Insurance Industry and FDI[/b]
By Pratik Nayak[/b]
Introduction[/b]
The concept of Insurance emerged thousands of years ago. It is said that the Chinese used to divide their cargoes among many boats to reduce the severity of loss from perils of sea. Marine insurance emerged in London when the ships started sailing for the New World. Fire insurance arose from the great fire of London in 1666, in which 14,000 buildings were destroyed. In 1759, Benjamin Franklin established the first life insurance company. In 1887, the first auto-liability policy was written.
Major types of business risk that produce fluctuations in business value include price risk, credit risk and pure risk. Pure risk is loss form damage to and theft or expropriation of business assets, legal liability for injuries to customers and others, work place injuries to employees and obligations under employee benefit plans. Major risk management methods include loss control, loss financing and internal risk reduction. The amount or risk that can be reduced through pooling arrangements increases as the number of participants increases, all other factors being held constant. Loss financing methods include retention (self insurance), insurance, hedging and other contractual risk transfers.
Functions of Insurance[/b]
· Primary functions:
Provide protection against future risk – economic loss
Collective bearing of risk.
Assessment of risk
Provide Certainty
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· Secondary functions:
Prevention of Losses - safety instructions
Small capital to cover larger risks
Contributes towards the development of larger industries
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· Other functions:
Means of savings and investment
Source of earning foreign exchange
Risk Free trade
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Milestones[/b]
The history of the modern Indian insurance sector dates back to 1818, when the Oriental Life Insurance Company was formed in Kolkata. The Triton Insurance Company Ltd formed in 1850 was the first of its kind in the general insurance sector in India. Established in 1907, Indian Mercantile Insurance Limited was the first company to handle all forms of India insurance. A new era began in the Indian insurance sector, with the passing of the Life Insurance Act of 1912.
The Indian Insurance Companies Act was passed in 1928. This act empowered the government of India to gather necessary information about life insurance and non-life insurance organizations operating in the Indian financial market .Due to the increase in allegations of unfair trade practices, the Government of India, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance sector and Life Insurance Corporation. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all.
In 1972, four General Insurance Cos were formed by nationalising 107 General Insurance companies -(1) National insurance Co Lltd (2) New India Assurance Co Ltd (3) Oriental Insurance Co Ltd and (4) United India insurance Co Ltd. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.
Malhotra Committee Report- IRDA constituted in 2000.
This opened up insurance sector for Private players.
16 new entrants during 2000-2001 and more later.
At end-September 2012, there are 52 insurance companies operating in India – 24 in the life insurance business, 27 in general insurance business, and 1 in reinsurance (GIC).
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Measure of Development[/b]
The potential and performance of the insurance sector is assessed with reference to the following
Insurance Penetration
The percentage of insurance premium underwritten in a given year to GDP
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Insurance Density.
Ratio of premium underwritten in a given year to the total population (per capita premium).
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Both insurance penetration and density have increased significantly over the years, especially with the opening up of the insurance industry to the private sector.
However, the increase has been marginal as far as the non-life insurance sector is concerned.
The insurance density of life insurance sector had gone up from USD 9.9 in 2001 to USD 64.4 in 2011.
Similarly, insurance penetration had gone up from 2.3 per cent in 2001 to 4.60 in 2009, and to 5.2 per cent in 2011.
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Re-Insurance[/b]
Insurance of insurance.
Reinsurance is an arrangement whereby an insurer transfers a part of the risk to another insurer.
The original insurer is called the ceding company
The reinsurer is not liable to the original insured.
Reinsurance is a contract of insurance whereby one insurer (called the reinsurer or assuming company) agrees, for a portion of the premium, to indemnify another insurer (called the reinsured or ceding company) for losses paid by the reinsured under insurance policies issued by the reinsured to its policyholders.
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Reforms in Insurance Sector[/b]
In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.
The objective was to assess the functionality of the Indian insurance sector and to complement the reforms initiated in the financial sector.
The Malhotra Committee attempted to improve various aspects of the insurance sector, making them more appropriate and effective for the Indian market.
The committee submitted its report in 1994 wherein, among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. (Next part of the article: http://www.managementparadise.com/article.php?article_id=4585 )
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