insurance in 21st century

7/29/2019 Insurance in 21st Century

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INSURANCE SECTOR IN 21ST

CENTURY

Bachelor of Commerce

(Banking & Insurance)

Semester V

(2012-13)

Submitted by

JASMEET SINGH KOHLI

SMT.M.M.K. COLLEGE OF COMMERCE AND ECONOMICS

BANDRA (W)

MUMBAI-50


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CENTURY

Bachelor of Commerce

(Banking & Insurance)

Semester V

(2012-13)

Submitted

In Partial Fulfillment of the requirements

For the Award of Degree of Bachelor of

CommerceBanking & Insurance

By

JASMEET SINGH KOHLI


BANDRA (W)

MUMBAI-50


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BANDRA (W)

MUMBAI-50

CERTIFICATE

(2012 2013)

This is to certify that Jasmeet Singh Kohli of B.com (Banking & Insurance)Semester V (2012-13) has successfully completed the project on RURAL

CREDIT IN INDIA under the guidance ofDR. Ashok Vanjani.

Date: -

Place: - Mumbai

(Prof. Mr. Vishal R Tomar) (Dr. Ashok Vanjani)

Course Co-ordinator Principal

(Prof. Dr. Ashok Vanjani)

Project Guide External Examiner


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DECLARATION

Date:-

I, Mr/Miss. Jasmeet Singh Kohli the student of B.Com (Banking & Insurance)

Semester V (2012-13) hereby declare that I have completed the project on


CENTURY successfully.

The information submitted is true and original to the best of my knowledge.

Thank you,

Yours faithfully,

Jasmeet Singh Kohli


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ACKNOWLEDGEMENT

At the beginning, I would like to thank Almighty God for his shower of

blessing. The desire of completing this dissertation was given a way by my

guide Dr. A. C. Vanjani. I am very much thankful to him for the guidance,

support and for sparing his precious time from a busy and hectic schedule.

I am thankful to Dr. ASHOK VANJANI, Principal of Smt. M.M.K. College.

My sincere thanks to Prof. Mr. Vishal Tomar who always motivated and

provided a helping hand for conceiving higher education.

I would fail in my duty ifI dont thank my parents who are pillars of my life.

Finally, I would express my gratitude to all those persons who directly and

indirectly helped me in completing dissertation.

Jasmeet Singh Kohli


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DECLARATION

Date:- 04.10.2012

I the undersigned Dr. A. C. Vanjani, have guided Jasmeet Singh Kohli for

his/her project, he/she has completed the project INSURANCE SECTOR IN

21ST

CENTURY successfully.

I hereby, declared that information provided in this project is true as per the best

of my knowledge.

Thank you,

Yours faithfully,

Dr. A. C. Vanjani.


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INTRODUCTION :

Insurance is the equitable transfer of the risk of a loss, from oneentity to another in exchange for payment. It is a form of riskmanagementprimarily used to hedge against the risk of a contingent,uncertain loss.

An insurer, or insurance carrier, is a company selling theinsurance; the insured, or policyholder, is the person or entity buyingthe insurance policy. The amount to be charged for a certain amountof insurance coverage is called the premium. Risk management, thepractice of appraising and controlling risk, has evolved as a discretefield of study and practice.

The transaction involves the insured assuming a guaranteed andknown relatively small loss in the form of payment to the insurer inexchange for the insurer's promise to compensate (indemnify) theinsured in the case of a financial (personal) loss. The insured receivesa contract, called the insurance policy, which details the conditionsand circumstances under which the insured will be financially

compensated.
http://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Decision_modelhttp://en.wikipedia.org/wiki/Indemnifyhttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Insurance_policyhttp://en.wikipedia.org/wiki/Insurance_policyhttp://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Indemnifyhttp://en.wikipedia.org/wiki/Decision_modelhttp://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Hedge_(finance)http://en.wikipedia.org/wiki/Risk_managementhttp://en.wikipedia.org/wiki/Risk_management


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DEFINITION :

General definition:

In the words of John Magee, Insurance is a plan bywhich large number of people associate themselves and transfer tothe shoulders of all, risks that attach to individuals.

Fundamental definition:

In the words of D.S. Hansell, Insurance may be defined as a

social device providing financial compensation for the effects ofmisfortune, the payment being made from the accumulatedcontributions of all parties participating in the scheme.Contractual definition:In the words of justice Tindall, Insurance is a contract in

which a sum of money is paid to the assured asconsiderat ion of insurers incurring the risk of paying a large sumupon a given contingency.

Characteristics of insurance:

Sharing of risks Cooperative device Evaluation of risk Payment on happening of a special event

The amount of payment depends on the nature of losses incurred.


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Principles

Insurance involves pooling funds from many insured entities(known as exposures) to pay for the losses that some may incur. Theinsured entities are therefore protected from risk for a fee, with the feebeing dependent upon the frequency and severity of the eventoccurring. In order to be insurable, the risk insured against must meetcertain characteristics in order to be an insurable risk. Insurance is acommercial enterprise and a major part of the financial servicesindustry, but individual entities can also self-insure through savingmoney for possible future losses.

[1]

Insurability

Risk which can be insured by private companies typically shareseven common characteristics:

[2]

Large number of similar exposure units:

Since insurance operates through pooling resources, the majorityof insurance policies are provided for individual members of largeclasses, allowing insurers to benefit from the law of large numbers inwhich predicted losses are similar to the actual losses. Exceptionsinclude Lloyd's of London, which is famous for insuring the life orhealth of actors, sports figures and other famous individuals.However, all exposures will have particular differences, which maylead to different premium rates.

Definite loss:

The loss takes place at a known time, in a known place, andfrom a known cause. The classic example is death of an insuredperson on a life insurance policy. Fire, automobile accidents, andworker injuries may all easily meet this criterion. Other types oflosses may only be definite in theory. Occupational disease, forinstance, may involve prolonged exposure to injurious conditionswhere no specific time, place or cause is identifiable. Ideally, the
http://en.wikipedia.org/wiki/Pooling_(resource_management)http://en.wikipedia.org/wiki/Insurable_riskhttp://en.wikipedia.org/wiki/Self_insurancehttp://en.wikipedia.org/wiki/Insurance#cite_note-1http://en.wikipedia.org/wiki/Insurance#cite_note-1http://en.wikipedia.org/wiki/Insurance#cite_note-1http://en.wikipedia.org/wiki/Insurance#cite_note-2http://en.wikipedia.org/wiki/Insurance#cite_note-2http://en.wikipedia.org/wiki/Law_of_large_numbershttp://en.wikipedia.org/wiki/Lloyd%27s_of_Londonhttp://en.wikipedia.org/wiki/Firehttp://en.wikipedia.org/wiki/Traffic_collisionhttp://en.wikipedia.org/wiki/Occupational_diseasehttp://en.wikipedia.org/wiki/Occupational_diseasehttp://en.wikipedia.org/wiki/Traffic_collisionhttp://en.wikipedia.org/wiki/Firehttp://en.wikipedia.org/wiki/Lloyd%27s_of_Londonhttp://en.wikipedia.org/wiki/Law_of_large_numbershttp://en.wikipedia.org/wiki/Insurance#cite_note-2http://en.wikipedia.org/wiki/Insurance#cite_note-1http://en.wikipedia.org/wiki/Self_insurancehttp://en.wikipedia.org/wiki/Insurable_riskhttp://en.wikipedia.org/wiki/Pooling_(resource_management)


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time, place and cause of a loss should be clear enough that areasonable person, with sufficient information, could objectivelyverify all three elements.

Accidental loss:

The event that constitutes the trigger of a claim should befortuitous, or at least outside the control of the beneficiary of theinsurance. The loss should be pure, in the sense that it results from anevent for which there is only the opportunity for cost. Events thatcontain speculative elements, such as ordinary business risks or evenpurchasing a lottery ticket, are generally not considered insurable.

Large loss:

The size of the loss must be meaningful from the perspective ofthe insured. Insurance premiums need to cover both the expected costof losses, plus the cost of issuing and administering the policy,adjusting losses, and supplying the capital needed to reasonablyassure that the insurer will be able to pay claims. For small losses,

these latter costs may be several times the size of the expected cost oflosses. There is hardly any point in paying such costs unless theprotection offered has real value to a buyer.

Affordable premium:

If the likelihood of an insured event is so high, or the cost of theevent so large, that the resulting premium is large relative to the

amount of protection offered, then it is not likely that the insurancewill be purchased, even if on offer. Furthermore, as the accountingprofession formally recognizes in financial accounting standards, thepremium cannot be so large that there is not a reasonable chance of asignificant loss to the insurer. If there is no such chance of loss, thenthe transaction may have the form of insurance, but not the substance.(See the US Financial Accounting Standards Board standard number113)
http://en.wikipedia.org/wiki/Financial_Accounting_Standards_Boardhttp://en.wikipedia.org/wiki/List_of_FASB_Pronouncementshttp://en.wikipedia.org/wiki/List_of_FASB_Pronouncementshttp://en.wikipedia.org/wiki/List_of_FASB_Pronouncementshttp://en.wikipedia.org/wiki/List_of_FASB_Pronouncementshttp://en.wikipedia.org/wiki/Financial_Accounting_Standards_Board


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Calculable loss:

There are two elements that must be at least estimable, if notformally calculable: the probability of loss, and the attendant cost.Probability of loss is generally an empirical exercise, while cost hasmore to do with the ability of a reasonable person in possession of acopy of the insurance policy and a proof of loss associated with aclaim presented under that policy to make a reasonably definite andobjective evaluation of the amount of the loss recoverable as a resultof the claim.

Limited risk of catastrophically large losses:

Insurable losses are ideally independent and non-catastrophic,meaning that the losses do not happen all at once and individuallosses are not severe enough to bankrupt the insurer; insurers mayprefer to limit their exposure to a loss from a single event to somesmall portion of their capital base. Capital constrains insurers' abilityto sell earthquake insurance as well as wind insurance in hurricanezones. In the US, flood risk is insured by the federal government. In

commercial fire insurance, it is possible to find single propertieswhose total exposed value is well in excess of any individual insurer'scapital constraint. Such properties are generally shared among severalinsurers, or are insured by a single insurer who syndicates the risk intothe reinsurance market.

Legal

When a company insures an individual entity, there are basiclegal requirements. Several commonly cited legal principles ofinsurance include:

Indemnity the insurance company indemnifies, or compensates, theinsured in the case of certain losses only up to the insured's interest.Insurable interestthe insured typically must directly suffer from theloss. Insurable interest must exist whether property insurance or

insurance on a person is involved. The concept requires that the
http://en.wikipedia.org/wiki/Independence_(probability_theory)http://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Earthquake_insurancehttp://en.wikipedia.org/wiki/Tropical_cyclonehttp://en.wikipedia.org/wiki/Flood_insurancehttp://en.wikipedia.org/wiki/Reinsurancehttp://en.wikipedia.org/wiki/Indemnityhttp://en.wikipedia.org/wiki/Insurable_interesthttp://en.wikipedia.org/wiki/Insurable_interesthttp://en.wikipedia.org/wiki/Indemnityhttp://en.wikipedia.org/wiki/Reinsurancehttp://en.wikipedia.org/wiki/Flood_insurancehttp://en.wikipedia.org/wiki/Tropical_cyclonehttp://en.wikipedia.org/wiki/Earthquake_insurancehttp://en.wikipedia.org/wiki/Capital_(economics)http://en.wikipedia.org/wiki/Independence_(probability_theory)


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insured have a "stake" in the loss or damage to the life or propertyinsured. What that "stake" is will be determined by the kind ofinsurance involved and the nature of the property ownership orrelationship between the persons. The requirement of an insurableinterest is what distinguishes insurance from gambling.

Utmost good faith the insured and the insurer are bound by a goodfaithbond of honesty and fairness. Material facts must be disclosed.

Contribution insurers which have similar obligations to the insuredcontribute in the indemnification, according to some method.

Subrogation the insurance company acquires legal rights to pursuerecoveries on behalf of the insured; for example, the insurer may suethose liable for insured's loss.Causa proxima, or proximate causethe cause of loss (the peril) mustbe covered under the insuring agreement of the policy, and thedominant cause must not be excluded

Mitigation - In case of any loss or casualty, the asset owner must

attempt to keep loss to a minimum, as if the asset was not insured.

Indemnification

To "indemnify" means to make whole again, or to be reinstated to theposition that one was in, to the extent possible, prior to the happeningof a specified event or peril. Accordingly, life insurance is generallynot considered to be indemnity insurance, but rather "contingent"

insurance (i.e., a claim arises on the occurrence of a specified event).There are generally three types of insurance contracts that seek toindemnify an insured:a "reimbursement" policy, anda "pay on behalf" or "on behalf of" policy, andan "indemnification" policy.From an insured's standpoint, the result is usually the same: theinsurer pays the loss and claims expenses.
http://en.wikipedia.org/wiki/Gamblinghttp://en.wikipedia.org/wiki/Implied_covenant_of_good_faith_and_fair_dealinghttp://en.wikipedia.org/wiki/Good_faithhttp://en.wikipedia.org/wiki/Good_faithhttp://en.wikipedia.org/wiki/Exclusion_clausehttp://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Life_insurancehttp://en.wikipedia.org/wiki/Exclusion_clausehttp://en.wikipedia.org/wiki/Good_faithhttp://en.wikipedia.org/wiki/Good_faithhttp://en.wikipedia.org/wiki/Implied_covenant_of_good_faith_and_fair_dealinghttp://en.wikipedia.org/wiki/Gambling


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If the Insured has a "reimbursement" policy the insured can berequired to pay for a loss and then be "reimbursed" by the insurancecarrier for the loss and out of pocket costs including, with thepermission of the insurer, claim expenses.

Under a "pay on behalf" policy, the insurance carrier woulddefend and pay a claim on behalf of the insured who would not be outof pocket for anything. Most modern liability insurance is written onthe basis of "pay on behalf" language which enables the insurancecarrier to manage and control the claim.

Under an "indemnification" policy the insurance carrier can

generally either "reimburse" or "pay on behalf of" whichever is morebeneficial to it and the insured in the claim handling process.

An entity seeking to transfer risk (an individual, corporation, orassociation of any type, etc.) becomes the 'insured' party once risk isassumed by an 'insurer', the insuring party, by means of a contract,called an insurance policy. Generally, an insurance contract includes,at a minimum, the following elements: identification of participating

parties (the insurer, the insured, the beneficiaries), the premium, theperiod of coverage, the particular loss event covered, the amount ofcoverage (i.e., the amount to be paid to the insured or beneficiary inthe event of a loss), and exclusions (events not covered). An insuredis thus said to be "indemnified" against the loss covered in the policy.When insured parties experience a loss for a specified peril, thecoverage entitles the policyholder to make a claim against the insurerfor the covered amount of loss as specified by the policy. The fee paid

by the insured to the insurer for assuming the risk is called thepremium. Insurance premiums from many insureds are used to fundaccounts reserved for later payment of claims in theory for arelatively few claimants and for overhead costs. So long as aninsurer maintains adequate funds set aside for anticipated losses(called reserves), the remaining margin is an insurer'sprofit.
http://en.wikipedia.org/wiki/Contracthttp://en.wikipedia.org/wiki/Insurance_policyhttp://en.wikipedia.org/wiki/Exclusion_clausehttp://en.wikipedia.org/wiki/Indemnityhttp://en.wikipedia.org/wiki/Overhead_(business)http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Profit_(accounting)http://en.wikipedia.org/wiki/Overhead_(business)http://en.wikipedia.org/wiki/Indemnityhttp://en.wikipedia.org/wiki/Exclusion_clausehttp://en.wikipedia.org/wiki/Insurance_policyhttp://en.wikipedia.org/wiki/Contract


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Indian Insurance sector poised for its next stage of growthThe insurance sector in India has grown at a fast rate post-liberalization in 1999. In the last decade, total premium grew at aCAGR of 25% and reached a total of $67 billion in 2010. Indian Lifeinsurance industry (which contributes 88% of total Life and Generalinsurance premium in India) has emerged as the 9th largest lifeinsurance market in the world. Yet, Insurance penetration (measuredas ratio of premium underwritten to GDP) was only at 5.2 % in 2010 significantly lower than Asian peers like South Korea, Taiwan,Japan and Hong Kong which boast an insurance density greater than10%. With low insurance penetration levels, growth potential remainspromising. More importantly, the pace and nature of growth will

likely see a change where new behaviors and dynamics of demandand supply will apply. On the demand side, growth is being fuelled bythe growing population base, rising purchasing power, increasedinsurance awareness, increased domestic savings and rising financialliteracy. The suppliers are correspondingly playing a market makingrole as competition heightens and differentiation become necessaryfor profitable growth.

In the new order, innovating across the business lifecycle hasbecome a necessity.

The puzzle of untapped potential:

While the growth in Insurance industry has been at 25% in thepast decade, a closer look suggests that this growth has come at a cost.Private insurance companies have incurred high expenses in the lastdecade in increasing awareness about the need of insurance,developing brand strength, establishing distribution channels andsetting-up branch network and other infrastructure. Most insurersinitial plans of breaking-even within first 7 to 9 years of operationshas been fraught with challenges. Some of the challenges can becharacterized as growing pains, while others are more fundamentaland intrinsic to how players have approached market making.To begin with, awareness levels of insurance offerings are low (e.g.compared to banking products) except for products like motor


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insurance where insurance is mandatory. Even when awareness ofinsurance products exists, the perceived value of buying insuranceremains low for reasons like high expectations on returns (whichother financial products may offer) and the belief that risk coverage isnot needed. Hence, insurance remains a push rather than a pull

product in India. Even among those who do buy insurance, the lapseratios are high (average ~25% lapse ratio for top 13 players as perIRDA 2010 annual report) and many buyers lose interest due tomismatch between expected returns and actual benefits.

In order to attract customers, the insurers have (especially innon-life insurance, post de-tariffing) resorted to premium discounting

which may have impacted the profitability and quality of risksunderwritten. Reaching out to the potential willing buyers andservicing them is also a challenge considering the sparsely spreadpopulation, especially outside the metros and Tier-I cities. Theindustry has faced challenges in acquiring and retaining (internal andexternal) channel teams considering the huge gap between thedemand and the supply of dependable and skilled personnel, resultingin high cost of customer acquisition and operations.

In our view, despite the latent potential, in the short term,Insurers will continue to be confronted by a multitude of challenges intheir quest to achieve top-line as well as bottom-line performances.Besides struggling to maintain growth, insurers are called upon tomeet the increasing dynamic needs of price- and service- consciouscustomers, meet regulatory demands, enhance risk managementcapabilities, reevaluate business partnerships and distribution models

and at the same time build capabilities in a more enabling technologyenvironment.

Due to above challenges, in our view, accessing the next waveof growth would require different strategies from those applied duringthe first wave. Players will need to innovatively improve primarilytwo aspects of business value proposition to customers (to improvecustomer acquisition) and operational performance (to improve

profitability).


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INSURANCE SECTORA PREVIEW :

T h e i n s u r a n c e s e c t o r i n I n d i a d a t e s b a c k t o1818 , when Or ien ta l L i fe Insurance Company wasincorpora t ed a t Ca lcu t t a . The rea f t e r , f ew o the r c o m p a n i e s l i k e B o m b a y L i f e A s s u r a n c e C o m p a n y , i n1 8 2 3 a n d T r i t o n I n s u r a n c e C o m p a n y , f o r G e n e r a lInsurance, in 1850 were incorporated. Insurance Act waspassed in1 9 2 8 b u t i t w a s s u b s e q u e n t l yr e v i e w e d a n d c o m p r e h e n s i v e legislation was enactedin 1938. The nationalization of life insurance business took place in1956 when 245 Indian and Foreign Insurance provident societies were

first merged and then nationalize d. It paved the way towards thees tabl i shment of Li fe Insurance Corpora t ion(LIC) ands i n c e t h e n i t h a s e n j o y e d a m o n o p o l y o v e r t h el i f e insurance business in India. General Insurance followedsuit and in1968, the insurance act was amended to allow for socialcontrol over the general insurance business. Subsequentlyin 1973, non-l i fe insurance business was nat ional isedand the General Insurance Business (Nationalisation) Act, 1972

was promulgated. The General Insurance Corporation (GIC) in itspresent form was incorporated in

1972 and maintains a very strong hold over the non-lifeinsurance business in India. Due to concerns of (a) Relatively lowspread of insurance in the country.(b) The efficient and qualityfunctioning of the Public Sector insurance companies(c) The

untapped potential for mobilizing long-term contractual savings fundsfor infrastructure the (Congress) government setup an InsuranceReforms committee in April 1993.The Committee submitted its report inJanuary 1994, recommended aphased program of liberalization,and called for private sector entry and restructuring of theLIC and GIC. But now the parliament has given a nod to theInsurance Regulatory and Development Authority(IRDA) bill withsome changes in the original structure.


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How big is the insurance market ?

Insurance is a Rs.400 bi l l ion business in India , andtogether with banking services adds about 7% to IndiasGDP. Gross premium collection is about 2% of GDP and hasbeen growing by 15-20% per annum. India also has the highestnumber of life insurance policies inforce in the world, and totalinvestible funds with the LIC are almost8% of GDP. Yetm o r e t h a n t h r e e - f o u r t h s o f I n d i a s i n s u r a b l e population has no life insurance or pension cover. Health insurance of anykind is negligible and other forms of non-life insurance are muchbelow international standards. To tap the vast insurance potential and tomobilize long-term savings we need reforms which include revitalizing andrestructuring of the public sector companies, and opening up thesector to private players. A statutory body needs to be made toregulate the market and promote a healthy marketstructure. Insurance Regulatory Authority (IRA) is one suchbody, which checks on these tendencies.


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INDIVIDUAL LIFE INSURANCE COVERAGE INDEX, 1994

COUNTRY NO. OF POLICIES PER 100PERSONS

Indonesia 2.0

Philippines 5.6

India 12.4

Thailand 14.7

Malaysia 35.5

Hong Kong 69.4

South Korea 70.5

Taiwan 75.2

Singapore 112.6

Japan 198.4

Source:Charted Financial Analyst May 1999. (Insurance inAsia:The financial times, quoted from Tillinghast study)


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Future course of Insurance Business:

One of the main differences between the developed economiesand the emerging economies is that insurance products are bought inthe former while these are sold in latter. Focus of insuranceindustry is changing towards providing a mix of bothprotection / risk over and long-term investment opportunities.Some of the major international players in the insurance business,which might try to enter the Indian market, areSun Life of Canada,Prudential of the United Kingdom, Standard Life, andA l l i a n z e t c . A l t h o u g h t h e i n s u r a n c e s e c t o r i sofficially open to private players, they still need a license fromthe IRDA, which wil l announce i ts guidelines in May2000.

Following might be the future strategies of insurance

companies:

(1)The new entrants cannot compete with the state owned

LIC on price alone. Due to i ts size, LIC operates at verylow costs and their premium on policies that offer pure protectionare on par with comparable schemes across the globe. What the newinsurance companies will probably offer is higher returns than t h ea n n u a l i z e d 9 - 1 0 % o n e c a n h o p e t o e a r n f r o mL I C s policies. This will put pressure on LIC to offer moreattractive returns.

(2)Consumers can also expect product innovations. For instance,at present , LIC provides cover for permanent disabil i tyand what the new companies could offer i s temporarydis abil it y insurance as well.

(3)Apart from the basic term insurance, most insuranceproducts worldwide are sold as long-term investment opportunitieswith t h e p r o t e c t i o n c o m p o n e n t b e i n g c l e a r l y s p e l tout in the scheme.


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( 4 ) L I C s p o l i c i e s a r e n o t f l e x i b l e a c c o r d i n g t ot h e c u s t o m e r s needs. New entrants have planned to offeruniversal life and variable life insurance products that allow theholder flexibility in deciding how his premium are split betweenprotection and s a v i n g s . N e w p r o d u c t s w o u l da l s o e n a b l e p r o d u c t combinations that allow greater customisation.

( 5 ) P r i v a t e i n s u r e r s w o u l d c o m p e t e f u r i o u s l yo n t h e s e r v i c e platform. These would not only include faster claimssettlement and other after-sales service but there agents would betrained in pr e - sa l e s in t e r ac t io n to us he r in a

customer-oriented approach. They would be better qualified inassisting clients infinancial planning.

(6) Foreign companies would a lso use superior so f t wa re ( l i ke APE X) t ha t w i l l g i ve t he m a n e dgeover the in-house LIC software. This technology will helpprivate insurers in product development and customising productsto suit individual needs.

(7)The foreign players will probably introduce a lot ofinnovation and competition on Surrender value. LIC pays surrendervalue only after three years but private insurancecompanies are likely to offer sops by way of better and timelysurrender value to clients.

( 8 ) A c c e s s t o i n s u r a n c e t o o w i l l

p r o b a b l y b e c o m e m o r e widespread. Role ofintermediaries would decrease and sale of insurance through directchannels and banks would increase. Simple products like terminsurance might be sold through the telephone or direct mail to highnet worth clients.

(9)In reaction to foreign players strategies one mightexpect LIC to react and drop its premia and upgrade its services.


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OPENING UP OF INSURANCE SECTOR :I n d i a n H i s t o r y : T i m e t o t u r n t h e c l o c k b a c k - a n do p e n u p insurance. For two years, around 30 foreigninsurers have eagerly explored the nationalized Indian insurancemarket, preparing to leap in when private participation isallowed. But it seems they have an endless wait before the sectoris opened up. That's ironical: in 1947,many of these insurers werefirmly established here. BAT subsidiary Eagle Star, for example,opened offices in Calcutta in 1894. By 1921,it was doing businesswith Brooke Bond and the Birlas. Prudential's first Asia officewas opened In India in 1923. Fifty years ago, India had ab u s t l i n g , i f s o me w h a t c h a o t i c , e n t i r e l y p r i v a t e

i n s u r a n c e industry. The year after Independence, 209 lifeInsurance companies w e r e d o i n g b u s i n e s s w o r t hR s 7 1 2 . 7 6 c r o r e . ( w h i c h g r e w t o a n amazing Rs.295,758crore in 1995-96). Foreign insurers had a large market share40 per cent for general insurance but there were alsoplenty ofIndian companies, many promoted by business houses liket h eT a t a s a n d D a l m i a s . T h e f i r s t I n d i a n - o w n e dl i f e i n s u r a n c e company, the Bombay Mutual Life Assurance

Society, was set up in1870 by six friends. It Insured Indian lives at thenormal rates instead of charging a premium of 15 to 20 percent asforeign insurers did. Its general insurance counterpart, IndianMercantile Insurance Company Ltd., opened in Bombay in 1907. Aplethora of insufficiently regulated players was a sure recipe for abuse,especially because there was no separation between business housesand the insurance companies they promoted. The Insurance Act,1938, introduced state controls o n i n s u r a n c e , i n c l u d i n g

m a n d a t o r y i n v e s t m e n t s i n a p p r o v e d s e c u r i t i e s ,b u t r e g u l a t i o n r e m a i n e d i n e f f e c t i v e . I n1 9 4 9 . Purshot tamdas Thakurdas, cha i rman of theOriental Assurance Company, admitted: "We cannot deny that, today,there is a tendency on the part of insurance companies in general tomake illicit gains.


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C a n w e o v e r l o o k t h e c u t t h r o a t

c o m p e t i t i o n f o r a c q u i r i n g b u s i n e s s ?

And still worse is the dishonest practice of adjusting ofaccounts." After a 1951 inquiry, the government was dismayedthat companies had high expense and premium rates, were speculating inshares , and giving loans regardless of securi ty. Nowonder that between 1945 and 1955, 25 insurers wentinto liquidation and 25transferred their business to othercompanies. This reckless record stoked the pro-n a t i o n a l i s a t i o n f i r e s . T h e 1 9 5 6 l i f e i n s u r a n c eNationalisation was a top-secret intrigue; for fear thatunscrupulous insurers would siphon funds off if warned. Thegovernment resolved to first take over the management oflife insurance companies by ordinance, then their ownership.The ordinance transferred control of 245 insurers to the government.LIC, established eight months later, took over their ownership.General Insurance had its turn in 1972,w h e n 1 0 7i n s u r e r s w e r e a m a l g a m a t e d i n t o f o u r c o m p a n i e s headquartered in the four metros, with GIC as a holdingcompany.Nationalization brought some benefits. Insurance spread froman urban-oriented, high-end business to a mass one. Today, 48 per cent OfL I C ' s n e w b u s i n e s s i s r u r a l . N e t p r e m i u m i n c o m e i ng e n e r a l insurance grew from Rs.222crore in 1973 to Rs.5,956crorein 1995-96. Yet, rigid controls hamper operational flexibilityand in i t i a t ive so both cus tomers se rvice and workc u l t u r e t o d a y a r e d i s ma l . T h e frontier spirit of the early insurershas been lost. Insurance companies h a v e a l s o b e e n t i m i d i nmanaging thei r investment port fol ios . Compet i t ionbetween the four GIC subsidiaries remains illusory.


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Why Liberalize, What Market structure to have finally, What

Role for Regulator?

Introduction :

T h e d e c i s i o n t o a l l o w p r i v a t e c o m p a n i e s t o s e l linsurance products in India rests with the lawmakers inParliament. These are the passage of the Insurance RegulatoryAuthority (IRA) Bill, which will make IRA a statutory regulatorybody, and amending the LIC and GIC Acts , which wil l endtheir respect ive monopol ies . In 1994 the governmentappointed a committee on insurance s ector refo rms(which

is known as the Malhotra Committee) which recommendedthat insurance business be opened up to private playersand laid down several guidelines for orchestrating the transition. Inparticular, we do not address many other rela ted questions suchas whether foreign (and not just private) players should beallowed, what cap should there be on foreign equityownersh ip , whe the r banks and o the r f inanc ia li n s t i t u t i o n s s h o u l d b e a l l o w e d t o o p e r a t e i n t h e

insurance business, whether firms should be allowed to sell both lifeand -non-life insurance, and so on. The three questions that we address are

(a) Why should insurance be opened up to private players?

(b) If opened up, what should be the appropriate market structure(manyunregulated players or a few regulated players); and finally,

(c) What is the role of the regulator in insurance business?


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Why allow entry to private players?

The choice between public and private might amount tochoosing between the lesser of two evils. An insurance contract is a"promise to pay" contingent on a specified event. In the case ofinsurance and banking, smooth functioning of businessdepends heavi ly on the cont inuat ion of the t rust andconfidence that people place on the solvency of thesefinancial institutions. Insurance products are of little value toconsumers if they cannot t rust the company to keep i tspromise. Furthermore, banking and insurance sectors are vulnerableto the "bank run" syndrome, wherein even one insolvency can trigger

panic among consumers leading to a widespread andcomplete breakdown. This impl ies the need for a publ icregulator, and not public provision of insurance. Indeed inIndia, insurance was in the p ri v at e s ec to r f o r a lo n g t i mep r i o r t o i n d e p e n d e n c e .The Life Insurance Corporation of India (LIC) was formed in1956,When the G over nmen t of Indi a br ough t tog ether over two

hundred odd private life insurers and provident societies, under onenationalized mo n op ol y co rp or at io n , i n th e w ak e o f s e v e r a l b a n k r u p t c i e s a n d malpractices'. Another importantjustification for Nationalisation was to raise the much-needed funds forrapid industrialization and self- reliance in heavy industries, especiallysince the country had chosen the path of state planning fordevelopment. Insurance provided theme ans to mobilize householdsavings on a large scale. LIC's stated mission was of mobilizing savings

for the development of the country.The non-life insurance business was nationalized in 1972 with theformation of General Insurance Corporation (GIC).Thus the fact that insurance is a state monopoly in India is an artifactof recent history the rationale for which needs to be examined in thecontext of liberalization of the financial sector. If traditionalinfrastructure and" semi-public goods" industries such as banking,airlines, telecom, power, and even postal services (courier) have

significant, private s e c t o r p r e s e n c e , c o n t i n u i n g a s t a t e


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m o n o p o l y i n p r o v i s i o n o f in su ran ce is in def en sib le.This is not to deny that there are some valid grounds forbeing cautious about private sector entry. Some of these concerns are:

(a) That there would be a tendency of private companies to "skim" themarkets ; thus private players would concentra te on thel u c r a t i v e m a i n l y u r b a n s e g m e n t l e a v i n g t h eu n p r o f i t a b l e s e g me n t t o t h e incumbent LIC.

(b) That without adequate regulation, the funds generated may not bedeployed in sectors (which yield long-term social benefits), such asinfrastructure and public goods; similar without regulation, private

f i r m s m a y r e n e g e o n t h e i r s o c i a l s e c t o r i n v e s t m e n to b l i g a t i o n s . Meeting these concerns requires a strong regulatory body.Another commonly expressed fear is that there would be massive joblosses in the industry as a whole due to computerization. Thishowever does not seem to be corroborated by the countries'experience'. Moreover, apart from consideration based on theoreticalprinciples alone, there is sufficient evidence that suggests thatintroduction of private players in insurance can only lead to greater

benefits to consumers. This can be seen from the fact that thespread in insurance in Ind ia i s l ow compared toi n t e r n a t i o n a l b e n c h m a r k s . T h e t w o c o n v e n t i o nmeasures of the spread of insurance are penetration and density. The formermeasure (premiums per unit) of GDP, and the latter, premiums per capita.Less than 7% of the population in India has life insurance cover. InSingapore, around 45 per cent of the people are covered andin Japan, this i s c lose to 100 p er cent . In the US, over 81

per cent the households have insurance cover. India has the biggestlife insurance sector in the world if we go by the number of policiessold, bu t t h e nu mbe r o f po l i c i e s s o l d pe r 10 pe r son sis very low. The demand for insurance i s l ike ly toincrease with rising per-capita incomes, rising literacyrates and increase of the service sector, as has been seenf r o m t h e e x a m p l e o f s e v e r a l o t h e r d e v e l o p i n gcountries. In fact, opening up of the insurance sector is an

integral part of the liberalization process being pursued by many


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developing countries. After Korean and Taiwaneseinsurance sectors were liberalized, the Korean market has grown threetimes faster than GDP and in Taiwan the rate of growth has been almost4 times that of its GDP. Philippines opened up its insurance sector in 1992.There are

several other factors that call for private sector

presence. Firstly, a state monopoly has little incentive to innovateor offer a wider range of products. This can be seen by a lack ofcertain products from LlC's portfolio, and lack of extensiverisk categorization in several GIC products, such as healthinsurance. In fact, it seems reasonable to conclude that manypeople buy life insurance just for the tax benefits, since almost 35per cent of the li fe insurance busines s is in March, the month of

financial closing. This suggests that insurance needs to be sold morevigorously. More competition in this business will spur firms to offerseveral new products, and more complex and extensive r i s kc a t e g o r i z a t i o n . T h e s y s t e m o f s e l l i n g i n s u r a n c et h r o u g h commission agents needs a better incentive structure,which a state monopoly tends to stifle. For example LIC pays out only5 per cent of its income as commissions, whereas this share in Singapore is16 per c e n t , a n d i n M a l a y s i a i t i s c l o s e t o 2 0

p e r c e n t . P r i v a t e s e c t o r presence will also mean that thecurrent investment norms, which tie-up almost 75 per cent ofinsurance funds in low yielding government securities, will haveto go. This wil l result in more proactive and marketoriented investment of funds. This needs to be tempered byprudential regulation to ensure solvency'. Of course, this also impliesthat cross-subsidizing across policyholders of different typesthat is seen both in l i fe and non-l ife insurance wil l

diminish. Since public sector firms are required to sel lsubsidized insurance to weaker sections of society, aseparate subsidy mechanism will have to be designed. The IndiaInfrastructure Report (GOI, 1996) estimates that the funds requiredin the next two decades are more than Rupees4000 billion.Finally, private sector entry into insurance might besimply a fiscal necessi ty. Since large scale funds formlong term contractual savings need to be mobilized, especially for


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investment in infrastructures the option of not having more (private)players in the insurance sector is too costly.

RESTRUCTURING OF LIC AND GIC :

In the insurance sector as of today and in all probabilities for al o n g t i m e t o c o m e , L I C a n d G I C w i l l f o r m a v e r ys i g n i f i c a n t p a r t . T h e reasons for these are many.Firstly, they have been in business for a long time and therefore, areinposition to know business conditions better than any new entrant.Secondly, the network of branches and agents is large, deep and

p e n e t r a t i n g , w h i c h w i l l t a k e a l o n g t i m e f o r a n yo t h e r en t r an t t o replicate.Thirdly, (especially the LIC), has a kind of government backingwhichin stills faith in all would-be policy holders, much more than aprivate c o mp a n y c a n h o p e t o g e n e r a t e . T h e e n v i s a g e dp r i v a t e s e c t o r participation in the insurance sector is unlikely totake this advantage away from LIC and GIC. In the short runat least. LIC and GIC will continue to command a very high

market presence and in the long run it will take a very goodmarket player to dislodge LIC and GIC from their primep o s i t i o n s . T h i s a l s o m e a n s t h a t t h e r e f o r m i ninsurance sector will necessarily mean the reform of LIC and GIC.


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Redefining Customer Value Proposition:

To improve customer acquisition, a closer examination of thestrategic components Core Product features, Positioning,Communication and Distribution channelsis warranted (refer figure

1). Innovation and developments of these components and theirinterplay will be critical to developing distinguishing and sustainingpropositions.

Core Product Features

Risk coverage, benefits, price/premium and associated servicesform the key components of core features of an insurance product.The product design teams need to configure innovative combinationsof these components to address specific segments needs and removedeterrents to buying insurance products.

Globally, insurers have designed innovative products targeted atspecific ages, types of groups, professionals or people with disease atdifferent stages. Instances of products with innovative coverage andbenefits include wellness programs, access to preferred providers,reward and loyalty programs, provision of emergency services andguaranteed NAV ULIPs. Products with innovative pricing includepay as you drive for motor insurance and co-payment claimproducts for health insurance. Globally, some players areexperimenting with use of telematics to offer driving behavior-basedpricing for motor insurance products. However, the insurers willhave to take caution against innovation that leads to more complicatedproducts and design products which are simple and focused onoffering the value desired from insurance by the customers.


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Figure 1: Components of Customer Value Proposition

Positioning

Positioning the product is equally important to improve theperceived core proposition of the product. Positioning involves

communicating key highlights or proposition of the product throughmessages which the target segment easily appreciates and connects


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with. Insurers have positioned their products as ones which provideprevention of disease, education for child, complete car

solutions, with you for life to position their products utility or

establish an emotional connect. Innovative positioning will requireunderstanding the potential and existing customers stated and

unstated needs and responding to changing socio-economic scenariosacross the target geographies. With changing lifestyles andincreasingly demanding customer segments, the players will have toposition their products around concepts like lifestyle products,

quick & easy or chose your coverage.

Customer Segmentation

Understanding customers and inherent customer behavior is avital element in developing a value proposition which resonates withthe customers unmet needs. However, there is a need to look beyondthe traditional segmentation strategies around income, wealth,geographies and life stage. Segmenting the customers according totheir insurance needs and behavior characteristics provides bettercustomer insights which are more likely to create a satisfied customer.

Developing that level of a refined understanding of the customer willenable insurers to adapt their product offerings, marketing campaignsand sales force alignment to suit their niche segments.

Communication and Distribution Channels

The identified product positioning requires appropriatecommunication channels which can reach geographically di1spersedand socio-economically diverse target customer segments. Thedistribution channels contribute by delivering on the promise madethrough the communications during the customer acquisition andservicing cycle. Insurers will need to deploy innovative distributionchannels to significantly improve the ability to reach target customersand communicate the value proposition at optimal cost. Insurers areincreasingly using communication and distribution channels likesocial media, self-help web-portals, bundling services with mobileservice providers and alliance with malls. Work-site marketing,


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groups like co-operative housing societies and unrelated productsdistribution channels are increasingly being leveraged by insurers toimprove distribution reach. For example, an experiment by a leadinginsurer in South Africa of distributing insurance products through aretail clothing store has been successful. Insurers have also leveragedSelf-Help Groups (SHGs) and Business Correspondent outlets ofbanks in rural areas to distribute micro-insurance products.

Aligning the Value Proposition with Customer segments

To ensure effectiveness of innovatively re-defined customer

value proposition, insurers will need to address specific segments ofcustomers. Insurers will need to segment the potential customers ondimensions of how Aware and Convinced are the customers(refer figure 2) about insurance products and services to better choosewhich components of value proposition to leverage.The segment under quadrant Addressable opportunity is a sweet-spot which could be serviced with minimal efforts, but most of theinsurers would be chasing this segment, making it a competitive space

to operate in. It is important to retain acquired customers byunderstanding their needs and serving them well. Addressing suchcustomers requires:

(a) innovative differentiation of product / services from other players;

(b) innovative service delivery model and

(c) the ability to cross-sell other products.

The segment under the quadrant titled Hidden opportunity mayhave only blurred to little understanding of insurance products butmay be willing (or are easier to convince) to buy insurance once theyare made aware about the features and benefits in greater detail.Addressing this segment requires innovative promotions, campaigns,communications and bundling with other/associated products. Forexample, low ticket or bundled health policies were launched tointroduce the products to identify those who respond positively (as


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they are willing buyers) and then increase the ticket-size and cross-sell more products. Innovative channels could also play an importantrole in increasing potential buyers affinity with products to explore

and serve the convinced buyers.

Figure 2: Customer Segments

The unconvinced segment is the informed segment which does not

perceive the need to buy insurance or had bad experiences in past.Addressing this segment requires innovative product design, alignedpricing and customized servicing. Players will need to assess thepossible reasons for this segment being unconvinced to refine thepricing, alter the product ticket-size upward or downward and changethe rigor of service levels and available channels.

The future opportunity segment should be monitored forfuture potential and revisited periodically depending on the untappedpotential available in the other quadrants. The population under


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future opportunity could also move towards the other quadrants byitself as product awareness and perceived need for insurance improvesdue to external parameters like larger media exposure, improvementin quality of life, word-of-mouth and large natural / human-madedisasters.

The challenge in undertaking the above however is the ability tomap the population along the four quadrants. This could be achievedby primary research, focused group interactions and stakeholder (e.g.healthcare providers in case of health insurance) feedback. On-goingindustry-wide research on consumer behavior and perception towardsinsurance products sponsored by the insurance players, councils or the

regulator could also provide significant insights.

Insurers who invest in incremental innovation across theinsurance value chain and not just in disruptive innovation are morelikely to benefit as the market stabilizes. Incremental innovation is notlikely to cost a lot (compared to existing cost structures of players), asit involves rejigging existing business and operating model to deliverbetter and is easier to implement. Insurers investing in redesigning

products and processes, smarter marketing, finer customersegmentation are more likely to gain a disproportionately high shareof market growth and market share.

Improving Operational Performance:

Apart from addressing the challenge of customer acquisition, theother big challenge for Indian insurers has been improving operationalperformance to achieve profitable growth. Many Insurers in past haveresorted to tactics like high commission payment to distributors,focusing more on new premium rather than renewals, high premiumdiscounting and focusing only on growth rather than also focusing onimproving operational maturity. The result has been high customeracquisition costs, low channel productivity, low customer-centricservice excellence, reduced ability to detect frauds, difficulty inimplementing risk-based pricing, challenges in acquiring and

retaining talent and poor quality of data.


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The insurers will need to innovatively alter the operating models,business processes, channel management and human resource strategyto control the operating expenses and the combined ratios. Insurershave implemented innovations like over-the-counter products, auto-underwritten and straight-through processed products to improve thespeed of service and reduce processing costs. However, withincreasing customer sophistication, growing scale of operations,larger diverse workforces and greater need to increase reach, theplayers will need to bring in rapid innovations across businessfunctions.


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Key challenges in leveraging Innovation:

While there have been instances of innovative products andbusiness models deployed by insurers in India, there are challenges internal and external to the insurers organizations which inhibitgreater innovation.Firstly, in the first decade of privatization, the focus was more onexpanding and stabilizing the business applying the prevailingbusiness models rather than on innovation. With a decade of learningabout the consumer behavior and channel economics, the players maynow be better equipped to implement successful innovations relevantin India. The imperatives for innovation too are now higher than inthe early years of privatization. Secondly, the management teamshave so far been more oriented to design, deploy and maintainsystems and processes rather than bring in innovation. The ability toinnovatewhich involves taking risksmay also have been hinderedby the fact that the players are constrained by low margins of error onaccount of lower profitability and high capital requirements.Lastly, some of the product and distribution innovations prevailing inother markets (e.g. Insurers offering insurance along with other

services like health programs) are not permitted in the Indianregulatory environment. While the regulator has supported insurers toimplement innovative practices through steps like product de-tariffingin general insurance and permitting Health plus life comboproducts, regulator has been cognizant of prevailing challenges. Withrealization of mis-selling instances and low consumer awareness, theregulator has avoided propagating drastic variations in core productparameters or the distribution channels

Improving the Innovation Quotient

Fuelling the innovation engine

Innovation management is all about people management. To

begin with, the organizations should commit themselves to deployinginnovation and creating a culture in which implementation of new


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ideas is a part of the core strategy. Secondly, the management shouldcommunicate to the stakeholders, the extent of role that innovation isexpected to playthe Innovation Quotientin the growth journey ofthe organization. Accordingly, the management should propagate theculture of risk taking within the set boundaries.

The participants of innovation process could either be the entireorganization or a focused team which could include various functions(sales, marketing, distribution, operation, strategy). The humanresources strategy and policies should be aligned to InnovationQuotient in terms of appropriateness of job roles, reporting structure,Key Result Areas (KRAs) and incentives to encourage innovative

behaviors. Integration of stakeholders outside the organization customers, channel partners, regulatorsis also critical to source andimplement innovations in the organization. Lastly, the organizationsshould develop capabilities to assess the extent of success and Returnof Investment (RoI) achieved through innovation.

Ability to Innovate also requires parameters external to theplayers to be conducive. For example, the regulatory regime should

allow and encourage innovation in areas like products anddistribution. The related sectors like healthcare, housing, motordealers and government should be receptive and agile to participatewith insurers to offer innovative products and deploy processes andtechnology to improve sales process and customer servicing.

Understanding the Innovation Levers

There are several Innovation Levers which may be applied byinsurers in the context of environment developments which are likelyto considerably change their business prospects over the next fewyears. Insurers which are better organized around harnessing andadapting these Innovation Levers will be better positioned to realizetheir potential by deploying their capital financial, managerial,technological as well as physical. A select list of illustrativeInnovation Levers have been detailed below.


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Innovation process


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Innovation process begins with generation of ideas by theidentified stakeholders. Organizations need to put in place, processwhich enables collation of ideas through modes like formal meetingsand workshops, suggestions boxes or technology enabled idea

banks.

Figure 3: Innovation Process

The desired stakeholders and the modes of seeking ideas dependon the scope of innovation (e.g. product innovation or operationalimprovement) and frequency of innovation (one time vs ongoing).The goals for seeking ideas and scope of idea generation should bedefined when inviting the ideas (refer figure 3).

The generated ideas need to be selected for implementationusing a matrix which accommodates imaginative exploration but alsoevaluates expected returns and risks involved through critical


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judgment. The ideas need to be further elaborated and converted intoproducts and services definitions in the context of the organizationsbusiness and socio-economic environment. In the final stage, theselected products and services need to be defined and delivered asprojects by engaging the stakeholders and closely monitoring thebenefit realization.

The process of innovation can take two forms Incremental orBreakthrough (refer figure 4). Breakthrough innovation is generallyless frequent, disruptive, more strategic with high revenue potentialand initiated at organization level with close involvement of the topmanagement.


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Figure 4: Forms of Innovation

Breakthrough strategy enables creation of growth strategies,

new product categories, services or business models that change thegame and generate significant new value customers and thecorporation. Breakthrough innovations are often managed as one-offlarge projects in the organizations.

Incremental Innovation involves successfully utilizing a newtechnology, undertaking small process improvements or launchingproduct variants, which bring incremental improvement. In the short

term, Incremental innovation has relatively low to medium impact onthe revenues or the expenses incurred by the organization. They maynot bring large, dramatic or game changing improvements in shortspan, but often lead to long term growth of the organization.Incremental innovation is often managed through imbibing ideageneration, selection, conversion and diffusion steps in the regularresponsibilities of the functional leaders of the organization.


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Conclusion:

Insurance industry in India has now been through a cycle

involving high growth and more recent moderation. The next wave ofgrowth will be of different nature and complexity, led by players whochange the market dynamics through innovation. With a decade ofexperience and learning about customer behavior and businesseconomics, Indian insurers are well-placed to select and diffuseinnovative ideas. However, this would require that insurers bringabout fundamental difference in mindset on how they perceive therole of innovation in achieving profitable growth. The insurers will

need to align the people strategies to create a culture of generatingnew ideas and implementing those using optimal resources. Insurershave the choice of adopting innovation and leap ahead or lag behind.

Need for Corporate Governance in Insurance Sector

Insurance industry bears a fiduciary relationship with policyholders

and long term performances. The honesty and integrity of insurers areparamount important as the industry has financial functions. Officersand employees can break the regulatory measures and enjoy themoney of policyholder. No insurer will be successful unless hisintegrity is tested as sound and useful for the effective performancesof the functions. The need of corporate governance is realized forconfidence building change-management, investment and viability.

Confidence

Insurance is based on confidence. New insurance companies candevelop only if the old insurance companies have demonstratedhonestly and integrity. For example, LIC has proved the insurance hassore reign guarantee. Long term contract is built only on confidence.Insurance particularly life insurance is long-term contract. Thereshould be benchmark standards against which insurers should

demonstrate public image.


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Insurance companies are facing several changes in the society. Theyhave to cope with changes and come forward to challenge thechanges. It has been observed that insurance industry is growingfaster than GDP. Specialized insurance companies are entering in themarket. Many foreign companies have entered in India to conductinsurance business. Health insurance is becoming a need of the hour.The insurance companies have to manage themselves for maintainingsafety and solvency. Non- insurers are growing in detarrified erachallenging their fair play, policyholders servicing and transparency.

Investment

Insurance companies manage their funds through investment whichinvolves safety solvency risk management and protection ofpolicyholders interest. The actuarial experiences also help decideinsurance expansion. It grapples greater challenges such as increasingnumber of good governance standard against which the companiesconduct and performance would get measured against thesebackdrops. They have to live up with securities market and governingrules. SEBI has formulated several rules and regulation which have tobe followed by the insurer.

Viability

The insurers have to prove their viability. Many new and existingcompanies now enter in the insurance business. Foreign, insurancecompanies have to prove their viability. Public sector insurers haveproved their viability and private sector insurers have to operate in asafe and sound manner and in accordance with the applicable rulesand regulations.

insurance in 21st century

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