insurence ind

7/28/2019 Insurence Ind

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4. Indian insurance industry

History:

Life insurance came to India from England in 1818 when oriental life

insurance company started in Calcutta by Europeans. After this many insurance

companies had been started in India. But these companies were looking after only

the needs of European community established in India. Indian people were not

being insured by these companies. First Indian life insurance company came as

Bombay mutual life insurance assurance. Second company was Bharat insurancecompany came in 1896. After this the united India in madras, national Indian and

national insurance in Calcutta and the co-operative assurance in Lahore were

established in 1906.

To regulate Indian insurance business first insurance act came in 1912

as life insurance company act and provident fund act. These acts consist of

premium rates tables and periodical valuations of companies. In the first two

decade of 20th century many life insurance companies were started. So the

insurance act came in 1938 to governing life and non life insurance companies

and to provide strict state control. In 1956 the life insurance business in India was

nationalized. In 1956 life insurance corporation of India (LIC) was created to

spreading life insurance much more widely particularly in rural areas. In that year

LIC had 5 zonal offices, 33 divisional offices and 212 branch offices. In 1957 the

business of LIC of sum assured of 200crores, 1000crores in 1970, and 7000crores

in 1986.


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Indian regulatory development authority:

In 1999, the Insurance Regulatory and Development Authority (IRDA) was

constituted as an autonomous body to regulate and develop the insurance

industry. The IRDA was incorporated as a statutory body in April, 2000. The key

objectives of the IRDA include promotion of competition so as to enhance

customer satisfaction through increased consumer choice and lower premiums,

while ensuring the financial security of the insurance market. The IRDA opened up

the market in August 2000 with the invitation for application for registrations.

Foreign companies were allowed ownership of up to 26%. The Authority has the

power to frame regulations under Section 114A of the Insurance Act, 1938 and

has from 2000 onwards framed various regulations ranging from registration of

companies for carrying on insurance business to protection of policyholders

interests.

Role of IRDA:

Protecting the interests of policyholders. Establishing guidelines for the operations of insurers, and brokers. Specifying the code of conduct, qualifications, and training for insurance

intermediaries and agents.

Promoting efficiency in the conduct of insurance business. Regulating the investment of funds by insurance companies. Specifying the percentage of business to be written by insurers in rural

sectors.

Handling disputes between insurers and insurance intermediaries.


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Changing perception of Indian customers:

Indian Insurance consumers are like Indian Voters, they are soft but when time is

right and ripe, they demand and seek necessary changes. De-tariff of many

Insurance Products are the reflection of changing aspirations and growing

demand of Indian consumers.

For historical years, Indian consumers were at receiving end. Insurance Product

was underwritten and was practically forced onto consumers on a Take-it-As-it-

basis. All that got changed with passage of IRDA act in 1999. New insurance

companies have come into existence leading to open competition and hence

better products for customers.

Indian customers have become very sensitive to Coverage / Premium as well as

the Products (read Risk Solution), that is given to them. There are not ready to

accept any product, no matter even if that is coming from the market leader,

should that product is not serving the purpose. A case in point is ULIP Product /

Group Life and Credit Life in Life Insurance segment and Travel / Family Floater

Health and Liability Insurance in the Non-life segment are new age Avatar. The

new products are constantly being demanded by Indian consumers, which is

putting huge pressures on Insurance companies (Read Risk Under-writers) and

Brokers to respond.


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Customers are looking at Insurance for covering Pure Risk now which I have

covered in my next section. Another good reason why we are seeing quick

changes in the buying behavior of Insurance from mere Investment to risk

mitigation is the cost of Replacement of Goods (ROG) or Cost of Services (COS).

Now Indian customers are aware of insurance industry and insurance products

provided by companies. They have become more sensitive. They would not

accept any type of insurance product unless it fulfills their requirements and

needs. In historic days customers looking at insurance products as a life cover

which can provide security against any unacceptable events, but now customers

look at insurance products as an investment as well as life cover. So todays

customers wants good return from the insurance companies. The Indian

customers forms the pivot of each companys strategy.

Investment of Indian household savings (as a % in different sector)

BANK DEPOSITS 39%

CORP. BANKS 2%

SHARES AND DEBENTURES 1%

MUTUAL FUNDS 2%

NBFCS 3%

GOVT. BONDS 13%


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INSURANCE 13%

PF/ RETIRE FUNDS 21%

CURRENCY 6%

Source: - www. avivaindia.com

Changing face of Indian insurance industry:

After the Insurance Regulatory and Development Authority Act have been

passed there has been establishment of many private insurance companies in

India. Previously there was a monopoly business for Life Insurance Corporation of

India (L.I.C.) who was the only life-insurance company for the people till 2000.

L.I.C. still holds 71.4% of the market share in 2006. But after the introduction of

private life insurance companies there is a great competition in Indian market

now. Everyone is trying to capture the fresh market here and penetrate it with

aggressive marketing strategies. Today life-insurance is not only limited up to just

life risk cover and maturity period bonuses but changed to greater return from

the investments. With the introduction of the unit linked insurance policies these

companies are investing the money in different investment instruments like

shares, bonds, debentures, government and other securities. People are

demanding for higher returns with the life risk cover and private companies are

giving 30-40% average growth per annum. These life-insurance companies have

every kind of policies suiting every need right from financial needs of, marriage,

giving birth and rearing up a child, his education, meeting daily financial needs of


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life, pension solutions after retirement. These companies have every aspects and

needs of our life covered along with the death-benefit.

In India only 25% of the population has life

insurance. So Indian life-insurance market is the target market of all the

companies who either want to extend or diversify their business. To tap the

Indian market there has been tie-ups between the major Indian companies with

other International insurance companies to start up their business. The

government of India has set up rules that no foreign insurance company can set

up their business individually here and they have to tie up with an Indian

company and this foreign insurance company can have an investment of only 24%

of the total start-up investment.

Indian insurance industry can be featured by:

Low market penetration. Ever growing middle class component in population. Growth of customers interest with an increasing demand for better

insurance products.

Application of information technology for business. Rebate from government in the form of tax incentives to be insured.

Today, the Indian life insurance industry has a dozen private players,

each of which are making strides in raising awareness levels, introducing

innovative products and increasing the penetration of life insurance in the vastly


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underinsured country. Several of private insurers have introduced attractive

products to meet the needs of their target customers and in line with their

business objectives. The success of their effort is that they have captured over

28% of premium income in five years.

The biggest beneficiary of the competition among life insurers has

been the customer. A wide range of products, customer focused service and

professional advice has become the mainstay of the industry, and the Indian

customers forms the pivot of each companys strategy. Penetration of life

insurance is beginning to cut across socio-economic classes and attract people

who have never purchased insurance before.

Life insurance is also now being regarded as a versatile financial

planning tool. Apart from the traditional term and saving insurance policies,

industry has seen the entry and growth of unit linked products. This provides

market linked returns and is among the most flexible policies available today for

investment. Now products are priced, flexible, and realistic and sustain so people

in better position to understand the risk and benefits of the product and they are

accepting these innovative products.

So it is clear that the face of life insurance in India is changing, but

with the changes come a host of challenges and it is only the credible players with

a long term vision and a robust business strategy that will survive. Whatever the

developments, the future and the opportunities in this industry will surely be

exciting.

There are 12 private players in Indian life insurance market.


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6 bank owned insurers: - HDFC standard life, ICICI prudential, ING Vysya, MetLife,

OM Kotak, SBI life.

6 independent insurers: - Aviva, ANP sanmar, Birla sun life, Bajaj Allianz, Max

New York life, Tata AIG.

Major international insurers are- Prudential and Standard

life from UK, Sun life of Canada, AIG, MetLife and New York life of the US.

Increasing growth since liberalization:

YEAR LIC (in bn rs.) PRIVATE PLAYER

FY03 110 10

FY04 120 20

FY05 130 40

FY06 140 60

FY07 240 160

Source: - Insurance Industry (ICFAI publication book)


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Possibilities for insurance companies in India:

Further deregulation of the market. Greater concern for the customers. Newer products and services. Competition and quality consciousness. Cost effective operations. Restructuring of the public sector. Consolidation of domestic insurance markets. Technology driven shift in product design. Actual operations and distribution. Convergence of financial services.


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5. Global insurance industry

Globally, insurers increasingly are pressured by the demands of their clients. The

development of global insurance industry over the past few years was influenced

by booming stock markets which enabled considerable capital gains to be made in

non life business. Increase in insurers equity capital increased underwriting

capacity, while demand did not develop at the same pace, resulting in decrease in

insurance policies prices. The stock market boom of the past few years led to

demand for unit linked insurance products.

The global insurance industry is growing at rapid pace. Most of the markets

are undergoing globalization. Lot of mergers and acquisition are taking place in

the insurance world. The rapidity in the industry, technological improvement has

resulted in pressures on a few economic parameters. The world insurance

industry is at peak of its globalization process.

Global insurance market is increasing by an average of six percent per

year since 1990. Insurance companies have collected $2443.7 billion premium

world wide according to the global development of premium volume in 144

countries in 2005. $1521.3 has been generated as life insurance premium and

$922.7 as non life insurance premium. The US accounted for 35% of global life

and non life premium, Japan had global share of 21%, and UK was having 10% of

global share.


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Influence on Indian insurance industry:

In this era of globalization, insurance companies face a dynamic global

environment. Dramatic changes are taking place owing to the internationalization

of activities, appearance of new risk, new types of covers to match with new risk

situations, and unconventional and innovative ideas on customer services. Low

growth rates in developed markets, changing customers needs, and the uncertain

economic conditions in the developing world are exerting pressure on insurers

resources and testing their ability to survive. Now the existing insurers are facing

difficulties from non-traditional competitors those are entering the retail marketwith new approaches and through new channels.

India has a rapidly growing middle class and this section can afford to buy

insurance products. This shows the attraction that the Indian market holds for

foreign insurers who have been putting pressure on developing countries as well

as on India to open up its market.

Life insurance penetration as a % of GDP

United kingdom 8.9%

Japan 8.3%

Korea 7.3%

United states 4.1%

Malaysia 3.6%


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India 3.0%

China 1.8%

Brazil 1.3%

Source: - www.indianinsuranceresearch.com

6. Functioning of insurance industry:

Insurers business model:

Profit = earned premium + investment income - incurred loss - underwriting

expenses

Insurers make money in two ways: (1) through underwriting, the processes by

which insurers select the risks to insure and decide how much in premiums to

charge for accepting those risks and (2) by investing the premiums they collect

from insured.

The most difficult 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 risks associated with the range of
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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.

An insurer's underwriting performance is measured in its combined ratio. The loss

ratio (incurred losses and loss-adjustment expenses divided by net earned

premium) is added to the expense ratio (underwriting expenses divided by net

premium written) to determine the company's combined ratio. The combined

ratio is a reflection of the company's overall underwriting profitability. A

combined ratio of less than 100 percent indicates underwriting profitability, while

anything over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on float. Float or available

reserve is the amount of money, at hand at any given moment that an insurer has

collected in insurance premiums but has not been paid out in claims. Insurers

start investing insurance premiums as soon as they are collected and continue toearn interest on them until claims are paid out.

. 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" or

insurance cycle.

Finally, claims and loss handling is the materialized utility of insurance. In

managing the claims-handling function, insurers seek to balance the elements of
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customer satisfaction, administrative handling expenses, and claims overpayment

leakages.

Investment management:

Investment operations are often considered incidental to the business of

insurance, and have traditionally viewed as secondary to underwriting. In the past

risk management was the most important part of business, whereas today the

focus has shifted to fund management. Investment income is a large component

of insurance revenues, skilful and careful management of funds. Insurance is a

business of large numbers and generates huge amount of funds over time. These

funds arise out of policyholder funds in the case of life insurance, and technical

and free reserves in the non-life segments. Time lag between the procurement of

premium and the payment of claim provides an interval during which the funds

can be deployed to generate income. Insurance companies are among the largest

institutional investors in the world. Assets managed by insurance companies are

estimated to account for over 40% of the worlds top ten asset managers.

Returns on investments influence the premium rates and

bonuses and hence investment income will continue to be an important

component of insurance company profits. In life insurance, benefits from

insurance profits accrue directly to policy holders when it is passed on to him in

the form of a bonus. In non life insurance the benefits are indirect and mostly by

the creation of an investment portfolio. Investment income has to compensate

for underwriting results which are increasingly under pressure. In the case of

insurance, the difference between revenue and the expenses is known as

operating surplus.


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Revenue =premium.

Expenses =sum of claims + commission payable on procurement of business +

operating expenses.

Operating surplus =revenue-expenses.

Net investment income includes income from trading in and holding stock market

securities including government securities, special deposits with the central

government, loans to several public utilities and service providers in stategovernment.

Insurance premium collected is converted in a pool of fund then

divided in to four expenses.

To pay the expenses of the management. To pay agency commission. To pay for the claims. Surplus money will be invested in govt. securities.

Requirements of an insurance risk

Insurancenormally insure only pure risks .However, not all pure risk is insurable

.certain requirements usually must be fulfilled before a pure risk can be privately

insured .From the view point of the insurer, there are ideally six requirement of

an insurable risk


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There must be a large number of exposure units The loss must be accidental and unintentional. The loss must be determinable and measurable. The loss should not be catastrophic. The chance of loss must be calculable. The premium must be economically feasible

Comparison of Insurance with other Similar Factors

(1)Insurance and gambling comparedInsurance is often erroneously confused with gambling .There are two

important differences between them .First ,gambling creates a new speculative risk

,while insurance is a technique for handling an already existing pure risk .thus ,if

you bet Rs 300 on a horse ,a new speculative technique is created ,but if you pay

Rs 300 to an insurer for fire insurance ,the risk of fire is already present and is

transferred to the insurer by a contract. No new risk is created by the transaction.

The second difference between insurance and gambling is that gambling is

socially unproductive, because the winners gain comes at the expense of the loser

.In contract; insurance is always socially productive, because neither the insurer

nor the insured is placed in a position where the gain of the winner comes at the

expense of the loser. The insurer and the insured have a common interest in the

prevention of a loss. Both parties win if the loss does occur .Moreover, consistent

gambling transaction generally never restore the losers to their former financial

position .In contract ,insurance contracts restore the insureds financially in whole

or in part if a loss occurs


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(2)Insurance and hedging comparedThe concept of hedging is to transferring the risk to the speculator through

purchase of future contracts .An insurance contract, however, is not the same thing

as hedging .Although both technique are similar in that risk is transferred by a

contract, and no new risk is created, there are some important difference between

them. First, an insurance transaction involves the transfer of insurable risks,

because the requirement of an insurable risk generally can be met .However,

hedging is a technique for handling risks that are typically uninsurable ,such as

protection against a decline in the price agriculture products and raw materials.

A second difference between insurance and hedging is that insurance and hedging

is that insurance can reduce the objective risk of an insurer by application of the

law of large numbers. As the number of exposure units increases, the insurers

prediction of future losses improves, because the relative variation of actual loss

from expected loss will decline .thus, many insurance transactions reduce objective

risk. In contract, hedging typically involves only risk transfer , not risk reduction

.The risk of adverse price fluctuation is transferred because of superior knowledge

of market conditions .The risk is transferred, not reduced, and prediction of loss

generally is not based on the law of large numbers.

Various types of life insurance policies:-

Endowment policies: This type of policy covers risk for a specifiedperiod, and at the end of the maturity sum assured is paid back to

policyholder with the bonuses during the term of the policy.

Money back policies: This type of policy is for periodic payments ofpartial survival benefits during the term of the policy as long as the policy

holder is alive.


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Group insurance: This type of insurance offers life insurance protectionunder group policies to various groups such as employers-employees,

professionals, co-operatives etc it also provides insurance coverage for

people in certain approved occupations at the lowest possible premium

cost.

Term life insurance policies: This type of insurance covers risk onlyduring the selected term period. If the policy holder survives the term, risk

cover comes to an end. These types of policies are for those people who

are unable to pay larger premium required for endowment and whole life

policies. No surrender, loan or paid up values are in such policies.

Whole life insurance policies: This type of policy runs as long as thepolicyholder is alive and is covered for the entire life of the policyholder. In

this policy the insured amount and the bonus is payable only to nominee on

the death of policy holder.

Joint life insurance policies: These policies are similar to endowmentpolicies in maturity benefits and risk cover, but joint life policies cover two

lives simultaneously such as married couples. Sum assured is payable on

the first death and again on the death of survival during the term of the

policy.


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Pension plan: a pension plan or annuity is an investment over a certainnumber of years but does not provide any life insurance cover. It offers a

guaranteed income either for a life or certain period.

Unit linked insurance plan: ULIP is a kind of insurance plan whichprovides life cover as well as return on premium paid over a certain period

of time. The investment is denoted as units and represented by the value

called as net asset value (NAV).

7. Insurance and economy

Indian economy is growing in reference to global market. Business ofinsurance with its unique features has a special place in Indian economy.

It is a highly specialized technical business and customer is the mostconcern people in this business, therefore this business is able to spur the

growth of infrastructure and act as a catalyst in the overall development ofIndian economy.

The high volumes in the insurance business help spread risk wider, allowinga lowering of the rates of the premium to be charged and in turn, raising

profits. When there is a bigger base, the probabilities become more

predictable, and with system wide risks balanced out, profits improve. This

explains the current scenario of mergers, acquisitions, and globalization of

insurance.

Insurance is a type of savings. Insurance is not only important for taxbenefits, but also for savings and for providing security. It can be serving as


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an essential service which a welfare state must make available to its

people.

Insurance play a crucial role in the commercial lives of nations and act asthe lubricants of economic activities. Insurance firms help to spread the

potentially financial consequences of risk among the large number of

entities, to mobilize and distribute savings for productive use, facilitate

investment, support and encourage external trade, and protect economic

entities against external risk.

Insurance and economic growth mutually influences each other. As the economy

grows, the living standards of people increase. As a consequence, the demand for

life insurance increases. As the assets of people and of business enterprises

increase in the growth process, the demand for general insurance also increases.

In fact, as the economy widens the demand for new types of insurance products

emerges. Insurance is no longer confined to product markets; they also cover

service industries. It is equally true that growth itself is facilitated by insurance. A

well-developed insurance sector promotes economic growth by encouraging risk-

taking. Risk is inherent in all economic activities. Without some kind of cover

against risk, some of these activities will not be carried out at all. Also insurance

and more particularly life insurance is a mobilizer of long term savings and life

insurance companies are thus able to support infrastructure projects whichrequire long term funds. There is thus a mutually beneficial interaction between

insurance and economic growth. The low income levels of the vast majority of

population have been one of the factors inhibiting a faster growth of insurance in

India. To some extent this is also compounded by certain attitudes to life. The


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economy has moved on to a higher growth path. The average rate of growth of

the economy in the last three years was 8.1 per cent. This strong growth will

bring about significant changes in the insurance industry.

At this point, it is important to note that not all activities can be insured. If

that were possible, it would completely negate entrepreneurship. Professor Frank

Knight in his celebrated book Risk Uncertainty and Profit emphasized that profit

is a consequence of uncertainty. He made a distinction between quantifiable risk

and non-quantifiable risk. According to him, it is non-quantifiable risk that leadsto profit. He wrote It is a world of change in which we live, and a world of

uncertainty. We live only by knowing something about the future; while the

problems of life or of conduct at least, arise from the fact that we know so little.

This is as true of business as of other spheres of activity. The real management

challenges are uninsurable risks. In the case of insurable risks, risk is avoided at a

cost.

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