurance companies in India. Famous Indian business houses started new insurance companies. Industrial and Prudential Bombay, Western India, Satara, were floated before the war, but by 1919, companies like Jupiter General, New India, Vulcan Insurance Company etc. came into being. Pandit K.Santhanam with blessing of Lala Lajpat Rai and Pandit Motilal Nehru started Laxmi Insurance Co. Similarly, And

hra Insurance was started in Masulipatnam, with the initiative of stalwarts like Dr. Pattabhi Sitaramaiah. From political platforms also, national leaders supported this cause. It is duty to every Indian to support only Indian Insurance. The keynote of our Swaraj is in placing all our insurance with our Indian companies", said Mahatma Gandhi in his message. "I hope Indians will realize the importance of patriotism only through Indian insurance institution", stated Pandit Jawaharlal Nehru. Thus, the cause of Indian insurance became a national issue. The pursuit to boost Indian insurance represented a crusade to extricate the Indian economy from foreign domination.

PROGRESS IN INSURANCE BUSINESS The growth of Life Insurance in concrete terms could be said to being during the first two decades of twentieth century when most

of the major companies were founded. They grew in terms of rise in the number of companies, in terms of number of policies and sum assured as well as total life fund. Indian Insurance Year Book, published for the first time in 1914, givesthe figure of the total business-in -force as 22.44 crore which grew to Rs. 298crore in 1938. In 1914, there were only 44companies transacting insurance business in India, and during the next 25 years their number rose to 176. The total progress on all the primary heads, viz. life fund (Rs. 50.50 crore), premium income (Rs. 10.50 crore) and new business (Rs. 43.30 crore) indicate that Indian Insurance Business had been making a definite headway during this years. The inter-war -years thus saw rapid growth life insurance in India. The promotion of new life insurance companies continued to be almost a craze and insurance companies mushroomed. In this period, 176 insurance companies were formed and many of them failed. Thus unhealthy growth was harmful to the interest of the policy holders a

nd insurance business in India. Feeling concerned about it, the All India Life Assurance Offices' Association urged upon the Government in 1932 to undertake the insurance legislation to· · ·

(a) Compulsorily register all Life Insurance companies. (b) Secure a deposit ofRs.2 lakh from all Life Insurance companies. (c) Compel foreign companies doingbusiness in India to keep sufficient funds in India securities to meet their liabilities under all policies issued in India.

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INSURANCE ACT, 1938 The Insurance Act, 1938, was the first comprehensive legislation governing not only life but also non- life branches of insurance to provide strict state control over insurance business. In sub- sections to dealt with provident companies, mutual offices and co-operative societies as well. The silent features of the Act were as follows:· · · ·

·

· · ·

(A) Constitution of a Department of Insurance under a superintendent vested with wide powers of supervision and control over all kinds of insurance companies. (B) Regulation for the compulsory registration of insurance companies and for filing of returns of investment and financial conditions. (C) Provisions for deposit, to prevent insurers of inadequate financial resources of speculative concerns for commencing business. (D) Provisions that 55% of the net life fund of an Indian or non- Indian insurer should invested in Indian Government and approved securities with at least 25% in Indian Government Rupee securities.. All other comp

anies, i.e., foreign companies must invest 100% of their Indian liabilities in Indian Government and approved securities, with at least 33.3% Indian Governmentsecurities. (E) Prohibition of rebating, restriction of commission, licensing of agents etc. Maximum rates of commission were fixed at 40% of the first premiums and 5% of the renewal premium in respect of life assurance business. The agentmust be licensed, to improve the status of the profession. (F) Periodical valuation of Indian Insurance business of foreign companies and the business of Indian companies. (G) Provision for policyholders' directors, making it possible for the representatives of policyholders to be on the Board of directors. (H) Standardization of policy conditions required all companies to file standard forms andtables of premium approved by an Actuary. Under this requirement, the initial deposit for life insurance business was raised from Rs. 25000 in Government securities to Rs. 50000 in cash approved securities, which was subsequently to be rais

ed by installments to Rs. 2 lakh within a specified time limit.

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GROWTH OF LIFE BUSINESS IN INDIA: 1914-1948 Sr no 1 No of insurers 1914 44 44 22.44 22.44 6.36 1930 68 68 748997 513925 (68.61) 220703 14369 258.42 84.89 (32.85) 69.76 3.77 20.53 1940 195 179 (91.79) 16 1945 215 200 (93.02) 15 1948 209 189(90.43) 20

(a) Indian (b) Non-Indian 2 Total No. of policies In force

1628381 2714000 3016000 1371963 2376000 2791000 (84.25) (87.55) (90.15) 181247 75171 304.03 225.51 (74.17) 60.12 18.4 62.41 261000 77000 573.07 459.43 (80.17) 91.85 21.79 107.4 234000 202000 712.76 566.38 (79.46) 101.08 45.3 150.39

(a) Indian (b) Non-Indian (c) 3 Indian outside India Total business in force

(a) Indian (Rs. Crore) (b) Non-Indian (c) 4 Indian outside India Total life funds (Rs. Crore)

Note: Figures in brackets show percentage of the total.

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NationalizationTHE LIFE INSURANCE CORPORATION OF INDIA: 1956 This was the first step taken towards the nationalization of life insurance business in India. On 20th January, 1956 all life insurance companies were taken over by 43 nominated custodians. Thecustodians were experienced senior executives of private insurance companies, reporting directly to the Finance Ministry. From the word go, the complex task ofrunning the industry on a permanent basis and continuing the services to policy

holders without interruption were their major concerns. The actual work of integration had to await legislation. The custodians managed the insurance companiestill 1-09-1956, when Life Insurance Corporation was established under the general direction and control of the Ministry of Finance. The Ordinance provided for the transfer of the control of 154 Indian insurers, 16 non Indian insurers and 75 provident societies. These arrangements were designed to ensure that no inconvenience whatsoever was caused to the policy holders. With the Government take over the management aimed towards the evolution of a common uniform premium rate, policy conditions and service and working procedures and above all to help promote team spirit. The corporation, a body corporate shall consist of not more than15 members appointed by the Central Government, one of them being appointed by the government as chairman. The capital of the corporation was at Rs 5 crore prov

ided by the central government. INSURANCE SECTOR REFORMS In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian Insurance industry and recommended its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the over all financial system whereit was necessary to address the need for similar reforms...". In 1994, the committee submitted the report and some of the key recommendations included: (1) STRUCTURE· · ·

Government stake in the Insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate

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(2) COMPETETION· · · · ·

Private Companies with minimum paid up capital of Rs.1 bn should be allowed to enter the industry. No Company should deal in both Life and General Insurance through a single entry. Foreign Companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowe

d to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

(3) REGULATORY BODY· · ·

The Insurance Act should be changed An Insurance Regulatory Body should be set up. Controller of Insurance (Currently a part from the Finance Ministry)should be made independent

(4) INVESMENTS· ·

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).

(5) CUSTOMER SERVICE· · ·

LIC should pay interest on delays on payments beyond 30 days. Insurance Companies must be encouraged to set up unit linked pension plans Computerization of operations and updating of technology to be carried out in the insurance industry.

The committee emphasized that in order to improve the customer service and increase the coverage of insurance industry should opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure onthe part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs. 100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

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Liberalization :OPENING UP OF INSURANCE SECTOR ± 1999 THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. The other decision taken simultaneously to provide the supporting systems to the insurance sect

or and in particular the life insurance companies was the launch of the IRDA's online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 14 life insurance companies have been registered. ENTRY OF PRIVATE COMPANIES Under the IRDA Act, private companies can now operate in India's insurance industry. However, they must obtain a license from the IRDA before being permitted to write business. To have its license application considered, a domestic private company must be registered in accordance with the Companies Act of 1956 and have approximately US$ 20 million of i

nvestment capital. The specific licensing requirements that Private Indian Companies must fulfill are set forth in the Registration on Indian Insurance Companies Regulations, published by the IRDA 2000. LIFTING OF BARRIERS TO FOREIGN INVESTMENT The IRDA Act also lifts certain barriers to foreign direct investment in Indian insurance industry. Global insurers are now permitted to set up and register a domestic company in order to write business in India. However, regulations stipulate that they have a capital base of at least US $ 20 million, and their investment in such company is capped at 26 percent. Thus, to participate in the market, they must form a joint venture with an Indian partner that is able to invest the remaining funds. The equity investments limit is the same for global reinsures seeking to write business in India, but they are required to put up a capital of approximately US$ 45 million in order to establish a domestic company.

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Since the IRDA first enacted these rules, 13 new life insurance companies have entered the market. On the other hand, no global reinsurer has established a domestic company. Instead, most of the top international reinsurance companies operate from their overseas offices by sharing the reinsurance risks picked up by the GIC. A recent proposal has been put forward to increase foreign direct investment to 49 percent. In addition, global companies are pushing for the right to establish branch offices in India. These changes are likely to substantially increa

se the presence of international insurers, reinsurers, and brokers in India. The IRDA Insurance Brokers Act in India 2002 permitted overseas insurance and reinsurance brokers to enter the market, but with the same equity cap as that governing the operations of foreign insurers and reinsurers. Thus, foreign brokers must also form a joint venture with an Indian partner in order to establish an Indian broking house. The 2002 IRDA legislation established four broker categories, one of which brokers must select when applying for a license: 1. 2. 3. 4. 5. Category 1A : Direct General Insurance Broker Category 1B : Direct Life Insurance Broker Category 2 : Reinsurance Broker Category 3: Composite Broker Category4: Others, for example Insurance Consultants and Risk Management Consultants.

Each category has different solvency margins and capital adequacy ratios, and al

l categories need to carry professional indemnity insurance at different minimum levels. In the years since market liberalization was initiated, the insurance sector has witnessed some impressive changes. The needs of insurance and reinsurance buyers have grown; the market is introducing new products to address these needs; and the services of brokers are now seen as critical to making informed insurance and reinsurance decisions. OVERVIEW OF THE CURRENT INSURANCE MARKET In the years since the IRDA Act initiated market reforms, the insurance sector has experienced some remarkable changes. The entry of a large number of Indian and Foreign private companies in life insurance business has to lead greater choice in terms of products and services. Increased consumer awareness of the benefits and importance of insurance and reinsurance has generated many more buyers; and new distribution channels_ among them brokers, bank assurance, the Internet, and corporate agents_ have provided additional ways of getting products and services

to customers.

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Private insurance companies have to date written a small percentage of businessin this sector during the last three years, but they have ushered in a competitive environment that has accelerated market growth. State owned insurers still write the bulk of insurance business, and they have the net worth required to underwrite large corporate risks without depending almost entirely on reinsurance support. However, their focus on restructuring is beginning to put them at a disadvantage against private competitors. Over the next few years, the share of the m

arket held by the public insurers is expected to drop substantially, with private companies assuming a growing percentage of the business written. At present there are 15 private insurers with two standalone private players and remaining private-foreign joint venture.

Purpose and Need of Insurance :Assets are insured, because they are likely to be destroyed through accidental occurrences. Such possible occurrences are called perils. Fire, floods, breakdowns, lightening, earthquakes, etc, are perils. If such perils can cause damage tothe asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of

rupees, depending on the cost of the building and the contents in it. The risk only means that there is a possibility of loss or damage. The damage may or may not happen. Insurance is done against the contingency that it may happen. There has to be an uncertainty about the risk. Insurance is relevant only if there areuncertainties. If there is no uncertainty about the occurrence of an event, it cannot be insured against. In the case of human being, death is certain, but thetime of death is uncertain. In the case of person who is terminally ill, the time of death is not uncertain, though not exactly known. He cannot be insured. Insured does not protect the asset. It does not prevent its loss due to peril. Theperil cannot be avoided through insurance. The peril can sometimes be avoided through better safety and damage control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on thatasset. It only compensates the losses and that too, not fully. Only economic con

sequences can be insured. If the loss is not financial, insurance may not be possible. Example of non-economic losses are love and affection of parents, leadership of managers, sentimental attachments to family heirlooms, innovative and creative abilities, etc.

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How Insurance Works?The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the otherswill share the loss and make good to the person who lost. All people who send goods by ship are exposed to the same risks, which are related to water damage, ship sinking, piracy, etc. Those owning factories are not exposed to these risks,but they are exposed to different kinds of risks like, fire, hailstorms, earthqu

ake, lightning, burglary, etc. Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all. Inother words, the risk is spread among the community and the likely big impact on one is reduced to smaller manageable impacts on all.

If a Jumbo Jet with more than 350 passengers crashes, the loss would run into several crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at same time. If 100 airline companies flying Jumbo Jets, come together into an insurance pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne by each airline would come down to

a few lakhs of rupees. Thus, insurance is a business of sharing . There are certain principles, which make it possible for insurance to remain a fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable when the community shares the burden. The second is that the perils should occur in an accidental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share thecosts of damage. This would be taking unfair advantage of an arrangement put into place to protect people from risks they are exposed to. The occurrence has tobe random, accidental, and not the deliberate creation of the insured person. The manner in which the loss is to be shared can be determined before-hand. It may be proportional to the risk that each person is exposed to. This would be indicative of the benefit he would receive if the peril befell him. The share could b

e collected from the members after the loss has occurred or the likely shares may be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid. The collection to be made from each person in advance is determined on assumptions. While it may not be possible to tell beforehand, which person will suffer, it may be possible to tell, on the basis of past experiences, how many persons, on anaverage, may suffer losses. The following two examples explain the above concept of insurance:

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Example 1

In a village, there are 400 houses, each valued at Rs. 20000. Each year, on theaverage, 4 houses get burnt, resulting into a total loss of Rs. 80000. If all the 400 owners come together and contribute Rs. 200 each, the common fund would be Rs. 80000. this is enough to pay Rs. 20000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners is spread over 400 house-owners of the vi

llage.

Example 2

There are 1000 persons who are all aged 50 and are healthy. It is expected thatof these, 10 persons may die during the year. If the economic value of the losssuffered by the family of each dying person is taken to be Rs. 20000, the totalloss would work out to Rs. 200000. If each person in a group contributed Rs. 200 a year, the common fund would be Rs. 200000. This would be enough to par Rs. 20000 to the family of each of the ten persons who die. Thus, the risks in the case of 10 persons, are shared by 1000 persons.

Insurance of `Human Asset'A human being is an income generating asset. One s manual labour, professional skills and business acumen are the assets. This asset also can be lost through unexpectedly early death or through sickness and disabilities caused by accidents. Accidents may or may not happen. Death will happen, but the timing is uncertain. If it happens around the time of one s retirement, when it could be expected that the income will normally cease, the person concerned could have made some other arrangements to meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, there can be losses to the person and dependents. Insurance is necessary to help those dependent on the income.A person, who may have made arrangements for his needs after his retirement, also would need insurance. This is because the arrangements would have been made on the basis of some expectations like, likely to live for another 15 years, or th

at children will look after him. If any of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much a problem as dying too young. Both are risks, which need to be safeguarded against. Insurance takes care.

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Insurance of Intangibles :The concept of insurance has been extended beyond the coverage of tangible assets. Exporters run risk of losses if the importers in the other country default in payments or in collecting the goods. They will also suffer heavily due to sudden changes in currency exchange rates, economic policies or political disturbances in the other country. These risks are insured. Doctors run the risk of being charged with negligence and subsequent liability for damages. The amounts in ques

tion can be fairly large, beyond the capacity of individuals to bear. These areinsured. Thus, insurance is extended to intangibles. In some countries, the voice of a singer or the legs of a dancer may be insured.

Types of Insurance :Any risk that can be quantified can potentially be insured. Specific kinds of risk that may give rise to claims are known as "perils". An insurance policy willset out in detail which perils are covered by the policy and which are not.

Below is a (non-exhaustive) list of the many different types of insurance that exist. A single policy may cover risks in one or more of the categories set forth below. For example, auto insurance would typically cover both property risk (co

vering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A homeowner

s insurance policy in the U.S. typically includes property insurance covering damage to the home and the owner

s belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner

s property. Automobile insurance known in the UK as motor insurance, is probably the most common form of insurance and may cover bothlegal liability claims against the driver and loss of or damage to the insured

s vehicle itself. Throughout most of the United States an auto insurance policy is required to legally operate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which reduces or eliminates the ability to sue for compensation but provides automatic eligibility for benefits. Aviation insurance insu

res against hull, spares, deductible, hull war and liability risks. Boiler insurance (also known as boiler and machinery insurance or equipment breakdown insurance) insures against accidental physical damage to equipment or machinery. Builder s risk insurance insures against the risk of physical loss or damage to property during construction. Builder

s risk insurance is typically written on an "all risk" basis covering damage due to any cause (including the negligence of theinsured) not otherwise expressly excluded.19


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Business insurance can be any kind of insurance that protects businesses against risks. Some principal subtypes of business insurance are (a) the various kindsof professional liability insurance, also called professional indemnity insurance, which are discussed below under that name; and (b) the business owners policy (BOP), which bundles into one policy many of the kinds of coverage that a business owner needs, in a way analogous to how homeowners insurance bundles the coverage that a homeowner needs. Casualty insurance insures against accidents, not n

ecessarily tied to any specific property. Credit insurance repays some or all of a loan back when certain things happen to the borrower such as unemployment, disability, or death. Mortgage insurance (which see below) is a form of credit insurance, although the name credit insurance more often is used to refer to policies that cover other kinds of debt. Crime insurance insures the policyholder against losses arising from the criminal acts of third parties. For example, a company can obtain crime insurance to cover losses arising from theft or embezzlement. Crop insurance "Farmers use crop insurance to reduce or manage various risks associated with growing crops. Such risks include crop loss or damage caused by weather, hail, drought, frost damage, insects, or disease, for instance." Defense Base Act Workers

compensation or DBA Insurance provides coverage for civilianworkers hired by the government to perform contracts outside the US and Canada.

DBA is required for all US citizens, US residents, US Green Card holders, and all employees or subcontractors hired on overseas government contracts. Dependingon the country, Foreign Nationals must also be covered under DBA. This coveragetypically includes expenses related to medical treatment and loss of wages, as well as disability and death benefits. Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred by directors and officers for which they are liable. In the industry, it is usually called "D&O" for short. Disabilityinsurance policies provide financial support in the event the policyholder is unable to work because of disabling illness or injury. It provides monthly support to help pay such obligations as mortgages and credit cards. o Total permanent disability insurance provides benefits when a person is permanently disabled andcan no longer work in their profession, often taken as an adjunct to life insura

nce. Errors and omissions insurance: See "Professional liability insurance" under "Liability insurance". Expatriate insurance provides individuals and organizations operating outside of their home country with protection for automobiles, property, health, liability and business pursuits. Financial loss insurance protects individuals and companies against various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might alsocover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently20


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referred to as "business interruption insurance." Fidelity bonds and surety bonds are included in this category, although these products provide a benefit to athird party (the "obligee") in the event the insured party (usually referred toas the "obligor") fails to perform its obligations under a contract with the oblige. Health insurance policies will often cover the cost of private medical treatments if the National Health Service in the UK (NHS) or other publicly-funded health programs do not pay for them. It will often result in quicker health care

where better facilities are available. Home insurance or homeowners insurance: See "Property insurance". Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner

s insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insurance also includes an aspect of liability insurance that indemnifies against the harm thata crashing car can cause to others

lives, health, or property. The protection offered by a liability insurance policy is twofold: a legal defense in the eventof a lawsuit commenced against the policyholder and indemnification (payment onbehalf of the insured) with respect to a settlement or court verdict. Liabilitypolicies typically cover only the negligence of the insured, and will not apply

to results of willful or intentional acts by the insured. o Environmental liability insurance protects the insured from bodily injury, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants. o Professional liability insurance also called professional indemnity insurance, protects professional practitioners such as architects, lawyers, doctors, and accountants against potential negligence claims made by their patients/clients. Professional liability insurance may take on different names depending on the profession. For example, professional liability insurance in reference to the medical profession may be called malpractice insurance. Notaries public may take out errors and omissions insurance (E&O). Other potential E&O policyholders include, for example, real estate brokers, home inspectors, appraisers, and website developers.Life insurance provides a monetary benefit to a decedent

s family or other designated beneficiary, and may specifically provide for burial, funeral and other fi

nal expenses. Life insurance policies often allow the option of having the proceeds paid to the beneficiary either in a lump sum cash payment or an annuity. o Annuities provide a stream of payments and are generally classified as insurancebecause they are issued by insurance companies and regulated as insurance and require the same kinds of actuarial and investment management expertise that lifeinsurance requires. Annuities and pensions that pay a benefit for life are sometimes regarded as insurance against the possibility that a retiree will outlive his or her financial resources. In that sense, they are the complement of life insurance and, from an underwriting perspective, are the mirror image of life insurance. Locked funds insurance is a little-known hybrid insurance policy jointlyissued by governments and banks. It is used to protect public funds from tamperby unauthorized parties. In special cases, a government may authorize its use in protecting semi-private funds21


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which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extreme cases where maximum security of funds is required. Marine insurance and marine cargo insurance cover the loss or damage of ships at sea or on inland waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustainedfrom fire, shipwreck, etc., but excludes losses that can be recovered from the c

arrier or the carrier s insurance. Many marine insurance underwriters will include "time element" coverage in such policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused by a covered loss. Mortgage insurance insures the lender against default by the borrower. National Insurance is the UK

s version of social insurance (which see below). No-fault insurance is a type of insurance policy (typically automobile insurance) where insurers are indemnified by their own insurer regardless of faultin the incident. Nuclear incident insurance covers damages resulting from an incident involving radio active materials and is generally arranged at the national level. (For the United States, see the PriceAnderson Nuclear Industries Indemnity Act.) Pet insurance insures pets against accidents and illnesses - some companies cover routine/wellness care and burial, as well. Political risk insurance c

an be taken out by businesses with operations in countries in which there is a risk that revolution or other political conditions will result in a loss. Pollution Insurance A first-party coverage for contamination of insured property either by external or on-site sources. Coverage for liability to third parties arising from contamination of air, water or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup and may include coverage for releases from underground storage tanks. Intentional acts are specifically excluded Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insurance, flood insurance,earthquake insurance, home insurance, inland marine insurance or boiler insurance. Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties,

guarantees, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the policy. Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The final premium is based on the insured s actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year

s premium is based partially (or wholly) on the current year s losses, although the premium adjustments may take months or years beyond the current year s expiration date. The rating formula is guaranteed in the insurance contract. Formula:retrospective premium = converted loss + basic premium × tax multiplier. Numerousvariations of this formula have been developed and are in use. Social insurancecan be many things to many people in many countries. But a summary of22


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its essence is that it is a collection of insurance coverage (including components of life insurance, disability income insurance, unemployment insurance, health insurance, and others), plus retirement savings, that mandates participation by all citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such as the justice system and the welfare state. This is a large, complicated topic that engen

ders tremendous debate, which can be further studied in the following articles (and others): o Social welfare provision o Social security o Social safety net oNational Insurance o Social Security (United States) o Social Security debate (United States)

Terrorism insurance provides protection against any loss or damage caused by terrorist activities. Title insurance provides a guarantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction. Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses suchas medical expenses, lost of personal belongings, travel delay, personal liabili

ties, etc. Workers

compensation insurance replaces all or part of a worker

s wages lost and accompanying medical expense incurred because of a job-related injury.

Advantages of Life Insurance :Life insurance has no competition from any other business. Many people think that life insurance is an investment or a means of saving. This is not a correct view. When a person saves, the amount of funds available at any time is equal to the amount of money set aside in the past, plus interest. This is so in a fixed deposit in the bank, in national savings certificates, in mutual funds and all other savings instruments. If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amount invest

ed plus appreciation. In life insurance, however, the fund available is not thetotal of the savings already made (premiums paid), but the amount one wished tohave at the end of the savings period (which is the next 20 or 30 years). The final fund is secured from the very beginning.23


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One is paying for it later, out of the savings. One has to pay for it only as long as one lives or for a lesser period if so chosen. There is no other scheme which provides this kind of benefit. Therefore life insurance has no substitute. Even so, a comparison with other forms of savings will show that life insurance has the following advantages.

In the event of death, the settlement is easy. The heirs can collect the moneys

quicker, because of the facility of nomination and assignment. The facility of nomination is now available for some bank accounts. There is a certain amount ofcompulsion to go though the plan of savings. In other forms, if one changes theoriginal plan of savings, there is no loss. In insurance, there is a loss. Certain cannot claim the life insurance moneys. They can be protected against attachments by courts. There are tax benefits, both in income tax and in capital gains.

Marketability and liquidity are better. A life insurance policy is property andcan be transferred or mortgaged. Loans can be raised against the policy. The following tenets help agents to believe in the benefits of life insurance. Such faith will enhance their determination to sell and their perseverance. Life insurance is not only the best possible way for family protection. There is no other wa

y. Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable. The terms of life are hard. The terms of insurance are easy. The value of human life is far greater than the value of property. Only insurance can preserve it. Life insurance is not surpassed by many other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. Insurance, including life insurance, is essential for the conservation of many businesses, just as it is in the preservation of homes. Life insurance enhances the existing standards of living. Life insurance helps people live financially solvent lives. Life insurance perpetuates life, liberty and thepersuit of happiness. Life insurance is a way of life.

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The Business of Insurance :Insurance companies are called insurers. The business of insurance is to (a) bring together persons with common insurance interests (sharing the same risks), (b) collect the share or contribution (called premium) from all of them, and (c) pay out compensation (called claims) to those who suffer. The premium is determined on the same lines as indicated in the examples above, but with some further refinements. In India, insurance business is classified primarily as life and non

-life or general. Life insurance includes all risks related to the lives of human beings and General insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing with all others like liability, fidelity, motor crop, personal accident, etc.). Personal accident and sickness insurance, which are related to human beings, is classifiedas non-life in India, but is classified as life , in many other countries. Whatis Non-life in India is termed as Property and Casualty in some other countries. The premium is based on expectations of the losses. These expectations are based on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a law of large numbers . When you toss a coin, the chance of a head or tail coming up is half. If the coin is tossed 10 times, one canno

t be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring, which is the basis of premium calculation, will be realized in practice. In order to be amenable tostatistical predictions, insurers have to insure large numbers of risks. Largerthe spread of business better is the experience in relation to expectations. The business of insurance is nothing but one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. Peoplewho suffer loss get relief because their loss is made good. People who do not suffer loss are relieved because they were spared the loss. The insurer is in theposition of a trustee as it is managing the common fund, for and on behalf of th

e community of policyholders. It has to ensure that nobody is allowed to take undue advantage of the arrangement. That means that the management of the insurance business requires care to prevent entry (into the group) of people whose risks are not of the same kind as well as paying claims on losses that are not accidental. The decision to allow entry is the process of underwriting of risk. Underwriting includes assessing the risk, which means, making an evaluation of how much is the exposure to risk. The premium to be charged depends on this assessmentof the risk. Both underwriting and claim settlements have to be done with greatcare.

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Criticism of Insurance Companies :Some people believe that modern insurance companies are money-making businesseswhich have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the principle of insurance. Other criticisms include: Insurance policies contain too many exclusion clauses. For example, some house insurance policies do

not cover damage to garden walls. Most insurance companies now use call centre and staff attempt to answer questions by reading from a script. It is difficult to speak to anybody with expert knowledge.

Role of Insurance in Economic Development :For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. Thesesavings are channeled into investments for economic growth. As on 31.3.2002, the total investments of the LIC exceeded Rs. 245000 crores, of which more than Rs. 130000 crores were directly in Government (both State and Centre) related securities, more than Rs. 12000 crores in the State Electricity Boards, nearly Rs. 20

000 crores in housing loans and Rs. 4000 crores in water supply and sewerage systems. Other investments included road transport, setting up industrial estates and directly financing industry. Investments in the corporate sector (shares, debentures and term loans) exceeded Rs. 30000 crores. These directly affect the lives of the people and their economic well-being. A life insurance company will have large funds. These amounts are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trustfor the benefit of the policyholders. The management of life insurance companies are required to keep this aspects in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large. Apa

rt from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact to major perils like fire, earthquake, floods, etc. Financiers, like banks, collapse if the factory, financed by it, is reduces to ashes by terrible fire. Insurers cover also the loss to financiers, if their debtors default.

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2. GLOBAL INSURANCE INDUSTRY :The global insurance industry is one of the largest sectors of finance. It ranges from consumer to corporate and industrial insurance, and even reinsurance, orinsurance of insurance. The major insurance markets of the world are obviously the US, Europe, Japan, and South Korea. Emerging markets are found throughout Asia, specifically in India and China, and are also in Latin America. With the internet and other forms of high-speed communication, companies and individuals are

now able to purchase insurance and related financial products from almost anywhere in the world. Increasing affluence, especially in developing countries, and a rising understanding of the need to protect wealth and human capital has led to significant growth in the insurance industry. Given the evolving and growing socio-economic conditions worldwide, insurance companies are increasingly reaching out across borders and are offering more competitive and customized products than ever before. Over the past ten years, global insurance premiums have risen by more than 50%, with annual growth rates ranging between 2 and 10%.In 2004, global insurance premiums amounted to $3.3 trillion. The majority of insurance comes from developed nations such as most of Europe, the US, and Japan. In 2004, premiums in North American amounted to $1,217 billion, while the European Union generated $1,198 billion, and Japan produced $492 billion. The UK amounted to $295 b

illion. The four biggest generators of insurance premiums comprised almost two-thirds of premiums for 2004, the US and Japan amount to half, while they only make up 7% of the world s population. In contrast, the emerging markets that make up 85% of the world s population produced only 10% of the premiums. The leading global insurance companies are:· · · · · · · · · ·

Zurich Financial Services, AXA Berkshire Hathaway/ Berkshire Hathaway Re Allianz Aviva ING Group Munich RE Group American International Group (AIG) Nippon LifeInsurance Assicurazioni Generali

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GLOBAL LIFE INSURANCE DENSITY :Continent/Country North America United States Canada Latin America Brazil Mexico Uruguay Argentina Panama Chile Colombia Europe United kingdom Switzerland Netherlands France Belgium Sweden Denmark Germany Italy Austria Portugal Spain Poland Russia Croatia Hungary Greece Bulgaria Ukraine Turkey Asia South Korea Japan Tiwan Hongkong Israel Malaysia Singapore Thailand India China Phillipines UAE Srilanka Indonesia Oman Vietnam Iran Kuwait Pakistan Saudia Arabia Africa South Afri

ca Mauritius Zimbabwe Morocco Kenya Nigeria Egypt Algeria Oceania Australia NewZealand World 2001** 1508.6 1602 675.9 26.3 10.8 53.2 21.5 68.8 39.3 122.1 11.5573.2 2567.9 2715.7 1345 1268.2 1155 1356 1364.4 674.3 720.8 632 302.9 491 48.733.2 25.3 59.3 108.9 5 0.1 5.5 125 763.4 2806.4 760.9 1249.7 525.2 129.5 713.2 34.1 9.1 12.2 6.6 56.3 4.3 3.6 13.6 2.1 1.1 30.3 1.2 0.6 22.4 377.2 95.3 12.4 9.4 2.9 0.5 2.7 0.4 697.5 1040.3 198.4 235 103.7 7.8 12.2 3 0.5 2.4 0.5 668.7 1010.4 211.1 247.3 2002** 1563.8 1662.6 657.3 29.1 27.2 59.2 17.8 19.7 44.6 103.5 12.5 620.4 2679.4 3099.7 1296.1 1349.5 1323.6 1232.2 1574.9 736.7 904.9 648.7 418.6 588 50.7 23.1 33.2 76.7 116 9.9 0.1 6.5 128.1 821.9 2783.9 925.1 1237.9 459.3 118.7 730.1 42.1 11.7 19.5 8.7 74 4.5 5.2 14.8 3.8 1.5 36.8 1 1.7 21.5 360.5 119.1 21.4 12 3.4 0.6 2.7 0.5 750.7 1129.3 272 267.1 2003** 1565.7 1657.5 722.9 30 35.8 41.3 15.4 24.2 42.4 138.3 12.4 726.9 2617.1 3431.8 1561.7 1767.9 2004.8 1602

.3 2037.5 930.4 1238.3 811 611.4 488.6 59.9 33.9 46.3 99.1 152.1 5.5 0.3 8.4 140.1 873.6 3002.9 1050.1 1483.9 460.8 139.8 1300.2 52 12.9 25.1 8.6 72.5 5.3 6.4 13.8 4.1 1.7 36.9 1.1 1.7 26.1 476.5 2004** 1617.2 1692.5 926.1 37.2 45.9 50.2 N/A 34.5 50.6 164.5 14.3 848.1 3190.4 3275.1 1936.5 2150.2 2291.2 1764.3 2310.5 1021.3 1417.2 955.3 768.1 571.9 73.3 24.8 58.7 117.3 177.9 8.2 0.6 12 147.2 1006.8 3044 1494.6 1884.3 467.4 167.3 1483.9 50.8 15.7 27.3 9.4 59.7 6.2 7.5 14.2 7.32.3 39.1 1.5 2.1 30.3 545.5 133.1 N/A 10.6 3.7 0.7 3.1 0.8 851 1285.1 318 291.52005** 1686.3 1753.2 1071.9 42.0 56.8 49.9 15.5 35.4 47.2 174.9 16.8 911.8 3287.1 3078.1 1954.2 2474.6 2988.7 2105.2 2489.9 1042.1 1449.8 1095.1 1113.7 615.8 101.9 6.3 70.9 148.2 213.1 11.1 1.3 12.7 149.6 1210.6 2956.3 1699.1 2213.2 510.2 188 1591.4 54.6 18.3 30.5 10.6 74.7 6.9 10.5 17.3 6.1 2.2 35.7 1.9 0.7 30.7 558.3 136.1 N/A 11.7 4.5 0.5 4 0.9 885 1366.7 219.7 299.5 2006** 1731.8 1789.5 1204.1 51.3 72.5 62.9 16.6 43.8 51.2 176 20.5 1119.6 5139.6 3111.8 2071.6 2922.5 2427.

7 2214.6 2840.8 1136.1 1492.8 1104.6 1131.5 651.0 150.5 4.0 81.8 192.3 256.7 13.2 1.9 13.1 154.6 1480.0 2829.3 1800.0 2456 532.6 189.2 1616.5 60 33.2 34.1 13.189.8 8.5 12.5 14.3 6.1 2.6 40.9 2.3 0.8 38.3 695.6 N/A N/A 14.7 5.3 0.8 4.7 1.2896.3 1389 215 330.6

Source: Swiss Re, Sigma volumes * Insurance density is measured as ratio of premium to total population ** Data relates to calender years Figure in US$ www.indiainsuranceresearc h.com

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3. PERFORMANCE OF INDIAN INSURANCE INDUSTRY :Performance up to October 2006The performance growth rate that was 22.8 percent as at September 2006 has moved up to 23.3 percent at the end of October 2006, an improvement of significance.The total premium at the end of October is Rs.14,628 crore as against Rs.11,855crore. The established players have added Rs.807 crore at a growth rate of 8.3 percent with the new players adding Rs.1966 crore at a growth rate of 62 percent.

Here again, ICICI Lombard has achieved an accretion of Rs.887 crore; whereas the total accretion of all the established players is Rs 807 crores, a truly impressive record. New India with Rs.286 crore, closely followed by Oriental with Rs.277 crore are the major contributors for the established players. Reliance, a late starter in the race for premium acquisition has recorded an accretion of Rs.357 crore as against a meager last year renewal of Rs.89 crore. The growth path is now led by several players: with eight out of the twelve players having achieved accretions in excess of Rs.100 crore and more at the end of October 2006. With the imminent detariffing around the corner in January 2007, the next two months should witness even more fierce battles for supremacy of the market turf. A few of the new players are inching towards breaking into the big league premium players of yesteryears and this may happen sooner than one thought. Interesting an

d challenging times are certainly ahead for all the players.

Premiums Rise 163.68% over October, 2006Individual premium: The life insurance industry underwrote Individual Single Premium of Rs.1336610.10 lakh for the period ended October, 2006 of which the private insurers garnered Rs.118242.78 lakh and LIC garnered Rs.1218367.32 lakh. Thecorresponding numbers for the previous year were Rs.443296.40 lakh for the industry, with private insurers underwriting Rs.64530.68 lakh and LIC Rs.378765.72 lakh. The Individual Non-Single Premium underwritten during April-October, 2006 was Rs.1771903.71 lakh of which the private insurers underwrote Rs.536863.16 lakhand LIC Rs.1235040.55 lakh. The corresponding numbers for the previous year were Rs.743586.24 lakh, Rs.260432.63 lakh and Rs.483153.61 lakh respectively. Grouppremium: The industry underwrote Group Single Premium of Rs.467348.58 lakh of wh

ich the private insurers underwrote Rs.30147.74 lakh and LIC Rs.437200.84 lakh.The lives covered being 7678192, 456696 and 7221496 respectively. The corresponding numbers for the previous year were Rs.171382.70 lakh with private insurers underwriting Rs.17261.98 lakh and LIC Rs.154120.72 lakh and the lives covered being 8547743, 397721 and 8150022 respectively. The Group Non-Single Premium underwritten during April-October, 2006 was Rs.53221.05 lakh which was underwritten entirely by the private insurers, covering 2366084 lives. The corresponding numbers for the previous year were Rs. 18031.15 lakh and covering 1277400 lives.29


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Segment-wise segregation: A further segregation of the premium underwritten during the period indicates that Life, Annuity, Pension and Health contributed Rs.2329869.52 lakh (64.24%), Rs.74006.48 lakh (2.04%), Rs.1221904.91 lakh (33.69%) and Rs.897.90 lakh (0.02%) respectively. In respect of LIC, the break up of life,annuity and pension categories was Rs.1677831.45 lakh (58.04%), Rs.69437.82 lakh (2.40%) and Rs.1143339.44 lakh (39.55%) respectively. In case of the private insurers, Rs.652038.07 lakh (88.58%), Rs.4568.66 lakh (0.62%), Rs.78565.47 lakh (1

0.67%) and Rs.897.90 lakh (0.12%) respectively was underwritten in the four segments. Unit linked and conventional premium: Analysis of the statistics in termsof linked and non-linked premium indicates that 49.46% of the business was underwritten in the non-linked category, and 50.54% in the linked category, i.e., Rs.1793702.35 lakh and Rs.1832976.45 lakh respectively. In case of LIC, the linkedand non-linked premium was 41.38% and 58.62% respectively, as against which forthe private insurers taken together this stood at 86.53% and 13.47% respectively. During the corresponding period of the previous year, linked and non-linked premium indicates that 54.74% of the business was underwritten in the non-linked category, and 45.26% in the linked category, i.e., Rs.752509.54 lakh and Rs.622185.30 lakh respectively. In case of LIC, the linked and non-linked premium was 33.96% and 66.04% respectively, as against which for the private insurers taken to

gether this stood at 77.02% and 22.98% respectively. Growth momentum continues in October 2006 with 25.3 percent

All-round growth :The month of October 2006 has been the month of extraordinary growth for the nonlife insurers with the growth rate high at 25.3 percent. This achieved rate is only slightly below that of September of 25.8 percent. As against the monthly renewals of Rs.1772 crore in October last year, the premium income scaled in 2006 is Rs.2220 crore. The established players have recorded an accretion of Rs.151 crore at a growth rate of 11.3 percent. The new players have had an accretion of Rs.297 crore at a growth rate of 63 percent. Among the former, New India leads with an accretion of Rs.60 crore followed by Oriental with Rs.56 crore. But the stellar performances in the month have come from ICICI Lombard that has produced a

massive accretion of Rs.167 crore with Reliance adding Rs.56 crore to its meager renewal premium of Rs.12 crore. The new players have continued to maintain a strong grip on their market share that stands at 35 percent. Two points of interest to the market have emerged. One is that the monthly accretion of ICICI Lombard at Rs.167 crore is higher than the combined accretion achieved by all the established players of Rs.151 crore. This performance should stand out as of interest to the market. The second point of market interest is that for the first time, the October monthly premium of ICICI Lombard at Rs.310 crore has exceeded the monthly premium performances of National Insurance and UIIC that have accomplished premiums of Rs.305 crores and Rs.257 crore respectively. The established players do seem to be coming under increasing pressure by the new players with theirrelentless high growth rates and premium productions.

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41 per cent growth in life insurance industry in 2006 :New Delhi: Life insurance sector grew by 41 per cent in 2005-06 due to better performance of country

s largest life insurer, LIC, and private players like Bajaj Allianz and ICICI Prudential. The 15 life insurance companies together collected Rs 35,898 crore in the fiscal ended March this year, compared to Rs 25,343 crore in the previous fiscal, according to data compiled by regulator IRDA. Life Insurance Corporation

s premium income rose more than 28 per cent to Rs 25,645 cro

re after it sold 3.16 crore policies as against Rs 19,972 crore collected a year ago. However, LIC

s market share dipped by 6.63 per cent to 71.44 per cent from 78.07 per cent in the year ago period due to stiff competition and aggressive marketing of private life insurers. The 14 private players were able to steadilyincrease their market share from 21.93 per cent to 28.56 per cent in a year

s time by collecting Rs 10,252 crore during the period under review.

Private sector life insurance business jumps 90% :In a tough battle to expand market shares the private sector life insurance industry consisting 14 life insurance companies at 26% have lost 3% of market shareto the state owned Life Insurance Corporation (LIC) in the domestic life insurance industry in 200607. According to the figures released by Insurance Regulatory

& Development Authority the total premium these 14 companies have shot up by 90% to Rs 19,471.83 crore in 2006-07 from Rs 10, 252 crore. LIC with a total premium mobilization of Rs 55,934 crore has been able retain a market share of 74.26% during the reporting period. In total the life insurance industry in first year premium has grown by 110% to Rs 75, 406 crore during 2006-07. The 2006-07 performance has thrown a few surprises in the ranking among the private sector lifeinsurance companies. New entrants like Reliance Life and SBI Life had shown a huge growth of over 381% and 210% respectively during the year. Reliance Life which has become one of the top five companies ended the year with a premium of Rs 930 crore during the year. Though ICICI Prudential Life Insurance remained as the No 1 private sector life insurance company during the year Bajaj Allianz overtook ICICI Prudential in terms of monthly market share in March, for the first time ever. Bajaj

s market share among private players in non-single premium for Mar

ch stood at 29.1% vs. ICICI Prudential s 23.8%. Bajaj gained 4.6 percentage point market share among private sector players for FY07. Among other private players, SBI Life and Reliance Life continued to do well, each gaining 4% market share in FY07. SBI Life s growth was driven by increasing contribution from ULIP premiums. Another notable development of the 2006-07 performance has been the expansion of retail markets by the life insurance comapnies. Bajaj Allianz Life insurance has added 20 lakh policies while ICICI Prudential has expanded over 19 lakhpolicies during the year.31


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Building a Vibrant Insurance Market in India :India

s insurance industry is an example of the positive effects of competitionand new investors in the marketplace. As we know, India opened its insurance market to the private sector in 1999 when parliament passed a new law establishingan independent regulatory body to oversee the insurance market. The law opened the door for participation of private insurance companies and a limited participation of foreign insurance companies through joint ventures with Indian companies

. The law also charged insurance companies to make available insurance productsand services to the huge segment of the population that are vulnerable and not necessarily part of the formal economy. The results of the liberalization are there for everyone to see. The insurance markets -both life and non-life -- have grown impressively. IRDA is working on a regulatory framework that helps level the playing field for all types of insurance companies, irrespective of their ownership. Since 1999, IRDA has licensed 22 new private Indian insurance companies, an overwhelming number of which have global insurance companies as their partners. To date, the industry has attracted foreign direct investment of $235 million. In 2006, Indian insurance companies mobilized over $29 billion, nearly four times as much as in 1999 ($8 billion). In other countries, this kind of capital mobilization provides crucial resources for investment in infrastructure, corporate

businesses, long-term bonds, and municipal projects. Once India does more to free insurance companies to invest in such important sectors, it too can gain benefit from this long-term financial resource. Other improvements are occurring aswell. New insurance products such as product liability insurance, professional liability insurance, small/medium size enterprise insurance, weather insurance, and group health insurance for the poor have been launched. Private insurance companies are also using banks, microfinance institutions and cooperatives to increase their market share and compete with well-entrenched stateowned insurance companies. The marketplace is getting competitive, but the market share of privateinsurance companies remains very low in the 10-15 percent range. The heavy handof government still dominates the market, with price controls, limits on ownership, and other restraints. We have seen what happens in India when a market is truly opened up. We saw it in the IT sector, we saw it in the telecom sector, and

we are seeing it in the aviation sector. Why can t insurance be next? India s insurance market remains very small compared with some of the major emerging markets. South Africa and South Korea, with a fraction (onetwentieth) of India s population, do at least twice as much insurance business as Indian companies did in2004. This is a major missed opportunity for India

s economy. A vibrant insurance market can support the economy by providing long-term capital -- equity and debt -- to the private sector. For example, in the U.S. over two-thirds of financial assets of insurance companies are in corporate bonds and equities, municipalsecurities and commercial mortgages. Insurance also shields households and businesses from irrecoverable loss, such as from major natural disasters, illness and death. In India, 80 percent of health care is privately provided, yet only 10 percent of the population has access to health insurance. Therefore, many individual households have to pay the full out-of-pocket costs for health treatment. What will expand the insurance industry and help it contribute to the economy? Major policy and institutional issues have to be addressed and changed.32


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Insurance is a capital-intensive industry. It is also a long-gestation business. India

s insurance industry needs capital, and a major source of capital would be from foreign investors, who are now limited to 26 percent ownership. India needs to raise the cap on Foreign Direct Investment (FDI) to attract capital for the industry. For some time there has been an understanding that the FDI cap willbe raised to 49 percent, and many companies entered the Indian market with thisexpectation. Failure to follow through in raising the cap is increasingly seen b

y investors as a breach of faith. This promise needs to be delivered, not 5 years from now, but soon, if India wishes to regain its credibility in the eyes of foreign investors. Increasing the cap on FDI will both enhance the growth of theinsurance industry and improve global confidence in India as a business and investment destination. The cap should be raised above 50 percent within a short period so that foreign investors would have management control commensurate with their investment and the flow of FDI to the sector will increase. Leading foreigncompanies bring more than capital to the insurance industry. They also bring generations of successful experience in managing and growing the industry. The benefit of the long-term capital that the insurance industry mobilizes is also being lost as a source of long-term capital. In India, over 60 percent of the insurance industry

s financial assets are locked in government securities. Investment g

uidelines for insurance companies prescribed by the regulator must be changed to allow and promote access to insurance funds by the corporate sector and infrastructure projects. There is also a strong case for raising the FDI cap for reinsurance and auxiliary insurance services, such as brokerage and actuarial services. Major lines of non-life insurance business such as fire and car continue to be governed by a pricing regime that is administered and not risk-based. This distorts the market and makes it inefficient. It has prevented the emergence of a culture of underwriting in insurance companies. The IRDA needs to dismantle this regime to make these segments of the market truly competitive. The IRDA should also seek to create a regulatory regime that promotes the most efficient use of capital, eliminates avoidable micro-management of business practices, allows companies to price their products prudentially, and levels the playing field betweenprivate and state-owned insurance companies. When markets are competitive and re

sponsive to consumer demand and preference, it is the consumer that benefits interms of lower cost and increased ability to manage risks. Health is an area that is underserved by the insurance industry. India as an economy has high healthspending but poor health outcomes. With no pooled risk sharing from insurance policies and a health care system that is primarily private, the cost to individuals becomes a major economic burden. For this reason, many microfinance institutions are finding that a primary use of micro loans to the poor is to pay medicalbills. The current minimum capital requirement of $22 million capital for setting up a health insurance company is a significant barrier to entry, particularlywhen FDI is restricted to 26 percent. The lack of data from both health providers and from existing claims makes risk-based pricing of health insurance products difficult. The absence of an appropriate regulatory framework that enforces a minimum level of service and hygiene standards is33


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an important reason the health insurance market in India is so underdeveloped. It is not surprising that not a single health insurance company is among the 22 new private insurance companies licensed since 1999. Clearly, the IRDA and the Ministry of Health need to work in tandem to solve these problems. Another area where the insurance industry is not doing its job is helping mitigate the risks for personal and business loss from natural catastrophes. In the past decade, India and China accounted for one-fourth of the global economic losses from natural

disasters. Insurance availability in India for natural catastrophes is almost negligible. As we have seen with the Indian Ocean tsunami, the absence of a "safety net" for property lost in a disaster has led to substantial personal loss andslowed economic recovery.

Insurance Sector Reforms in India: Challenges and Opportunities :Insurance in India started without any regulations in the nineteenth century. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centers. After the independence, theLife Insurance Company was nationalized in 1956, and then the general insurancebusiness was nationalized in 1972. Only in 1999 private insurance companies were allowed back into the business of insurance with a maximum of 26 per cent of fo

reign holding (World Bank Economic Review 2000). The entry of the State Bank ofIndia with its proposal of bank assurance brings a new dynamics in the game. OnJuly 14, 2000 Insurance Regulatory and Development Authority bill was passed toprotect the interest of the policyholders from private and foreign players. Thefollowing companies are entitled to do insurance business in India. The privateinsurance joint ventures have collected the premium of Rs.1019.09 crore with the investment of just Rs.3,000 crore in three years of liberalization. The private insurance players have significantly improving their market share when compared to 50 years Old Corporation (i.e. LIC). As per the figures compiled by IRDA, the Life Insurance Industry recorded a total premium underwritten of Rs. 10,707.96 crore for the period under review. Of this, private players contributed to Rs.1, 019.09 crore, accounting for 10 percent. Life Insurance Corporation of India (LIC), the public sector giant, continued to lead with a premium collection of Rs

.9,688.87 crore, translating into a market share of 90 per cent. In terms of number of policies and schemes sold, private sector accounted for only 3.77per cent as compared to 96.23 per cent share of LIC (The Economic Times, 21March 04). he ICICI Prudential topped among the private players in terms of premium collection. It recorded a premium of Rs. 364.9 crore and a market share of 25 per cent, followed by Birla Sun Life with a premium underwritten Rs.170 crore and a market share of 15 percent, HDFC Standard with 132.7 crore and Max New York Life with Rs.76.8 crore with a market share of approximately 15 per cent each. Unlike their counterpart in the life insurance business, private non-life insurance companies have not yet started addressing the retail market. All is set to change in the coming years. Like in the banking sector, nonlife insurance companies will soon have no choice but to focus on individual buyers. The latest series of b

lic and private insurance companies

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