introduction to insurance ppt 07-09-10

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Introduction to insuranceGrowth and development of Insurance in India, Reforms

in Indian insurance sector (Malhotra Committee Reforms)

By K.Viswanathan

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Introduction to Insurance What is Insurance?

Definitions:In law and economics, insurance is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for payment. Insurance is a hedging instrument used as a precautionary measure against future contingent losses.

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Introduction to Insurance Is insurance only a hedge?

The primary function of insurance, be it life or non-life or reinsurance, is providing protection by assessing the risk and sharing the same with many by the process of risk sharing and thus minimizing individual risk and impact.

These basic functions are also followed by subsidiary responsibilities like efforts for preventing losses and aiding economic development through the investment of funds.

The huge funds collected from policy holders by way of premium and the amount retained by them as solvency funds to meet unforeseen contingencies are invested according to the mandatory / prudential norms approved by the Regulator (IRDA), thus leading to economic development.

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Introduction to Insurance Contribution of Insurance :

It is a cost effective means of hedging risk It is a means of savings- both policies and deposit

insurance It is a means of investment and development of trade

and industry. It encourages risk taking by entrepreneurs It is a tool of wealth management It ensures optimum utilisation of capital. It is a means to achieve better health and higher life

expectancy.

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Introduction to Insurance The 5 ‘P’s of insurance:

1. Properties- properties of all descriptions2. Perils- All types including man-made and vis-

major ( unavoidable catastrophes or acts of God)

3. People – all segments of the society4. Places- all places of geographical,

topographical descriptions5. Period- Durations of different terms

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Introduction to Insurance Major concepts of Insurance :

Any property , human or animal life, or any event that may lead to a loss of a legal right, including value, or the creation of legal liabilities is referred to as the subject matter of insurance

Difference between assurance and insurance:- event that may or may not occur- insurance - event certain to happen but the date and timing is not known- assurance

Life and non-life Tool of risk reduction and loss sharing Difference between peril and hazard:

- Hazard- arabic- ( Az-zahar)- chance or luck- an event that happens by luck or chance arising out of a perilex. Occupational hazard, fireman’s hazard, moral hazard, etc.- Perils are the causes of loss like – fire , water, rain

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Introduction to Insurance Major concepts of Insurance :Major types of hazards: Moral hazard: certain undesirable pre-dispositions on the

part of the insured, adding to the chance of risk and increases the liability of the insurer.- ex. smoking hazard

Morale hazard: Careless attitude, dishonest tendency adding to the loss and increasing the liability of the insurer- a tendency to be careless – for ex. Employee antecedent non-verification

Occupational Hazard: Occupation of a fireman or a life guard on the beach

Physical hazard: Physical conditions contributing to the enhancement of risk- ex. rain hazard

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Introduction to Insurance Major concepts of Insurance : Indemnity principle:

It is a legal principle relating mainly to life and general insurance which holds that the person / company covered under a contract of insurance should be restored to the approximate financial position before the loss occurred. Indemnity is a contract document setting out the terms and conditions of the compensation for loss arising out of contract of insurance

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Introduction to Insurance Major concepts of Insurance : Insurable Risk:

To cover a homogenous group should be available. Premium will be otherwise very high. Insurability of a risk is a function of probability of an event, which is based on law of averages.The loss should normally be measurable. But we do have life insurance where the emotional loss is not measurable.Insurable risks are those beyond the risk bearing capacity of the insured. Normally a sinking fund is created for these. For ex. Replacement of a machine Insurance does not cover catastrophic losses. Ex . Nuclear explosion, bombing in a war Insurability also takes it into account the normal health and general habits of the life to be insured and in non-life the general risks associated with such insurance

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Introduction to Insurance Major concepts of Insurance : Insurable interest :- This doctrine was developed to avoid insurance being used as a

way of making unlawful gains.- Gambling and racing also have insurance cover abroad - Prize

indemnity Insurance – winner paid by insurance co.- There are many deviations- like family insuring the children,

divorced husband and wife, dismantled partnership etc.- There are some decided court cases where in the absence of

insurable interest claims have been rejected.- In general insurance there should be insurable interest both at

the time of insurance as well as at the time of claim. – exception marine insurance – the importer bearing the cost of insurance

- Third party motor insurance - Double insurance – concept of contribution and subrogation – pro

rata clause

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Introduction to Insurance Major concepts of Insurance : Contribution : Where covered by more

than one insurance, Insurers have the right to recover from others proportionately.

Subrogation: The insurer who fulfilled the obligation of insurance steps into the shoes of insured and can claim the loss from a third party. This right of subrogation arises only after the claim is admitted by the insurer.

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Introduction to Insurance Major concepts of Insurance : Insurance- The Contract:The contract of insurance is to provide compensation for the losses

arising out of the perils as laid down in the contract.Contract of insurance is subordinate to the National Law of Contracts of

the country in which the company operates.The following are the requirements :• Parties should have legal capacity to contract.• Express consent to the terms of the contract• Valid consideration• No disqualification under any statute.In India the contract of insurance is governed by Section 10 the Indian

Contracts Act 1872. Insurance is a contract of utmost good faith- or uberrimae fidei.Caveat emptor- Buyer’s bewareCaveat Venditor- Let the seller beware- Proponent has to declare every

important aspect

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Introduction to Insurance Major concepts of Insurance : Insurance- The Contract:

Under Section 45 of the Indian Insurance Act 1938, indisputable clause – i.e no policy can be declared null and void 2 yrs after its issuance. But in case of non-disclosure of material fact, the insurer can dispute if there is any claim.Policy can be assigned.Contract of adhesion- Insurer sets the terms and insured accepts it.Insurance of life- Premium has bearing on the amount of insurance.In other cases the losses are compensated for the exact amount of loss.In case of breach the contract becomes void. There can be minor breaches and if so contract has to be honoured with minor damages paid to the breached party.

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Introduction to Insurance Major concepts of Insurance : Sum Assured:

This is one of the important components of insurance.In the case of life it is the value for which it is insured.In the case of non-life, it is normally the market value for which the insurance is taken. The claim is settled based on the pro rata average clause. i.e. ratio of the value of the damaged property to the total value of the assetIn case of some properties where it is difficult to value it, such properties are covered under “Valued Policy” based on acceptable certificate of valuation.- normally life insurance policies.

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Introduction to Insurance Major concepts of Insurance : Risk Commencement:

The risk is covered after realisation of the premium Expired and Unexpired Risks:

For life it is always the full value. In non-life the period expired is expired risk. For the balance the insurer creates Unexpired Risk Reserve (URR). Business net of reinsurance ceded is recognised as Net Written Business . For balance sheet purposes the premium outgo for reinsurance is deducted to arrive the premium on Net written business.Net earned premium= Net written premium – unearned premium Reserve carried forward to the succeeding fiscal.

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Introduction to Insurance Major concepts of Insurance : Backdating of Policies:

Backdating is permitted within the financial year only. Not earlier than that.Back dating is resorted to accommodate late birds.It is also done to accommodate professionals whose business is seasonal.While backdating the difference between the possible higher premium and the actual premium is lost by the insurer. But interest is collected.In general insurance the policy becomes void ab initio if premium is not received. In Life policies it depends upon policy conditions.

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Introduction to Insurance Based on the nature of cover offered, insurance

business is grouped into the following major categories:

Life insurance or Long term contracts Annuities or pension Group Life insurance Non- Life general insurance Reinsurance

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Growth and Development of Insurance in India The early years:

Organised business began in India in 1818.First legislation of the British Government in 1870 did not touch the Indian Insurance.Subsequent enactment of 1909 also did not cover Indian Insurance. Life Insurance Companies Act 1912 . Till that time Companies Act 1866 covered all insurance companies.The first Indian Insurance Act 1912 was modelled on Insurance Companies Act of 1870 modified by the replacing Act of 1909.

Then UK enacted Assurance Companies Act in 1946, which was applicable to the entire insurance industry. The earlier Act insisted on deposits, where as the later stipulated capital of £ 50000.

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Growth and Development of Insurance in India

The early years:Still discrimination between Indian and British Companies continued. Indian Companies had to place a deposit with the Government where as the British companies were exempted from this requirement.Resentment among Indian Companies. In 1928 this was sought to be corrected.Many companies were started and failed.All India Life Offices Association – a collective Body of Indian Companies was started in 1928.Sen Committee made recommnendations.Reviewed by NN Sarcar Committee and finally Bill piloted in 1937, became an act in 1938 and came into force with July 1st 1939. This was the first comprehensive legislation.

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Major points of the Indian Insurance Act of 1938: Compulsory Registration of Insurance Companies Filing of return on financial statements. Norms for investment of net life funds- Indian and foreign Prescribed securities for investment Compulsory licensing of agents Rebating made an offence Maximum rate of commission payable were prescribed Standardisation of premium for life insurance and compulsory approval of

premium rates by actuaries. Standardisation of policy forms and primary documents Amount of security deposits to be placed with the government. Creation of Dept of Insurance in the government

Many further amendments carried out during 1938-45. Many unscrupulous companies started operating. Therefore Sir Cowasji Jehangir Commission was appointed in 1945. The bill was taken up after independence

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Developments after independence: On January 19, 1956, Life Insurance was natioanlised

mainly with the aim of offering insurance to the needy sections of the society.

Life Insurance Corporation of India came into being on September 1,1956 with initial capital of Rs. 5 crores and seed capital. This was to be increased to Rs. 100 crores.

In 1968, the Insurance Act was substantially amended to bring in social control of General Insurance. GIC came into being in 1972 based on General Insurance Business (Nationalisation) Act 1971- merging 107 companies into one or other of the 4 major subsidiaries of GIC- i.e. National Insurance Co., New India Assurance Co., Oriental Insurance Co., United India Insurance Co.04/08/2023 .21


Indian Economy was undergoing a pace of liberalisation, which led to the opening up of the financial sector to private players.It was felt that this should also include the insurance sector.

Hence a Committee was formed under the chairmanship of the retired RBI governor R.N Malhotra to study the insurance sector and propose the necessary modifications.

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Terms of reference Of Malhotra Committee: To examine the structure of Insurance industry-its existing

framework and its strengths and weaknesses with the objective of creating an efficient and viable insurance industry- providing efficient services and mobilising financial resources for development.

To make suitable recommendations for changes in its structure To make suggestions for improvement of LIC and GIC To review and make suggestions for improvement of the

regulations to be in tune with the requirements. To review and make recommendations on the roles of

surveyors, intermediaries and other ancillaries of the insurance sector.

To make recommendations for the health and long term development of the insurance sector.04/08/2023 .23


Malhotra Committee Major Recommendations:On liberalisation: Pvt sector to be allowed to enter business.

- competition will improve customer service- improve quality and price of products-better inroads into the market- Other wings like Banks and MFs were also exposed - Public desired competition- Public sector was already well established. No fear of competition.

No composite co- separate for life and general No of entrants to be controlled04/08/2023 .24


Malhotra Committee Major Recommendations:On liberalisation: Minimum paid up capital Rs. 100 crores. Could

be lower for state level co-op Institutions. Promoters equity not to exceed 40% or to be

brought within that level. Promoters equity not to go below 26%. No singe holder other than promoter to have

more than 1% share. For pension funds the net worth should be Rs

50 cr.04/08/2023 .25


Malhotra Committee Major Recommendations:On liberalisation: Obligation to do business in rural areas and for weaker

sections of the community Selective entry to foreign companies- to float an Indian co

as joint venture. Industry to develop and improve effective customer service

and claims management Income tax concessions to individual pension schemes. Privatisation of LIC and GIC: Establishment of an Insurance Regulatory Authority on the

lines of SEBI.

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Malhotra Committee Major Recommendations: Insurance Regulatory Authority:IRDA was established by

enactment of the IRDA Bill in 1999. Comprised of a govt nominee and a member each from Life

insurance and general Insurance industries. Primary task to frame suitable regulations Control opening of offices , licensing of intermediaries etc. Also to develop insurance industry and train and develop

professionalism. Monitoring the activities of Tariff Advisory Committee , divesting

GIC of its authority to transact non-life business and designating it as Reinsurer.

IRDA started with N Rangachary as the first chair person, with 4 full time directors , 2 part time directors and with a 25 member advisory council.

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Mission of IRDA: To protect the interest of and ensure fair treatment to

policy holders To ensure speedy and orderly growth of insurance industry To set, promote and monitor high standards To ensure that insurance customers receive correct

information To ensure speedy settlement of genuine claims To promote fairness, transparency and orderly conduct in

financial markets To take suitable actions where failures are observed To bring about optimum self regulation

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Work carried out by IRDA: Under the regulations by IRDA, only Indian Co.s

registered under Indian Co.s Act 1956 are eligible to be registered.

Hence foreign co.s have to have Indian partners- joint ventures.

Foreign co.s can have 29% equity in the joint ventures.

Before permitting a foreign co. verification is done of the foreign co through local regulator of the country in which it is registered. Local co is also required to produce an income tax clearance.

Foreign Direct Investment (FDI) is now riased to 49% 04/08/2023 .29


After liberalisation many private insurance co.s have started operations in India.

Now private insurance co.s have a market share of approximately 12%.

They make impressive strides in the pension markets.

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LIFE INSURERS Websites

Public Sector

Life Insurance Corporation of India www.licindia.com

Private Sector

Allianz Bajaj Life Insurance Company Limited

www.allianzbajaj.co.in

Birla Sun-Life Insurance Company Limited www.birlasunlife.com

HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com

ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com

ING Vysya Life Insurance Company Limited www.ingvysayalife.com

Max New York Life Insurance Co. Limited www.maxnewyorklife.com

MetLife Insurance Company Limited www.metlife.com

Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com

SBI Life Insurance Company Limited www.sbilife.co.in

TATA AIG Life Insurance Company Limited

www.tata-aig.com

AMP Sanmar Assurance Company Limited www.ampsanmar.com

Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com


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GENERAL INSURERS

Public Sector

National Insurance Company Limited www.nationalinsuranceindia.com

New India Assurance Company Limited www.niacl.com

Oriental Insurance Company Limited www.orientalinsurance.nic.in

United India Insurance Company Limited www.uiic.co.in

Private Sector

Bajaj Allianz General Insurance Co. Limited

www.bajajallianz.co.in

ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com

IFFCO-Tokio General Insurance Co. Ltd. www.itgi.co.in

Reliance General Insurance Co. Limited www.ril.com

Royal Sundaram Alliance Insurance Co. Ltd.

www.royalsun.com

TATA AIG General Insurance Co. Limited www.tata-aig.com

Cholamandalam General Insurance Co. Ltd.

www.cholainsurance.com

Export Credit Guarantee Corporation www.ecgcindia.com

HDFC Chubb General Insurance Co. Ltd.

REINSURER

General Insurance Corporation of India www.gicindia.com

Growth and Development of Insurance in India Solvency Margins for Indian Insurance Cos: Till 1970s if the assets of the co matched its liabilities

the co.s were considered satisfactory Internationally solvency ratios are tools to measure

the financial stability of an insurer co. If the ratio exceeds a certain percentage, then the

Regulator considers that the company will be in a position to honour all its commitments relating to expected and unexpected risks.

An insurer can face unexpected situations like risks due to calamities, fall in the interest rates, erosion of the value of the investment portfolios due to market fluctuations etc The Regulator prescribes norms after taking into a/c various factors.04/08/2023 .33

Growth and Development of Insurance in India Solvency Margins for Indian Insurance Cos: The Solvency margins are governed by the provisions of IRDA

(Assets, Liabilities,& Solvency Margins for insurers) Regulations 2000. Insurers are required to maintain an excess of value of assets over

liabilities to the prescribed extent, which is Rs. 50 crores or an equivalent amount prescribed in the IRDA formula, which is based on the mathematical reserve and sum at risk.

The present norm is Rs. 100 crores for Life insurance co.s and Rs. 50 crores or an amount equal to 30% of the net incurred claim whichever is higher for general insurance co.s and Rs. 100 crores for reinsurance co.s.

All insurers are required to maintain a solvency ratio which is 150% of normal stipulation.

The recommendation for introducing a formula based link between minimum capital and solvency margin is under consideration.

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Introduction to insuranceGrowth and development of Insurance in India, Reforms in

Indian insurance sector (Malhotra Committee Reforms)

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introduction to insurance ppt 07-09-10

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insurance growth

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insuranceis insurance

ps of insurance

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primary function of

chance of risk