Description
this is the project all about the insuarance sector influence in indai has made by me awesome i putted the best efforts of me to complete this i think u will like this
Introduction of Insurance
In today's world we hardly come across anyone who is not familiar with the term insurance. Our life is uncertain, we do not have any idea what will happen in our future. But insurance has become one of the great ways to secure our future. Getting the right introduction to insurance is important so as to get more familiar with the term. The idea of insurance is very simple. It can simply be defined as an instrument used for managing the possible risks of the future. Throughout our life we may face many kinds of risks such as failing health, financial losses, accidents and even fatalities. Insurance addresses all these uncertainties on financial terms. So one should understand the importance of insurance in their life. With that, you will get to know all the types of insurance plus the benefits. As insurance covers risks against financial losses, it should not be taken as an investment instrument. There a need of insurance in every stage of our life and risks always increases with the changing environment of our life. Insurance is essentially a mechanism that eliminates risks primarily by transferring the risk from the insured to the insurer. It’s never too late to get insured. Insure now and secure your financial future. Learn how to buy insurance online. Different types of insurance companies discussed will broaden your horizon on insurance. 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. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy”. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. In the last few decades we have seen numerous changes in the insurance industry since the need for insurance is more evident now than earlier. People's spending patterns are changing and more & more resources are needed for immediate consumption. So review your insurance portfolio from time to time. Specially due to the inflation is increasing day by day so you must get the proper return as equals to your spending. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country’s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was
Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes .The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.
Characteristics of insurance:Risk which can be insured by private companies typically share seven common characteristics: 1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, is a British insurance and reinsurance market. It serves as a partially metalized marketplace where multiple financial backers, underwriters, or members, whether individuals (traditionally known as Names) or corporations, come together to pool and spread risk, which is famous for insuring the life or health of actors, sports figures and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates. 2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements. 3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable. 4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that the insurance will be purchased, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the US Financial Accounting Standards Board standard number 113) 6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim. 7. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the US, flood risk is insured by the federal government. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Insurance sector in India
In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts has reference to marine trade loans and carriers' contracts. Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. At the dawn of the twentieth century, many insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. However, the disparity still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. It is in business.
The Government of India issued an Ordinance on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies —245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalization) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been DE-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited. NAME OF THE INSURANCE COMPANY AND THE SHARE HOLDING PATTERN Name of the Insurance Company Agricultural Insurance Co Bajaj Allianz General Insurance Co. Ltd. Cholamandalam MS General Insurance Co. Ltd. Export Credit Guarantee Company HDFC Chubb General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO-Tokio General Insurance Co. Ltd. National Insurance Co. Ltd. New India Assurance Co. Ltd. Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Shareholding Bank and Public Ins Co Privately Held Privately Held Public Sector Privately Held Privately Held Privately Held Public Sector Public Sector Public Sector Privately Held
Royal Sundaram Alliance General Insurance Co. Ltd. Tata AIG General Insurance Co. Ltd. United India Insurance Co. Ltd.
Privately Held Privately Held Public Sector
There are a total of 13 life insurance companies operating in India, of which one is a Public Sector Undertaking and the balance 12 are Private Sector Enterprises. List of Companies are indicated below:TABLE NO: 4 NAME OF THE LIFE INSURANCE COMPANY AND THE SHARE HOLDING PATTEN Name of the company Alliance Bajaj Life Insurance Co Aviva Life Insurance Birla Sun Life Insurance Co HDFC Standard Life Insurance Co ICICI Prudential Life Insurance Co ING Vysya Life Insurance Co. Life Insurance Corporation of India Max New York Life Insurance Co. MetLife Insurance Co. Om Kotak Mahindra Life Insurance Reliance insurance SBI Life Insurance Co TATA- AIG Life Insurance Company Nature of Holding Private Private Private Private Private Private Public Private Private Private Private Private Private
TABLE 5. NAME OF THE PLAYER MARKET SHARE (%) Name of the Player LIFE INSURANCE CORPORATION OF INDIA ICICI PRUDENTIAL BIRLA SUN LIFE BAJAJ ALLIANZ SBI LIFE INSURANCE HDFC STANDARD TATA AIG MAX NEW YARK AVIVA OM KOTAK MAHINDRA ING VYSYA MET LIFE PRESENT SCENARIO OF INSURANCE INDUSTRY ? India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. ? Consumers remain the most important center of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies ? The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. Market share (%) 82.3 5.63 2.56 2.03 1.80 1.36 1.29 0.90 0.79 0.51 0.37 0.21
?Direct selling ? ?Corporate agents ? ?Group selling ? ?Brokers and cooperative societies ? ?Bancassurance ? ? Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. ? The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds. 10 Gross and Net Premium in India for last 10 years
Objectives and Constraints for Insurance Companies
Insurance companies have obligations to pay out certain benefits (death benefits, annuities) in the future. Their investment policies should be set with these obligations in mind. Strategic Objective As a leading insurance companies, they are committed to providing the best possible service for there clients. Since the establishment of the company, they have set a number of long term strategic goals. They are keen to achieve. On top of our goals is to build a strong loyal customer base, that they always try to enrich by providing the best services at competitive costs. they have broaden our range of services over the years, in order to reach out for more customers and meet their precise needs. One of the main objectives of the company is to maintain a stable financial position in the market along with a stable growth in capital over the years. Finally , our achievements and clients speak for us,which proves that we are on the right track for more than 20 years now. Risk Objective Future liabilities and interest rate sensitivity generally result in lower risk tolerance. Many insurers segment funds, with liabilities covered by safe assets of similar duration and surplus funds invested in riskier securities. Asset/liability risk considerations figure prominently in life insurers' risk objectives, not only because of the need to fund insurance benefits but also because of the importance of interest rate-sensitive liabilities. Examples of such liabilities are annuities and deposit type contracts, such as guaranteed investment contracts (GI Cs) and funding agreements (stable-value instruments similar to GI Cs). Return Objective Earn a positive spread over the rates paid to policyholders. Constraints Liquidity is not typically a concern. However, liquidity needs can become important if the insurer is responsible for high annuity payments or if there is significant interest rate volatility (reducing liquidity of assets.) The overall time horizon is long-term, though many insurers prefer to segment time horizons according to product classes. Insurers are commercial entities and subject to taxation, so after-tax returns are the critical measure. Insurers also face heavy legal and regulatory constraints on investment policy ranging from adherence to the prudent investor rule to restrictions on investments and valuation methodology. Unique circumstances vary by insurer.
Non-Life Insurance Companies. Return objectives
However, times have changed and the investment and operating functions are much more closely coordinated now. Factors influencing return objectives include competitive pricing policy, profitability, growth of surplus, tax considerations, and total return management. Competitive policy pricing Low insurance policy premium rates, due to competition, provide an incentive for insurance companies to set high desired investment return objectives. The flip side is that high investment
returns may induce insurance companies to lower their policy rates, even though a high level of returns cannot be sustained. In the late 1970s and early 1980s, for example, many casualty insurance companies, especially the larger ones, took advantage of the high interest rates being earned on new investments to lower insurance premiums or to delay the normal pass through of cost increases to their customers. As a result of this strategy, casualty insurance premiums lagged the otherwise high rate of inflation that characterized the early 1980s. Once interest rates began to fall, projections of high investment returns became suspect. The operating margin decline that many casualty insurance companies experienced in the mid-1980s resulted, in part, from the mis-pricing of their products because of expected returns that did not materialize. The low interest rate and weak stock market environment of 2000 through 2002 reinforced the perception that insurers cannot rely on investment returns to cover underwriting losses and that underwriting quality and profitable pricing are important. Thus any influence of competitive policy pricing on a casualty company's return objectives needs to be assessed in light of wellthought-out capital market assumptions and the insurance company's ability to accept risk. Profitability Investment income and the investment portfolio return are primary determinants of continuing profitability for the typical casualty company and, indeed, the industry. The underwriting cycle influences the volatility of both company and industry earnings. Return requirements for casualty companies are not framed in reference to a crediting rate for their policies; rather, casualty insurance portfolios are managed to maximize return on capital and surplus to the extent that prudent asset/liability management, surplus adequacy considerations, and management preferences will allow. Given the underwriting uncertainties inherent in the casualty insurance business, investment income obviously provides financial stability for the insurance reserves. In fact, investment earnings are expected to offset periodic underwriting losses (claims and expenses in excess of premium income) from the insurance side of the company. Most casualty insurance products are priced competitively, and thus casualty premium rates are generally not sufficiently ample or flexible to eliminate the loss aspects of the underwriting cycle. The insurance industry measures underwriting profitability using the ''combined ratio,'' the percentage of premiums that an insurance company spends on claims and expenses. Over the past 25 years, the combined ratio for U.S.-based non-life insurance companies has been above 100 percent, reflecting underwriting losses, in over 60 percent of the years. Growth of surplus An important function of a casualty company's investment operation is to provide growth of surplus, which in turn provides the opportunity to expand the volume of insurance the company can write. As mentioned earlier, the risk-taking capacity of a casualty insurance company is measured to a large extent by its ratio of premiums to capital and surplus. Generally, companies maintain this ratio between 2-to-1 and 3-to-1, although many well capitalized companies have lower ratios. Casualty companies have invested in common stocks, convertible securities, and alternative investments to achieve growth of surplus. These investments' return and marketability characteristics fit well within the industry's underwriting cycles.
Tax considerations Over the years, non-life insurance companies' investment results have been very sensitive to the after-tax return on the bond portfolio and to the tax benefits, when they exist, of certain kinds of investment returns. In the United States, these returns have included dividend income (through the exclusion of a portion of the dividends received by one corporation on stock issued by another corporation), realized long-term capital gains, and tax-exempt bonds. U.S. casualty insurance companies have historically favored the latter, especially when underwriting is profitable, to achieve the highest after-tax return. For many casualty companies, the flexibility to shift between taxable and tax-exempt bonds has long been an important consideration as a key element of managing and optimizing after-tax income through the operating loss carry back and carry forward provisions of the U.S. tax code. Most companies have maintained some balance of taxable and tax-exempt bonds in their portfolios, shifting that mix as tax considerations warranted. Recent changes in the tax laws have diminished most of the tax benefits available to casualty insurance companies. Outside of the United States, tax-exempt securities for insurance companies either do not exist or are more limited in supply( insurance mathematics ).For non-U.S. insurance companies, therefore, taxes are even more of a constraint. Total return management. Active bond portfolio management strategies designed to achieve total return, rather than yield or investment income goals only, have gained popularity among casualty insurance companies, especially large ones. Because GAAP and statutory reporting require that realized capital gains and losses flow through the income statement, the decline in interest rates and increase in bond prices since 1982 have encouraged casualty insurance portfolio managers to trade actively for total return in at least some portion of their bond portfolios. One of the most interesting characteristics of casualty insurance companies is that their investment returns vary significantly from company to company. This variation reflects the latitude permitted by insurance regulations; differences in product mix, and thus in the duration of liabilities; a particular company's tax position; the emphasis placed on capital capital and surplus positions. Exhibit 3-6 illustrates this contrast.
doc_280933114.doc
this is the project all about the insuarance sector influence in indai has made by me awesome i putted the best efforts of me to complete this i think u will like this
Introduction of Insurance
In today's world we hardly come across anyone who is not familiar with the term insurance. Our life is uncertain, we do not have any idea what will happen in our future. But insurance has become one of the great ways to secure our future. Getting the right introduction to insurance is important so as to get more familiar with the term. The idea of insurance is very simple. It can simply be defined as an instrument used for managing the possible risks of the future. Throughout our life we may face many kinds of risks such as failing health, financial losses, accidents and even fatalities. Insurance addresses all these uncertainties on financial terms. So one should understand the importance of insurance in their life. With that, you will get to know all the types of insurance plus the benefits. As insurance covers risks against financial losses, it should not be taken as an investment instrument. There a need of insurance in every stage of our life and risks always increases with the changing environment of our life. Insurance is essentially a mechanism that eliminates risks primarily by transferring the risk from the insured to the insurer. It’s never too late to get insured. Insure now and secure your financial future. Learn how to buy insurance online. Different types of insurance companies discussed will broaden your horizon on insurance. 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. An insurer is a company selling the insurance; an insured, or policyholder, is the person or entity buying the insurance policy”. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. In the last few decades we have seen numerous changes in the insurance industry since the need for insurance is more evident now than earlier. People's spending patterns are changing and more & more resources are needed for immediate consumption. So review your insurance portfolio from time to time. Specially due to the inflation is increasing day by day so you must get the proper return as equals to your spending. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts. With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20 per cent annually. Together with banking services, it adds about 7 per cent to the country’s GDP .In spite of all this growth the statistics of the penetration of the insurance in the country is very poor. Nearly 80% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India. It was due to this immense growth that the regulations were introduced in the insurance sector and in continuation “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was
Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform. Since then the insurance industry has gone through many sea changes .The competition LIC started facing from these companies were threatening to the existence of LIC .since the liberalization of the industry the insurance industry has never looked back and today stand as the one of the most competitive and exploring industry in India. The entry of the private players and the increased use of the new distribution are in the limelight today. The use of new distribution techniques and the IT tools has increased the scope of the industry in the longer run.
Characteristics of insurance:Risk which can be insured by private companies typically share seven common characteristics: 1. Large number of similar exposure units: Since insurance operates through pooling resources, the majority of insurance policies are provided for individual members of large classes, allowing insurers to benefit from the law of large numbers in which predicted losses are similar to the actual losses. Exceptions include Lloyd's of London, is a British insurance and reinsurance market. It serves as a partially metalized marketplace where multiple financial backers, underwriters, or members, whether individuals (traditionally known as Names) or corporations, come together to pool and spread risk, which is famous for insuring the life or health of actors, sports figures and other famous individuals. However, all exposures will have particular differences, which may lead to different premium rates. 2. Definite loss: The loss takes place at a known time, in a known place, and from a known cause. The classic example is death of an insured person on a life insurance policy. Fire, automobile accidents, and worker injuries may all easily meet this criterion. Other types of losses may only be definite in theory. Occupational disease, for instance, may involve prolonged exposure to injurious conditions where no specific time, place or cause is identifiable. Ideally, the time, place and cause of a loss should be clear enough that a reasonable person, with sufficient information, could objectively verify all three elements. 3. Accidental loss: The event that constitutes the trigger of a claim should be fortuitous, or at least outside the control of the beneficiary of the insurance. The loss should be pure, in the sense that it results from an event for which there is only the opportunity for cost. Events that contain speculative elements, such as ordinary business risks or even purchasing a lottery ticket, are generally not considered insurable. 4. Large loss: The size of the loss must be meaningful from the perspective of the insured. Insurance premiums need to cover both the expected cost of losses, plus the cost of issuing and administering the policy, adjusting losses, and supplying the capital needed to reasonably assure that the insurer will be able to pay claims. For small losses these latter costs may be several times the size of the expected cost of losses. There is hardly any point in paying such costs unless the protection offered has real value to a buyer.
5. Affordable premium: If the likelihood of an insured event is so high, or the cost of the event so large, that the resulting premium is large relative to the amount of protection offered, it is not likely that the insurance will be purchased, even if on offer. Further, as the accounting profession formally recognizes in financial accounting standards, the premium cannot be so large that there is not a reasonable chance of a significant loss to the insurer. If there is no such chance of loss, the transaction may have the form of insurance, but not the substance. (See the US Financial Accounting Standards Board standard number 113) 6. Calculable loss: There are two elements that must be at least estimable, if not formally calculable: the probability of loss, and the attendant cost. Probability of loss is generally an empirical exercise, while cost has more to do with the ability of a reasonable person in possession of a copy of the insurance policy and a proof of loss associated with a claim presented under that policy to make a reasonably definite and objective evaluation of the amount of the loss recoverable as a result of the claim. 7. Limited risk of catastrophically large losses: Insurable losses are ideally independent and non-catastrophic, meaning that the losses do not happen all at once and individual losses are not severe enough to bankrupt the insurer; insurers may prefer to limit their exposure to a loss from a single event to some small portion of their capital base. Capital constrains insurers' ability to sell earthquake insurance as well as wind insurance in hurricane zones. In the US, flood risk is insured by the federal government. In commercial fire insurance it is possible to find single properties whose total exposed value is well in excess of any individual insurer's capital constraint. Such properties are generally shared among several insurers, or are insured by a single insurer who syndicates the risk into the reinsurance market.
Insurance sector in India
In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts has reference to marine trade loans and carriers' contracts. Insurance in its current form has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer. At the dawn of the twentieth century, many insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. However, the disparity still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. It is in business.
The Government of India issued an Ordinance on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies —245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalization) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been DE-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited. NAME OF THE INSURANCE COMPANY AND THE SHARE HOLDING PATTERN Name of the Insurance Company Agricultural Insurance Co Bajaj Allianz General Insurance Co. Ltd. Cholamandalam MS General Insurance Co. Ltd. Export Credit Guarantee Company HDFC Chubb General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO-Tokio General Insurance Co. Ltd. National Insurance Co. Ltd. New India Assurance Co. Ltd. Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Shareholding Bank and Public Ins Co Privately Held Privately Held Public Sector Privately Held Privately Held Privately Held Public Sector Public Sector Public Sector Privately Held
Royal Sundaram Alliance General Insurance Co. Ltd. Tata AIG General Insurance Co. Ltd. United India Insurance Co. Ltd.
Privately Held Privately Held Public Sector
There are a total of 13 life insurance companies operating in India, of which one is a Public Sector Undertaking and the balance 12 are Private Sector Enterprises. List of Companies are indicated below:TABLE NO: 4 NAME OF THE LIFE INSURANCE COMPANY AND THE SHARE HOLDING PATTEN Name of the company Alliance Bajaj Life Insurance Co Aviva Life Insurance Birla Sun Life Insurance Co HDFC Standard Life Insurance Co ICICI Prudential Life Insurance Co ING Vysya Life Insurance Co. Life Insurance Corporation of India Max New York Life Insurance Co. MetLife Insurance Co. Om Kotak Mahindra Life Insurance Reliance insurance SBI Life Insurance Co TATA- AIG Life Insurance Company Nature of Holding Private Private Private Private Private Private Public Private Private Private Private Private Private
TABLE 5. NAME OF THE PLAYER MARKET SHARE (%) Name of the Player LIFE INSURANCE CORPORATION OF INDIA ICICI PRUDENTIAL BIRLA SUN LIFE BAJAJ ALLIANZ SBI LIFE INSURANCE HDFC STANDARD TATA AIG MAX NEW YARK AVIVA OM KOTAK MAHINDRA ING VYSYA MET LIFE PRESENT SCENARIO OF INSURANCE INDUSTRY ? India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. ? Consumers remain the most important center of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies ? The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. Market share (%) 82.3 5.63 2.56 2.03 1.80 1.36 1.29 0.90 0.79 0.51 0.37 0.21
?Direct selling ? ?Corporate agents ? ?Group selling ? ?Brokers and cooperative societies ? ?Bancassurance ? ? Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. ? The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs 3,500 and Rs 2,900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds. 10 Gross and Net Premium in India for last 10 years
Objectives and Constraints for Insurance Companies
Insurance companies have obligations to pay out certain benefits (death benefits, annuities) in the future. Their investment policies should be set with these obligations in mind. Strategic Objective As a leading insurance companies, they are committed to providing the best possible service for there clients. Since the establishment of the company, they have set a number of long term strategic goals. They are keen to achieve. On top of our goals is to build a strong loyal customer base, that they always try to enrich by providing the best services at competitive costs. they have broaden our range of services over the years, in order to reach out for more customers and meet their precise needs. One of the main objectives of the company is to maintain a stable financial position in the market along with a stable growth in capital over the years. Finally , our achievements and clients speak for us,which proves that we are on the right track for more than 20 years now. Risk Objective Future liabilities and interest rate sensitivity generally result in lower risk tolerance. Many insurers segment funds, with liabilities covered by safe assets of similar duration and surplus funds invested in riskier securities. Asset/liability risk considerations figure prominently in life insurers' risk objectives, not only because of the need to fund insurance benefits but also because of the importance of interest rate-sensitive liabilities. Examples of such liabilities are annuities and deposit type contracts, such as guaranteed investment contracts (GI Cs) and funding agreements (stable-value instruments similar to GI Cs). Return Objective Earn a positive spread over the rates paid to policyholders. Constraints Liquidity is not typically a concern. However, liquidity needs can become important if the insurer is responsible for high annuity payments or if there is significant interest rate volatility (reducing liquidity of assets.) The overall time horizon is long-term, though many insurers prefer to segment time horizons according to product classes. Insurers are commercial entities and subject to taxation, so after-tax returns are the critical measure. Insurers also face heavy legal and regulatory constraints on investment policy ranging from adherence to the prudent investor rule to restrictions on investments and valuation methodology. Unique circumstances vary by insurer.
Non-Life Insurance Companies. Return objectives
However, times have changed and the investment and operating functions are much more closely coordinated now. Factors influencing return objectives include competitive pricing policy, profitability, growth of surplus, tax considerations, and total return management. Competitive policy pricing Low insurance policy premium rates, due to competition, provide an incentive for insurance companies to set high desired investment return objectives. The flip side is that high investment
returns may induce insurance companies to lower their policy rates, even though a high level of returns cannot be sustained. In the late 1970s and early 1980s, for example, many casualty insurance companies, especially the larger ones, took advantage of the high interest rates being earned on new investments to lower insurance premiums or to delay the normal pass through of cost increases to their customers. As a result of this strategy, casualty insurance premiums lagged the otherwise high rate of inflation that characterized the early 1980s. Once interest rates began to fall, projections of high investment returns became suspect. The operating margin decline that many casualty insurance companies experienced in the mid-1980s resulted, in part, from the mis-pricing of their products because of expected returns that did not materialize. The low interest rate and weak stock market environment of 2000 through 2002 reinforced the perception that insurers cannot rely on investment returns to cover underwriting losses and that underwriting quality and profitable pricing are important. Thus any influence of competitive policy pricing on a casualty company's return objectives needs to be assessed in light of wellthought-out capital market assumptions and the insurance company's ability to accept risk. Profitability Investment income and the investment portfolio return are primary determinants of continuing profitability for the typical casualty company and, indeed, the industry. The underwriting cycle influences the volatility of both company and industry earnings. Return requirements for casualty companies are not framed in reference to a crediting rate for their policies; rather, casualty insurance portfolios are managed to maximize return on capital and surplus to the extent that prudent asset/liability management, surplus adequacy considerations, and management preferences will allow. Given the underwriting uncertainties inherent in the casualty insurance business, investment income obviously provides financial stability for the insurance reserves. In fact, investment earnings are expected to offset periodic underwriting losses (claims and expenses in excess of premium income) from the insurance side of the company. Most casualty insurance products are priced competitively, and thus casualty premium rates are generally not sufficiently ample or flexible to eliminate the loss aspects of the underwriting cycle. The insurance industry measures underwriting profitability using the ''combined ratio,'' the percentage of premiums that an insurance company spends on claims and expenses. Over the past 25 years, the combined ratio for U.S.-based non-life insurance companies has been above 100 percent, reflecting underwriting losses, in over 60 percent of the years. Growth of surplus An important function of a casualty company's investment operation is to provide growth of surplus, which in turn provides the opportunity to expand the volume of insurance the company can write. As mentioned earlier, the risk-taking capacity of a casualty insurance company is measured to a large extent by its ratio of premiums to capital and surplus. Generally, companies maintain this ratio between 2-to-1 and 3-to-1, although many well capitalized companies have lower ratios. Casualty companies have invested in common stocks, convertible securities, and alternative investments to achieve growth of surplus. These investments' return and marketability characteristics fit well within the industry's underwriting cycles.
Tax considerations Over the years, non-life insurance companies' investment results have been very sensitive to the after-tax return on the bond portfolio and to the tax benefits, when they exist, of certain kinds of investment returns. In the United States, these returns have included dividend income (through the exclusion of a portion of the dividends received by one corporation on stock issued by another corporation), realized long-term capital gains, and tax-exempt bonds. U.S. casualty insurance companies have historically favored the latter, especially when underwriting is profitable, to achieve the highest after-tax return. For many casualty companies, the flexibility to shift between taxable and tax-exempt bonds has long been an important consideration as a key element of managing and optimizing after-tax income through the operating loss carry back and carry forward provisions of the U.S. tax code. Most companies have maintained some balance of taxable and tax-exempt bonds in their portfolios, shifting that mix as tax considerations warranted. Recent changes in the tax laws have diminished most of the tax benefits available to casualty insurance companies. Outside of the United States, tax-exempt securities for insurance companies either do not exist or are more limited in supply( insurance mathematics ).For non-U.S. insurance companies, therefore, taxes are even more of a constraint. Total return management. Active bond portfolio management strategies designed to achieve total return, rather than yield or investment income goals only, have gained popularity among casualty insurance companies, especially large ones. Because GAAP and statutory reporting require that realized capital gains and losses flow through the income statement, the decline in interest rates and increase in bond prices since 1982 have encouraged casualty insurance portfolio managers to trade actively for total return in at least some portion of their bond portfolios. One of the most interesting characteristics of casualty insurance companies is that their investment returns vary significantly from company to company. This variation reflects the latitude permitted by insurance regulations; differences in product mix, and thus in the duration of liabilities; a particular company's tax position; the emphasis placed on capital capital and surplus positions. Exhibit 3-6 illustrates this contrast.
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