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From Umakant Chaudhari
SERVICE SECTOR MANAGEMENT FINANCIAL SERVICES - INSURANCE
SECTION I: KNOWLEDGE OF THE INSURANCE INDUSTRYINTRODUCTION
Insurance industry has always been a growth-oriented industry globally. On the Indian scene too,the insurance industry has always recorded noticeable growth vis-à-vis other Indian industries.The Triton General Insurance Co. Ltd. was the first general insurance company to be establishedin India in 1850, which was a wholly British-owned company. The first general insurancecompany to be set up by an Indian was Indian Mercantile Insurance Co. Ltd., which wasestablished in 1907. There emerged many a player on the Indian scene thereafter.The general insurance business was nationalised after the promulgation of General InsuranceBusiness (Nationalisation) Act, 1972. The post-nationalisation general insurance business wasundertaken by the General Insurance Corporation of India (GIC) and its 4 subsidiaries:1.Oriental Insurance Company Limited;2.New India Assurance Company Limited;3.National Insurance Company Limited; and4.United India Insurance Company Limited.Towards the end of 2000, the relation ceased to exist and the four companies are, at present,operating as independent companies.The Life Insurance Corporation (LIC) was established on 01.09.1956 and had been the solecorporation to write the life insurance business in India.The Indian insurance industry saw a new sun when the Insurance Regulatory & DevelopmentAuthority (IRDA) invited the applications for registration as insurers in August, 2000. With theliberalisation and opening up of the sector to private players, the industry has presented promising prospects for the coming future. The transition has also resulted into introduction of ampleopportunities for the professionals including Chartered Accountants.The Indian Insurance industry is featured by the attributes:
Low market penetration;
Ever-growing middle class component in population.
Growth of consumer movement with an increasing demand for better insurance products;
Inadequate application of information technology for business.
Adequate fillip from the Government in the form of tax incentives to the insured, etc.The industry formations need to keep vigil on these characteristics of the Indian market andformulate their strategies to entail maximum contribution to the output of the sector.The Indian life and non-life insurance business accounted for merely 0.42 percent of the world'slife and non-life business in 1997. The figures of the basic parameters of the industry's performance viz. Insurance Density and Insurance Penetration also are evident of the hithertoexisting low-yield Indian market conditions.The term "Insurance Penetration" broadly measures the contribution of the insurance industry inrelation to a nation's entire economic productivity. The figure of premium vis-à-vis the GDP of 1999 stood at 0.54 percent for non-life insurance business and 1.39 percent for the life insurance business. The term "Insurance Density" reflects the Insurance purchasing power. The premium per capita in India amounted to US $ 2.40 for non-life insurance and US $ 6.10 for life insurance in1999 but with the deregulation of the sector, a sea change in the scene is most likely.The insurance sector in India has come a full circle from being an open competitive market to
SERVICE SECTOR MANAGEMENT FINANCIAL SERVICES - INSURANCE
nationalisation and back to a liberalized market again. Tracing the developments in the Indianinsurance sector reveals the 360-degree turn witnessed over a period of almost two centuries.
A BRIEF HISTORY OF THE INSURANCE SECTOR
The business of life insurance in India in its existing form started in India in the year 1818 withthe establishment of the Oriental Life Insurance Company in Calcutta.
Some of the importantmilestones in the life insurance business in India are:1912:
The Indian Life Assurance Companies Act enacted as the first statute to regulate the lifeinsurance business.
1928:
The Indian Insurance Companies Act enacted to enable the government to collect statisticalinformation about both life and non-life 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 centralgovernment and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with acapital contribution of Rs. 5 crore from the Government of India. The General insurance businessin India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the firstgeneral 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 andthe Tariff Advisory Committee set up.
1972:
The General Insurance Business (Nationalisation) Act, 1972 nationalised the generalinsurance business in India with effect from 1 st January 1973. 107 insurers amalgamated andgrouped into four companies viz. the National Insurance Company Ltd., the New India AssuranceCompany Ltd., the Oriental Insurance Company Ltd. and the United India Insurance CompanyLtd. GIC incorporated as a company.
STRUCTURE OF THE INSURANCE INDUSTRY
The structure of the insurance industry comprises of the Operating department, Administrativedepartment and the finance department. The Operating Department generally performs the basicfunctions pertaining to the designing of products, marketing thereof, servicing the insured, the the
SERVICE SECTOR MANAGEMENT FINANCIAL SERVICES - INSURANCE
the insured, management of portfolio, etc. The Administrative Department looks after the day-to-day affairs of the company. The Finance Department backs the operations and administration of the company by accounting for the transactions, streamlining the flow of funds, materializing themanagement decisions, etc.The Administration Department as well as the Finance Department, usually, functions through in-house setup. The Finance Department functions in the areas of accounting, financial andmanagement reporting, budgeting and controlling, etc. and thus renders enormous scope for finance professionals. The new entrants in the insurance sector are likely to call for the services of the Chartered Accountants for their financial setup requirements. The Chartered Accountants haveengaged themselves in the audit of Insurance Companies since long. With the transition in theinsurance sector, the horizons for their contribution have broadened. There has, emerged a king-size pool of opportunities that the Chartered Accountants can explore and apply their professionalwisdom and experience to.
BASIC FUNCTIONS OF THE INSURANCE INDUSTRY1.Risk Perception and Evaluation:
The fundamental function of an insurer is to provide a cover against the detriment caused to theinsured due to the happening of certain specified and agreed events. Thus, prior to providing suchumbrella through a product, the insurer has to assess the risk involved in the transaction. Theinsurer has to identify the element of risk prevalent in the concerned industry or a particular unit.The perception of risk requires the study of variables through various methods including theapplication of scientific and statistical techniques and correlation thereof with the industry or unitunder study in light of their basic environmental and infra-structural characteristics. After theidentification and categorisation of the risks perceived, the probability of happening of the loss-causing events and the severity of the loss has to be assessed.
2.Designing the Insurance Product:
On the basis of the risks perceived, the insurer develops a product to cover the stipulated risks.While designing an insurance product, an insurer decides its cost to be charged from the insured inthe form of premium, reduction thereof in certain cases like not lodging any claim during the previous covered period(s), suggesting the implementation of risk-mitigating measures, etc. Thefeatures of a product should be flexible enough to provide for the determination of premiums,rebates, additional premiums, etc. depending upon the risk benchmarks as determined.
3.Marketing of the Product:
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