Insurance sector in india.
Index.
1.Evolution of Insurance sector....................................................1 2. Milestones ..................................................................................4 3. What is Insurance?....................................................................6 4. Principles of Insurance..............................................................7 5. Evolution of Insurance organisation........................................11 6. Insurance and social security...................................................13 7. Growth of Insurance business in India..................................20 8. Insurance sector after nationalisation......................................21 9. Role of insurance in economic development........................24
10. Liberalisation of Insurance industry in India......................26 11. Impact of liberalisation on Insurance industry....................28 12. Current scenario of Insurance industry...............................34 13. Recent development in Indian insurance.............................35 14. Bibliography............................................................................36
EVOLUTION OF INSURANCE SECTOR.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
In 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay
Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and nonlife business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation
was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 nonIndian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. 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 complement the reforms initiated in the financial sector. 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.
Milestones.
The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost 190 years. The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
1928 - The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and nonlife insurance businesses. 1938 - Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956 - 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of the important milestones in the general insurance business in India are: 1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957 - General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 - The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 - The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
What is insurance?
Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. In the United States, the predominant form simply specifies a lump sum to be paid on the insured's demise. As with most insurance policies, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the
designated beneficiaries if an insured event occurs which is covered by the policy. The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the Life Assured.
Principles of Insurance.
1. A large number of homogeneous exposure units: The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004. The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take 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. 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, are generally not considered insurable.
3.
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 little 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 anyone will buy insurance, 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.
5.
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.
6. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5%. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is
another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. 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.
Evolution of insurance organisation
(A) Self insurance: The arrangement in which an individual or concern sets up a private fund out of which the losses, if take place are paid is termed self insurance. The person lays aside periodically convinced sum to meet the losses of any contemplated risk. While it may be called self insurance it is not as a matter of fact insurance at all because there is no hedge, no shifting of distributing of burden of risk among larger persons. It is merely a provision for meeting the
unforeseen event. Here the insured himself becomes the insurer for the particular risk. But, it can be effectively worked only when there is wide distribution of risks subject to the same hazard. It may be lesser expensive provided the amount of loss is terrific. The fund as it accumulates belongs to the insured and he can invest it as he may deem prudent. He pays no commission to agents, no extra expenses for maintaining office. The self insurance will be successfully operated where 1) There are several properties such as machine motor vehicle, house, factories, etc. 2) The properties or units are widely distributed. 3) These are under the influence of varied risks . 4) The risks are greater at one place and lesser at another place.
(B) Lloyds Association: Lloyds association is one of the greatest insurance institutions in the world. Taking its name from the coffee house of Edward Lloyd where underwriters assembled to transact business and pick up news. The organization traces its origin to the latter part of the seventeenth century. So, it is the oddest insurance organization in existing form in the world. In 1871, Lloyds act was passed incorporating the members of the association into a single
corporate body with perpetual succession and a corporate seal. The powers of Lloyds corporation were extended from marine insurance to other insurance and guarantee business. The Lloyds association is an association of individual insurers know as underwriters. They are also termed as syndicates or names any insurer who wants to become a member of such association has to deposit a certain fee as security for the regular payment of his liabilities. The association b4 enrolling the insurer as a member of the association will inquire about the financial position of the concern business reputation and experience. On satisfactory proof the association admits him into association.
INSURANCE AND SOCIAL SECURITY.
The path of insurance has been evolved to look after the interests of people from uncertainty by providing certainty of compensation at a given contingency. The insurance principle comes to be more useful in modern affairs. It not only serves the ends of individuals, or of special groups of individuals, but also tends to spread through and renovate modern social order.
(A)
Social Security to individuals
(1)Insurance provides safety and security: The insurance provides safety and security against the loss on a particular event. In case of life insurance, payment is made when death occurs or the term of insurance is expired. The loss to the family at a premature death and payment in old-age are adequately provided by insurance. In other words, security against premature death and old-age sufferings are provided by life insurance. Similarly, the property of insured is secured against loss on a fire in fire insurance. In other insurance, too, this security is provided against the loss against at a given contingency. The insurance provides safety and security against the loss of earning at death or in old-age, against the loss of damage, destruction or disappearance of property, goods, furniture and machines, etc.
(2) Insurance offers peace of mind: The security wish is the prime motivating factor. This is the wish, which tends to stimulate to work more. If this wish is unsatisfied, it will create a tension which may manifest itself in the form of an unpleasant reaction causing reduction in work. The security banishes fear and uncertainty. Fire windstorm, automobile accident and death are almost beyond the control of human agency and on occurrence of any of these events may frustrate or weaken the human mind. By means of insurance, however, feeling of insecurity may be eliminated.
(3)Insurance protects mortgaged property: At the death of the owner of the mortgaged property, the property is taken over by the lender of the money and the family is deprived of the use of the property. At the damage or destruction of
the property, he will lose his right to get the loan repaid. The insurance will provide adequate amount to the dependents at the early death of the property-owner to pay-off the unpaid loans. Similarly, the mortgagee gets adequate amount at the destruction of the property. (4) Insurance eliminates dependency: What would happen at the of the husband or father, the annihilation of family needs no elaboration. Similarly, at destruction of property and goods, the family would suffer a lot. It brings reduced standard of living and the suffering may go to any extent of begging from the relatives, neighbours, or friends. The economic independence of the family is reduced or, sometimes lost totally. What can be more pitiable condition than this that the wife and children are looking at others more benevolent than the husband and father in absence of protection against such dependency? The insurance is here to assist them and provide adequate amount at the time of sufferings
(5) Life insurance encourages saving: The element of protection and investment is present only in case of life insurance. In property insurance, only protection element exist. In most of the life policies elements of savings predominates.
These policies combine the programs of insurance and savings. The savings with insurance has certain extra advantages:
(a) Systematic savings is possible because regular premium are required to be compulsorily paid. The savings with a bank is voluntarily paid one can easily omit a month or two and then abandon the program entirely. (b) In insurance the premium deposited cannot be withdrawn easily before the expiry of the term of the policy. In contrast to this, the savings which can be withdrawn at any moment will finish with in mo time. (c) The insurance will pay the policy- holder money irrespective of the premium deposited while in case of bank deposit, only the deposited amount along with interest is paid. The insurance, thus, provides the wished amount of insurance and the banks provides only the deposited amount. (d) The compulsion or force to pay premium at in insurance is so high that if the policy-holder fails to pay premiums within the days of grace, he subjects his policy to lapsation and may get back only a very nominal portion of the total premium paid on the policy.
(B) Social security to business The insurance has been useful to the business society also .some of the uses are discussed below: (1) Uncertainty of business and loss if reduced: In world of business, commerce and industry a huge number of properties are employed. With a slight slackness or negligence , the property may be turned into ashes. The accident may be fatal not only to the individual or property but to the third party also. New construction and new establishment are possible only with the help of insurance in absence of it , uncertainty will be to the maximum level and nobody would like to invest a huge amount in the business or industry. A person may not be sure of his life and health and cannot continue the business up to longer period to support his dependents. by purchasing policy, he can be sure of his earning because the insurer will pay a fixed amount at the time of death .again ,the owner of business might foresee contingencies that would bring great loss. To meet such situations they might decide to set aside annually a reserve, but it cannot be accumulated due to death. However, by making an annual payment, to secure immediately, insurance policy can be taken.
(2) Key man indemnification : Key man is that particular man whose capital, expertise, experience energy, ability to control, goodwill and dutifulness make him the most valuable asset in the business and whose absence will reduce the income of the employer till the time such employee is not substituted. The death or disability of such valuable lives will ,in many instances, prove a more serious loss than that by fire or any other hazard. The potential loss to be suffered and the compensation to the dependents of such employee require adequate provision, which is met by purchasing adequate life policies. The amount of loss may be up to the amount of reduced profit, expenses involved in appointing and training insurance policy or convertible term insurance policy is more suitable in this case. (3) Enhancement of credit: the business can obtain loan by pledging the policy as collateral for the loan. The insured persons are getting more loan due to certainty of payment at their deaths. The amount of loan that can be obtained with such pledging a policy will not exceed the cash value of the policy .in case of death, this cash value can be utilized for setting the loan along with the interest. If the borrower is un willing to repay the loan and interest the lender can surrender the policy and get the amount of loan and interest thereon repaid. The redeemable debentures can be issued on the collateral of capital redemption policies. The insurance properties are the best collateral and the lenders grant adequate loans.
(4) Business continuation: In a business, particularly partnership business may get discontinued at the death of any partner, although the surviving partners can restart the business . But in both the cases the business and the partners will suffer economically . The insurance policies provide adequate funds at the time of death . Each partner may be insured for the amount of his interest in the partnership and his dependents may get that amount at the death of the partner.
Growth of insurance business in India.
By 1956, 229 Indian insurers, provident insurance societies, and 16 non-Indian insurers were carrying on life
insurance business in India. But since January 19,1956 the life insurance business came under the control and ownership of government. In June 1956, a bill was passed for establishing life insurance corporation of India, which started functioning since corporate having September 1,1956. The corporation is a body
perpetual succession and a common seal with powers to acquire, hold and dispose of property and may by its name sue and may be sued. There will be not more than 15 members including a chairman thereof. The corporation is charged with the main duty to carry on life insurance business. It has one Central office, 5 Zonal offices and several Divisional and Branch offices.
The growth of life insurance business has been analysed under new business inclusive of group insurance business, new business individual insurance excluding activities, growth in sum assured and number of policies, average amount per policy , rural new business, annuities , business in force, lapses, number of offices, productivity of assets , and process of new insurance plans.
Year
Business in India
Business outside India
Total business
31st March, 1957 31st March, 1963
277.67 734.72
5.40 11.24
283.07 745.96
31st March, 1970 31st March, 1980 31st March, 1990 31st March, 1994 31st March, 2000
1025.80 7998.16 43490.34 80560.88 158110.37
10.28 11.22 100.00 199.07 340.00
1036.08 8009.38 43590.34 80759.95 158450.37
Insurance sector after Nationalisation.
The growth of insurance over a period of time has been evaluated in terms of parameters such as growth of gross and net premium, geographical spread of business, class-wise distribution of business, underwriting results, reinsurance operations, investment income free and technical reserves, net worth, overall profitability, etc. The overall claim ratio expenses on management have also been examined. Based on the data the following picture emerges: 1. The gross domestic premium income in India (GDPI),which was Rs.184 crore in 1973,has increased to Rs.9522 crore in 19992000,recording an average growth rate of about 16.90%. The premium income originating outside India went up over the level of Rs 24 crore in 1973 to Rs.460 crore in 1999-2000,registering annual
growth rate of about 11.95%.The total gross premium income ,which was Rs.208 crore in 1973,stood at Rs.9,982 crore in 19992000,recording average annual growth rate of about 16.50%.The total net premium income increased to Rs.9364 crore in 1990-2000 from the level of Rs.222 crore in 1973.It recorded average annual growth rate of about 15.75%. The net premium income as percentage to total premium income was 93.8% in 1999-2000, indicating that only about 7% of GDPI went outside the country through reinsurance. As compared to 1973, the GDPI in India has grown by about 47 times.
2. The net claim payable were at Rs.7586 crore in 1999-2000 as against Rs 1123 crore in 1973 ,accounting for 81% to net premium. 3. The expenses including management expenses, commission and other outgo which were Rs.68 crore in 1973 increased to Rs.2510 crore in 1999-2000. It constituted 31% and 27% of net premium income in 1999-2000 respectively. 4 . The expenses of the management increased from Rs.43 crore in 1973 to Rs.2264 crore in 1999-2000. It amounted to 22.7%of gross premium income and 24.1% of net premium. 5. The paid up capital and free reserves increased from Rs.37 crore and Rs.62 crore in 1973 to Rs. 7745 crore in 1999-2000 respectively. The increased for reserves for unexpired risk which was Rs.23 crore
in 1973 increased to Rs.485 crore in 1999-2000. 6. The geographical spread of the premium written in India indicates that the maximum ,i.e. about 40% was generated from western region and minimum, i.e. about 9% from the eastern region . The northern and southern region contributed about 26% and 24% of gross premium in 1999-2000 respectively. 7. The underwriting profits of the industry was Rs.18 crore (8.2% of the net premium) in 1973 .However .over a period of time underwriting operations have resulted into losses and these losses amounted to Rs. 1215 crore in 1999-2000,accounting for 13% of net premium income.
ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT.
The role of insurance service in contributing to the course of economic development has not been properly valued in economic text .While a large numbers of studies and research are available on
the role played by other services such as banking ,transport, communication ,public administration ,defence, etc. in accelerating the national income of an economy, there is a dearth of material on interlink ages between economic development on the one hand and insurance services on the other. One of the most lucid and exhaustive literatures on the subject is by Harold .D. Skipper, Jr. who has comprehensively evaluated the contribution of insurance services to the economic growth process. The growth of GDP is a function of host of factors, both economic and non-economic in nature, which directly or indirectly contribute to it. From an economic angle, these factors could be grouped into following four categories (SamuelsonEconomics):
•
Human resources ( labour, education, discipline, motivation, etc).
•
Natural resources (land, minerals, fuels, climate etc).
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Capital resources (machines, factories, roads, etc).
•
Technological resources (science, engineering, or management, enterprise, etc).
One of the most important factors contributing to the process
of economic development particularly in developing or underdeveloped economies is the capital formation. The relationship between capital formation and insurance services in both developed and developing economies of the world has been quiet prominent and noteworthy.
Liberalisation of insurance industry in India.
The Government of India in 1993 had set-up a high powered committee by R.N. Malhotra , former Governor, Reserve Bank of India, to examine the structure of the Insurance industry and recommend changes to make it more efficient and competitive keeping in view structural changes in other parts of the financial system of the economy.
Major Recommendations of Malhotra Committee
The committee submitted its report in January 1994 recommending that private insurers be allowed to co-exit along with government companies like LIC and GIC companies. Committees recommendations were as follows : [1] Raising the capital base of LIC and GIC upto Rs.200 crores, half
retained by the government and rest sold to the public at large with suitable reservations for employees. [2] Private sector be granted permission to enter insurance industry with a minimum paid up capital of Rs. 100 crores. [3] Foreign insurance companies be allowed to enter by floating an Indian company preferably joint venture with Indian partners. [4] Steps to be initiated to set-up a strong and effective insurance regulatory in the form of statutory autonomous board on the lines of SEBI. [5] Limited number of private companies to be allowed in the sector. But no firm be allowed to operate in both lines of insurance (life or non-life). [6] Tariff Advisory Committee (TAC) is delinked from GIC to function as a separate statutory body under necessary supervision by the insurance regulatory authority. [7] All insurance companies be treated on equal footing and governed by the provisions of the insurance act. No special dispensation is given to government companies.
[8] Setting up of a strong and effective regulatory body with independent source for financing before allowing private companies into sector.
Impact of Liberalisation on insurance industry.
The opening-up of insurance sector for competition offers ample opportunities to both existing as well as new players to penetrate into untapped areas, sectors and sub-sectors and unexploited segments of population as presently both insurance density and penetration are at low level. Both indices bring at very low level in the country even compared to the countries with the same level of economic development and per capita income are indicative of the vast potential of the sector in future.
1.Opportunities :
a. Untapped market: News comers will get the benefit of untapped market .while nationalized general insurance companies and LIC of India have done a commendable job in extending their services throughout the country but the choices available to the insuring public are inadequate in terms of services, products and prices the untapped potential is quite large. The Malhotra committee, which went into various aspects of India’s insurance industry, estimated that in life insurance 22%of the insurable population has been tapped so far. In India, premium per capita is only 2 and premium as percentage of GDP is 0.55%,which is very less in comparison of USA where premium per capita is 1381and premium as percentage of GDP is 4.80 this huge gap from the global bench mark is itself lucrative.
b-Mandatory insurance: In disaster prone areas, government of India is going to make insurance mandatory. The interim report of the high powered committee set-up by the centre on disaster management, has proposed mandatory insurance of life and property by people residing
in disaster prone area such as coastal belts, flood prone areas, site near nuclear, chemical and hazardous industries and thickly populated areas.
c-More products offered: A state monopoly has little incentive to offer a wide range of products. It can be seen by a lack of certain products from LIC’s portfolio and lack of extensive categorization in several GIC products such as health insurance. More competition in this business will spur firms to offer several new products and more complex and extensive risk categorization.
d-Growth of economy: With allowing of holding of equity shares by foreign company either itself or through its subsidiary company or nominee not exceeding 26% of paid up capital of Indian insurance company, joint ventures between foreign investors and Indian partners will be operated resulting into supplementing domestic savings and economic progress of the nations.
e-Better customer services: It would result in better customers services and help improve the variety and price insurance products. Competition will compel the players to bring new innovative product, wider choice of prices and quality service to consumers.
2.Challenges:
a-New insurers : New insurers will have to invest a minimum capital of Rs 100 crore. The normal gestation period is of five years. Hence, the new insurers will have to lock up their capital for at least five years before earning any profits. Besides they will face problems or shortage of trained man power for the insurance industry.
b-Expectations of the customers: Today, LIC has more than 60 products and GIC has more than 180 products to offer in market. But most of them are outdated, as they are not suitable to the needs of consumers. Hence, all the insurers will have to offer innovative products to the consumers. The consumers are particularly expecting good pension plans, health insurance, term insurance and investment products like unit linked insurance from the life insurers. Similarly, the consumers expect innovative products from the general insurance for managing health care, property insurance, accident insurance and other products at an attractive terms and premium.
c-Premium on customer service: The days of giving fixed insurance products are over. Now customers need insurance solution that match their wants.
3.Strategies:
To be more competitive and responsive to, the needs of the societies, the insurance players would be required to concentrate on the following major strategies: a Environmental Analysis: The companies should concentrate on environmental change, its direction, magnitude and its short-term and long-term impact, formulating strategies to meet the challenges of high competition preparing contingency plans and then designing action plans for effective implementing of formulated strategies. b. Restructuring organizations: The traditional hierarchy system is very slow in making decisions due to several levels of management, due to its procedural inflexibility and slow communication. A manager in the privatized scenario is required to be an organisational specialist, country specialist and a global specialist. c. Speed, Cost, Effectiveness and Innovations: The insurance companies will have to make substantial investments in customer relationship management technologies. They will be required to have wide area networks (WAN) connecting branches spread across wide geographical locations and workout modalities facilitating premium payment through the internet. LIC is setting up an interactive response systems in more cities so that a policyholder need not to travel to company’s office for information. After all, the customer should have
the choice of getting work done in the shortest possible time without having to visit insurer’s office.
d. Human Resource Development: Human capital is important for any organization especially for organizations whose activities revolve around special human interactions. Along with products and services the new insurers need people with the right set of knowledge, skills and aptitude for insurance. The persons who are involved in selling the product and those who are doing the back office work need to equip themselves with newer skills and insights into every aspect of company’s functioning. They have a daunting task of exploiting potential in the industry at the same time bring good risks to the company for providing insurance coverage. They have to retain the existing customers for which they need to have better understanding of products and services by creating healthy internal environment with group harmony. Existing companies will have to frame their human resource policies to retain the competent and motivated staff since new entrants will be eying them by offering lucrative salaries.
Current industry.
scenario
of
insurance
After opening up of insurance to private sector, seventeen new players have entered in the field of insurance both life and non-life business. Some of these are TATA AIG, Birla Sunlife, HDFC Standard Life Insurance, Kotak Mahindra Old Mutual Life Insurance, Reliance General Insurance, ICICI Prudential Life Insurance, Royal Sundaram Alliance Insurance, Bajaj Auto Alliance, IFFCO Tokyo General Insurance, ING Vysya Life Insurance, Dabur CJU Life Insurance, Max New York Life Insurance.
SBI life Insurance has launched three products- Sanjeevan, Sukhjeevan and young Sanjeevan and so far it has sold more than 300 policies under its plan. Various insurance companies have tied up with Indian Bank products.
RECENT DEVELOPMENTS IN INDIAN INSURANCE.
The basic factor behind most of the shortcomings pointed out in Indian Insurance sector, has been supposed to be lack of competition in Indian Insurance market. The nationalized insurance companies perceive themselves to be extension of government and accordingly function in bureaucratic manner without giving regard to emerging requirement of the economy. This is affected in their lack of innovation with regard to designing of products. Appreciating these concerns and realizing them utmost need of vibrant insurance industry government of India decided to liberalise the industry. Accordingly, Insurance Regulatory and Development Authority Act, 1999 was enacted. The IRDA has been assigned basically three functions: • The protection of consumer interests. • To ensure financial soundness of the insurance industry, and
• To ensure healthy growth of the insurance market.
In insurance of its mandate, the IRDA acted with enthusiasm and announced draft guidelines for insurance brokers and agent from that of a broker.
Bibliography.
• insurance –fundamentals, environment procedures- by m.c. garg, and k.p. singh. and
•
www.google.com
• Insurance and financial sector reforms in india- by s .k. singh and a.banerjee. • Economic reforms in india – by p.p. arya, b.b. tendon.
doc_961279073.doc
Index.
1.Evolution of Insurance sector....................................................1 2. Milestones ..................................................................................4 3. What is Insurance?....................................................................6 4. Principles of Insurance..............................................................7 5. Evolution of Insurance organisation........................................11 6. Insurance and social security...................................................13 7. Growth of Insurance business in India..................................20 8. Insurance sector after nationalisation......................................21 9. Role of insurance in economic development........................24
10. Liberalisation of Insurance industry in India......................26 11. Impact of liberalisation on Insurance industry....................28 12. Current scenario of Insurance industry...............................34 13. Recent development in Indian insurance.............................35 14. Bibliography............................................................................36
EVOLUTION OF INSURANCE SECTOR.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
In 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay
Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and nonlife business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation
was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 nonIndian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. 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 complement the reforms initiated in the financial sector. 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.
Milestones.
The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost 190 years. The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are: 1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
1928 - The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and nonlife insurance businesses. 1938 - Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956 - 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. Some of the important milestones in the general insurance business in India are: 1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business. 1957 - General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968 - The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972 - The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.
What is insurance?
Life insurance or life assurance is a contract between the policy owner and the insurer, where the insurer agrees to pay a sum of money upon the occurrence of the insured individual's or individuals' death or other event, such as terminal illness or critical illness. In return, the policy owner agrees to pay a stipulated amount called a premium at regular intervals or in lump sums. There may be designs in some countries where bills and death expenses plus catering for after funeral expenses should be included in Policy Premium. In the United States, the predominant form simply specifies a lump sum to be paid on the insured's demise. As with most insurance policies, life insurance is a contract between the insurer and the policy owner whereby a benefit is paid to the
designated beneficiaries if an insured event occurs which is covered by the policy. The value for the policyholder is derived, not from an actual claim event, rather it is the value derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse financial consequences caused by the death of the Life Assured.
Principles of Insurance.
1. A large number of homogeneous exposure units: The vast majority of insurance policies are provided for individual members of very large classes. Automobile insurance, for example, covered about 175 million automobiles in the United States in 2004. The existence of a large number of homogeneous exposure units allows insurers to benefit from the so-called “law of large numbers,” which in effect states that as the number of exposure units increases, the actual results are increasingly likely to become close to expected results. There are exceptions to this criterion. Lloyd's of London is famous for insuring the life or health of actors, actresses and sports figures. Satellite Launch insurance covers events that are infrequent. Large commercial property policies may insure exceptional properties for which there are no ‘homogeneous’ exposure units. Despite failing on this criterion, many exposures like these are generally considered to be insurable.
2.
Definite Loss. The event that gives rise to the loss that is subject to insurance should, at least in principle, take 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. 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, are generally not considered insurable.
3.
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 little 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 anyone will buy insurance, 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.
5.
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.
6. Limited risk of catastrophically large losses. The essential risk is often aggregation. If the same event can cause losses to numerous policyholders of the same insurer, the ability of that insurer to issue policies becomes constrained, not by factors surrounding the individual characteristics of a given policyholder, but by the factors surrounding the sum of all policyholders so exposed. Typically, insurers prefer to limit their exposure to a loss from a single event to some small portion of their capital base, on the order of 5%. Where the loss can be aggregated, or an individual policy could produce exceptionally large claims, the capital constraint will restrict an insurer's appetite for additional policyholders. The classic example is earthquake insurance, where the ability of an underwriter to issue a new policy depends on the number and size of the policies that it has already underwritten. Wind insurance in hurricane zones, particularly along coast lines, is
another example of this phenomenon. In extreme cases, the aggregation can affect the entire industry, since the combined capital of insurers and reinsurers can be small compared to the needs of potential policyholders in areas exposed to aggregation risk. 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.
Evolution of insurance organisation
(A) Self insurance: The arrangement in which an individual or concern sets up a private fund out of which the losses, if take place are paid is termed self insurance. The person lays aside periodically convinced sum to meet the losses of any contemplated risk. While it may be called self insurance it is not as a matter of fact insurance at all because there is no hedge, no shifting of distributing of burden of risk among larger persons. It is merely a provision for meeting the
unforeseen event. Here the insured himself becomes the insurer for the particular risk. But, it can be effectively worked only when there is wide distribution of risks subject to the same hazard. It may be lesser expensive provided the amount of loss is terrific. The fund as it accumulates belongs to the insured and he can invest it as he may deem prudent. He pays no commission to agents, no extra expenses for maintaining office. The self insurance will be successfully operated where 1) There are several properties such as machine motor vehicle, house, factories, etc. 2) The properties or units are widely distributed. 3) These are under the influence of varied risks . 4) The risks are greater at one place and lesser at another place.
(B) Lloyds Association: Lloyds association is one of the greatest insurance institutions in the world. Taking its name from the coffee house of Edward Lloyd where underwriters assembled to transact business and pick up news. The organization traces its origin to the latter part of the seventeenth century. So, it is the oddest insurance organization in existing form in the world. In 1871, Lloyds act was passed incorporating the members of the association into a single
corporate body with perpetual succession and a corporate seal. The powers of Lloyds corporation were extended from marine insurance to other insurance and guarantee business. The Lloyds association is an association of individual insurers know as underwriters. They are also termed as syndicates or names any insurer who wants to become a member of such association has to deposit a certain fee as security for the regular payment of his liabilities. The association b4 enrolling the insurer as a member of the association will inquire about the financial position of the concern business reputation and experience. On satisfactory proof the association admits him into association.
INSURANCE AND SOCIAL SECURITY.
The path of insurance has been evolved to look after the interests of people from uncertainty by providing certainty of compensation at a given contingency. The insurance principle comes to be more useful in modern affairs. It not only serves the ends of individuals, or of special groups of individuals, but also tends to spread through and renovate modern social order.
(A)
Social Security to individuals
(1)Insurance provides safety and security: The insurance provides safety and security against the loss on a particular event. In case of life insurance, payment is made when death occurs or the term of insurance is expired. The loss to the family at a premature death and payment in old-age are adequately provided by insurance. In other words, security against premature death and old-age sufferings are provided by life insurance. Similarly, the property of insured is secured against loss on a fire in fire insurance. In other insurance, too, this security is provided against the loss against at a given contingency. The insurance provides safety and security against the loss of earning at death or in old-age, against the loss of damage, destruction or disappearance of property, goods, furniture and machines, etc.
(2) Insurance offers peace of mind: The security wish is the prime motivating factor. This is the wish, which tends to stimulate to work more. If this wish is unsatisfied, it will create a tension which may manifest itself in the form of an unpleasant reaction causing reduction in work. The security banishes fear and uncertainty. Fire windstorm, automobile accident and death are almost beyond the control of human agency and on occurrence of any of these events may frustrate or weaken the human mind. By means of insurance, however, feeling of insecurity may be eliminated.
(3)Insurance protects mortgaged property: At the death of the owner of the mortgaged property, the property is taken over by the lender of the money and the family is deprived of the use of the property. At the damage or destruction of
the property, he will lose his right to get the loan repaid. The insurance will provide adequate amount to the dependents at the early death of the property-owner to pay-off the unpaid loans. Similarly, the mortgagee gets adequate amount at the destruction of the property. (4) Insurance eliminates dependency: What would happen at the of the husband or father, the annihilation of family needs no elaboration. Similarly, at destruction of property and goods, the family would suffer a lot. It brings reduced standard of living and the suffering may go to any extent of begging from the relatives, neighbours, or friends. The economic independence of the family is reduced or, sometimes lost totally. What can be more pitiable condition than this that the wife and children are looking at others more benevolent than the husband and father in absence of protection against such dependency? The insurance is here to assist them and provide adequate amount at the time of sufferings
(5) Life insurance encourages saving: The element of protection and investment is present only in case of life insurance. In property insurance, only protection element exist. In most of the life policies elements of savings predominates.
These policies combine the programs of insurance and savings. The savings with insurance has certain extra advantages:
(a) Systematic savings is possible because regular premium are required to be compulsorily paid. The savings with a bank is voluntarily paid one can easily omit a month or two and then abandon the program entirely. (b) In insurance the premium deposited cannot be withdrawn easily before the expiry of the term of the policy. In contrast to this, the savings which can be withdrawn at any moment will finish with in mo time. (c) The insurance will pay the policy- holder money irrespective of the premium deposited while in case of bank deposit, only the deposited amount along with interest is paid. The insurance, thus, provides the wished amount of insurance and the banks provides only the deposited amount. (d) The compulsion or force to pay premium at in insurance is so high that if the policy-holder fails to pay premiums within the days of grace, he subjects his policy to lapsation and may get back only a very nominal portion of the total premium paid on the policy.
(B) Social security to business The insurance has been useful to the business society also .some of the uses are discussed below: (1) Uncertainty of business and loss if reduced: In world of business, commerce and industry a huge number of properties are employed. With a slight slackness or negligence , the property may be turned into ashes. The accident may be fatal not only to the individual or property but to the third party also. New construction and new establishment are possible only with the help of insurance in absence of it , uncertainty will be to the maximum level and nobody would like to invest a huge amount in the business or industry. A person may not be sure of his life and health and cannot continue the business up to longer period to support his dependents. by purchasing policy, he can be sure of his earning because the insurer will pay a fixed amount at the time of death .again ,the owner of business might foresee contingencies that would bring great loss. To meet such situations they might decide to set aside annually a reserve, but it cannot be accumulated due to death. However, by making an annual payment, to secure immediately, insurance policy can be taken.
(2) Key man indemnification : Key man is that particular man whose capital, expertise, experience energy, ability to control, goodwill and dutifulness make him the most valuable asset in the business and whose absence will reduce the income of the employer till the time such employee is not substituted. The death or disability of such valuable lives will ,in many instances, prove a more serious loss than that by fire or any other hazard. The potential loss to be suffered and the compensation to the dependents of such employee require adequate provision, which is met by purchasing adequate life policies. The amount of loss may be up to the amount of reduced profit, expenses involved in appointing and training insurance policy or convertible term insurance policy is more suitable in this case. (3) Enhancement of credit: the business can obtain loan by pledging the policy as collateral for the loan. The insured persons are getting more loan due to certainty of payment at their deaths. The amount of loan that can be obtained with such pledging a policy will not exceed the cash value of the policy .in case of death, this cash value can be utilized for setting the loan along with the interest. If the borrower is un willing to repay the loan and interest the lender can surrender the policy and get the amount of loan and interest thereon repaid. The redeemable debentures can be issued on the collateral of capital redemption policies. The insurance properties are the best collateral and the lenders grant adequate loans.
(4) Business continuation: In a business, particularly partnership business may get discontinued at the death of any partner, although the surviving partners can restart the business . But in both the cases the business and the partners will suffer economically . The insurance policies provide adequate funds at the time of death . Each partner may be insured for the amount of his interest in the partnership and his dependents may get that amount at the death of the partner.
Growth of insurance business in India.
By 1956, 229 Indian insurers, provident insurance societies, and 16 non-Indian insurers were carrying on life
insurance business in India. But since January 19,1956 the life insurance business came under the control and ownership of government. In June 1956, a bill was passed for establishing life insurance corporation of India, which started functioning since corporate having September 1,1956. The corporation is a body
perpetual succession and a common seal with powers to acquire, hold and dispose of property and may by its name sue and may be sued. There will be not more than 15 members including a chairman thereof. The corporation is charged with the main duty to carry on life insurance business. It has one Central office, 5 Zonal offices and several Divisional and Branch offices.
The growth of life insurance business has been analysed under new business inclusive of group insurance business, new business individual insurance excluding activities, growth in sum assured and number of policies, average amount per policy , rural new business, annuities , business in force, lapses, number of offices, productivity of assets , and process of new insurance plans.
Year
Business in India
Business outside India
Total business
31st March, 1957 31st March, 1963
277.67 734.72
5.40 11.24
283.07 745.96
31st March, 1970 31st March, 1980 31st March, 1990 31st March, 1994 31st March, 2000
1025.80 7998.16 43490.34 80560.88 158110.37
10.28 11.22 100.00 199.07 340.00
1036.08 8009.38 43590.34 80759.95 158450.37
Insurance sector after Nationalisation.
The growth of insurance over a period of time has been evaluated in terms of parameters such as growth of gross and net premium, geographical spread of business, class-wise distribution of business, underwriting results, reinsurance operations, investment income free and technical reserves, net worth, overall profitability, etc. The overall claim ratio expenses on management have also been examined. Based on the data the following picture emerges: 1. The gross domestic premium income in India (GDPI),which was Rs.184 crore in 1973,has increased to Rs.9522 crore in 19992000,recording an average growth rate of about 16.90%. The premium income originating outside India went up over the level of Rs 24 crore in 1973 to Rs.460 crore in 1999-2000,registering annual
growth rate of about 11.95%.The total gross premium income ,which was Rs.208 crore in 1973,stood at Rs.9,982 crore in 19992000,recording average annual growth rate of about 16.50%.The total net premium income increased to Rs.9364 crore in 1990-2000 from the level of Rs.222 crore in 1973.It recorded average annual growth rate of about 15.75%. The net premium income as percentage to total premium income was 93.8% in 1999-2000, indicating that only about 7% of GDPI went outside the country through reinsurance. As compared to 1973, the GDPI in India has grown by about 47 times.
2. The net claim payable were at Rs.7586 crore in 1999-2000 as against Rs 1123 crore in 1973 ,accounting for 81% to net premium. 3. The expenses including management expenses, commission and other outgo which were Rs.68 crore in 1973 increased to Rs.2510 crore in 1999-2000. It constituted 31% and 27% of net premium income in 1999-2000 respectively. 4 . The expenses of the management increased from Rs.43 crore in 1973 to Rs.2264 crore in 1999-2000. It amounted to 22.7%of gross premium income and 24.1% of net premium. 5. The paid up capital and free reserves increased from Rs.37 crore and Rs.62 crore in 1973 to Rs. 7745 crore in 1999-2000 respectively. The increased for reserves for unexpired risk which was Rs.23 crore
in 1973 increased to Rs.485 crore in 1999-2000. 6. The geographical spread of the premium written in India indicates that the maximum ,i.e. about 40% was generated from western region and minimum, i.e. about 9% from the eastern region . The northern and southern region contributed about 26% and 24% of gross premium in 1999-2000 respectively. 7. The underwriting profits of the industry was Rs.18 crore (8.2% of the net premium) in 1973 .However .over a period of time underwriting operations have resulted into losses and these losses amounted to Rs. 1215 crore in 1999-2000,accounting for 13% of net premium income.
ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT.
The role of insurance service in contributing to the course of economic development has not been properly valued in economic text .While a large numbers of studies and research are available on
the role played by other services such as banking ,transport, communication ,public administration ,defence, etc. in accelerating the national income of an economy, there is a dearth of material on interlink ages between economic development on the one hand and insurance services on the other. One of the most lucid and exhaustive literatures on the subject is by Harold .D. Skipper, Jr. who has comprehensively evaluated the contribution of insurance services to the economic growth process. The growth of GDP is a function of host of factors, both economic and non-economic in nature, which directly or indirectly contribute to it. From an economic angle, these factors could be grouped into following four categories (SamuelsonEconomics):
•
Human resources ( labour, education, discipline, motivation, etc).
•
Natural resources (land, minerals, fuels, climate etc).
•
Capital resources (machines, factories, roads, etc).
•
Technological resources (science, engineering, or management, enterprise, etc).
One of the most important factors contributing to the process
of economic development particularly in developing or underdeveloped economies is the capital formation. The relationship between capital formation and insurance services in both developed and developing economies of the world has been quiet prominent and noteworthy.
Liberalisation of insurance industry in India.
The Government of India in 1993 had set-up a high powered committee by R.N. Malhotra , former Governor, Reserve Bank of India, to examine the structure of the Insurance industry and recommend changes to make it more efficient and competitive keeping in view structural changes in other parts of the financial system of the economy.
Major Recommendations of Malhotra Committee
The committee submitted its report in January 1994 recommending that private insurers be allowed to co-exit along with government companies like LIC and GIC companies. Committees recommendations were as follows : [1] Raising the capital base of LIC and GIC upto Rs.200 crores, half
retained by the government and rest sold to the public at large with suitable reservations for employees. [2] Private sector be granted permission to enter insurance industry with a minimum paid up capital of Rs. 100 crores. [3] Foreign insurance companies be allowed to enter by floating an Indian company preferably joint venture with Indian partners. [4] Steps to be initiated to set-up a strong and effective insurance regulatory in the form of statutory autonomous board on the lines of SEBI. [5] Limited number of private companies to be allowed in the sector. But no firm be allowed to operate in both lines of insurance (life or non-life). [6] Tariff Advisory Committee (TAC) is delinked from GIC to function as a separate statutory body under necessary supervision by the insurance regulatory authority. [7] All insurance companies be treated on equal footing and governed by the provisions of the insurance act. No special dispensation is given to government companies.
[8] Setting up of a strong and effective regulatory body with independent source for financing before allowing private companies into sector.
Impact of Liberalisation on insurance industry.
The opening-up of insurance sector for competition offers ample opportunities to both existing as well as new players to penetrate into untapped areas, sectors and sub-sectors and unexploited segments of population as presently both insurance density and penetration are at low level. Both indices bring at very low level in the country even compared to the countries with the same level of economic development and per capita income are indicative of the vast potential of the sector in future.
1.Opportunities :
a. Untapped market: News comers will get the benefit of untapped market .while nationalized general insurance companies and LIC of India have done a commendable job in extending their services throughout the country but the choices available to the insuring public are inadequate in terms of services, products and prices the untapped potential is quite large. The Malhotra committee, which went into various aspects of India’s insurance industry, estimated that in life insurance 22%of the insurable population has been tapped so far. In India, premium per capita is only 2 and premium as percentage of GDP is 0.55%,which is very less in comparison of USA where premium per capita is 1381and premium as percentage of GDP is 4.80 this huge gap from the global bench mark is itself lucrative.
b-Mandatory insurance: In disaster prone areas, government of India is going to make insurance mandatory. The interim report of the high powered committee set-up by the centre on disaster management, has proposed mandatory insurance of life and property by people residing
in disaster prone area such as coastal belts, flood prone areas, site near nuclear, chemical and hazardous industries and thickly populated areas.
c-More products offered: A state monopoly has little incentive to offer a wide range of products. It can be seen by a lack of certain products from LIC’s portfolio and lack of extensive categorization in several GIC products such as health insurance. More competition in this business will spur firms to offer several new products and more complex and extensive risk categorization.
d-Growth of economy: With allowing of holding of equity shares by foreign company either itself or through its subsidiary company or nominee not exceeding 26% of paid up capital of Indian insurance company, joint ventures between foreign investors and Indian partners will be operated resulting into supplementing domestic savings and economic progress of the nations.
e-Better customer services: It would result in better customers services and help improve the variety and price insurance products. Competition will compel the players to bring new innovative product, wider choice of prices and quality service to consumers.
2.Challenges:
a-New insurers : New insurers will have to invest a minimum capital of Rs 100 crore. The normal gestation period is of five years. Hence, the new insurers will have to lock up their capital for at least five years before earning any profits. Besides they will face problems or shortage of trained man power for the insurance industry.
b-Expectations of the customers: Today, LIC has more than 60 products and GIC has more than 180 products to offer in market. But most of them are outdated, as they are not suitable to the needs of consumers. Hence, all the insurers will have to offer innovative products to the consumers. The consumers are particularly expecting good pension plans, health insurance, term insurance and investment products like unit linked insurance from the life insurers. Similarly, the consumers expect innovative products from the general insurance for managing health care, property insurance, accident insurance and other products at an attractive terms and premium.
c-Premium on customer service: The days of giving fixed insurance products are over. Now customers need insurance solution that match their wants.
3.Strategies:
To be more competitive and responsive to, the needs of the societies, the insurance players would be required to concentrate on the following major strategies: a Environmental Analysis: The companies should concentrate on environmental change, its direction, magnitude and its short-term and long-term impact, formulating strategies to meet the challenges of high competition preparing contingency plans and then designing action plans for effective implementing of formulated strategies. b. Restructuring organizations: The traditional hierarchy system is very slow in making decisions due to several levels of management, due to its procedural inflexibility and slow communication. A manager in the privatized scenario is required to be an organisational specialist, country specialist and a global specialist. c. Speed, Cost, Effectiveness and Innovations: The insurance companies will have to make substantial investments in customer relationship management technologies. They will be required to have wide area networks (WAN) connecting branches spread across wide geographical locations and workout modalities facilitating premium payment through the internet. LIC is setting up an interactive response systems in more cities so that a policyholder need not to travel to company’s office for information. After all, the customer should have
the choice of getting work done in the shortest possible time without having to visit insurer’s office.
d. Human Resource Development: Human capital is important for any organization especially for organizations whose activities revolve around special human interactions. Along with products and services the new insurers need people with the right set of knowledge, skills and aptitude for insurance. The persons who are involved in selling the product and those who are doing the back office work need to equip themselves with newer skills and insights into every aspect of company’s functioning. They have a daunting task of exploiting potential in the industry at the same time bring good risks to the company for providing insurance coverage. They have to retain the existing customers for which they need to have better understanding of products and services by creating healthy internal environment with group harmony. Existing companies will have to frame their human resource policies to retain the competent and motivated staff since new entrants will be eying them by offering lucrative salaries.
Current industry.
scenario
of
insurance
After opening up of insurance to private sector, seventeen new players have entered in the field of insurance both life and non-life business. Some of these are TATA AIG, Birla Sunlife, HDFC Standard Life Insurance, Kotak Mahindra Old Mutual Life Insurance, Reliance General Insurance, ICICI Prudential Life Insurance, Royal Sundaram Alliance Insurance, Bajaj Auto Alliance, IFFCO Tokyo General Insurance, ING Vysya Life Insurance, Dabur CJU Life Insurance, Max New York Life Insurance.
SBI life Insurance has launched three products- Sanjeevan, Sukhjeevan and young Sanjeevan and so far it has sold more than 300 policies under its plan. Various insurance companies have tied up with Indian Bank products.
RECENT DEVELOPMENTS IN INDIAN INSURANCE.
The basic factor behind most of the shortcomings pointed out in Indian Insurance sector, has been supposed to be lack of competition in Indian Insurance market. The nationalized insurance companies perceive themselves to be extension of government and accordingly function in bureaucratic manner without giving regard to emerging requirement of the economy. This is affected in their lack of innovation with regard to designing of products. Appreciating these concerns and realizing them utmost need of vibrant insurance industry government of India decided to liberalise the industry. Accordingly, Insurance Regulatory and Development Authority Act, 1999 was enacted. The IRDA has been assigned basically three functions: • The protection of consumer interests. • To ensure financial soundness of the insurance industry, and
• To ensure healthy growth of the insurance market.
In insurance of its mandate, the IRDA acted with enthusiasm and announced draft guidelines for insurance brokers and agent from that of a broker.
Bibliography.
• insurance –fundamentals, environment procedures- by m.c. garg, and k.p. singh. and
•
www.google.com
• Insurance and financial sector reforms in india- by s .k. singh and a.banerjee. • Economic reforms in india – by p.p. arya, b.b. tendon.
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