PROJECT REPORT O

A COMPARATIVE A ALYSIS OF LIFE I SURA CE CORPORATIO A D PRIVATE I SURA CE COMPA IES

Report submitted in partial fulfillment of the requirements for Masters in Business Administration

SUBMITTED BY: DIVYA PRIYA MBA-D 1020343

U DER THE GUIDA CE OF: PROF. UMA SHARMA MBA, CUIM

CO TE TS

Topic Preface Introduction (Concepts) Research Methodology Analysis and Interpretation Findings and Conclusions References

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3 4-6 7-8 9-28 29-31 32

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PREFACE
This report presents the research, findings and conclusions resulting from the project, COMPARATIVE A ALYSIS OF LIC A D PRIVATE I SURA CE COMPA IES, supported by Prof.Uma Sharma, CUIM.

The objective was to compile and synthesize information on the concepts and process of the Insurance Sector, status of insurance industry in India, current performance, and comparison between public and private insurance company procedures.

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CHAPTER 1 INTRODUCTION
CONCEPT OF INSURANCE :
Life has always been an uncertain thing. To be secure against unpleasant possibilities, always requires the utmost resourcefulness and foresight on the part of man. To pray or to pay for protection is the spirit of the humanity. Man has been accustomed to pray God for protection and security from time immemorial. In modern days Insurance Companies want him to pay for protection and security. The insurance man says "God helps those who help themselves"; probably he is correct. Too many people in this country are not in employment; and work for too many no longer guarantees income security. Several millions are part-time, self employed and low-earning workers living under pitiable circumstances where there is no security cover against risk. Further the inherent changing employment risks, the prospect of continual change in the work place with its attendant threats of unemployment and low pay especially after the adoption of New Economic Policy and the imminent life cycle risks - a new source of insecurity which includes the changing demands of family life, separation, divorce and elderly dependents are tormenting the society.

Risk has become central to one's life. It is within this background life insurance policy has been introduced by the insurance companies covering risks at various levels. Life insurance coverage is against disablement or in the event of death of the insured, economic support for the dependents. It is a measure of social security to livelihood for the insured or dependents. This is to make the right to life meaningful, worth living and right to livelihood a means for sustenance. Therefore, it goes without saying that an appropriate life insurance policy within the paying capacity and means of the insured to pay premium is one of the social security measures envisaged under the Indian Constitution. Hence, right to social security, protection of the family, economic empowerment to the poor and disadvantaged are integral part of the right to life and dignity of the person guaranteed in the constitution. Man finds his security in income (money) which enables him to buy food, clothing, shelter and other necessities of life. A person has to earn income not only for himself but also for his dependents, viz., wife and children. He has to provide legally for his family needs, and so he has to keep aside something regularly for a rainy day and for his old age. This fundamental need for security for self and dependents proved to be the mother of invention of the institution of life insurance.

WHAT IS INSURANCE :
The business of insurance is related to the protection of the economic values of assets. Every asset has a value. The asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefit from it. The benefit may be an income or some thing else. It is a benefit because it meets some of his needs. In the case of a factory or a cow, the product generated by is sold and income generated. In the case of a motor car, it provides comfort and convenience in transportation. There is no direct income. Every asset is expected to last for a certain period of time during which it will perform. After that, the benefit may not be available. There is a life-time for a machine in a factory or a cow or a motor car. None of them will last for ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute is made available. Thus, he makes sure that the value or income is not lost. However, the asset may get lost earlier. An accident or some other unfortunate event may destroy it or make it nonfunctional. In that case, the owner and those deriving benefits from there, would be deprived of the benefit and the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations. Insurance, in law and economics, is a form of risk management primarily used to hedge against the risk of a contingent loss. Insurance is defined as the equitable transfer of the risk of a potential loss, from one entity to another, in exchange for a premium. Insurer, in economics, is the company that sells the insurance. Insurance rate is a factor used to determine the amount, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
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THE LIFE INSURANCE CORPORATION OF INDIA: 1956

This was the first step taken towards the nationalization of life insurance business in India. On 20th January, 1956 all life insurance companies were taken over by 43 nominated custodians. The custodians were experienced senior executives of private insurance companies, reporting directly to the Finance Ministry. From the word go, the complex task of running the industry on a permanent basis and continuing the services to policy holders without interruption were their major concerns. The actual work of integration had to await legislation. The custodians managed the insurance companies till 1-09-1956, when Life Insurance Corporation was established under the general direction and control of the Ministry of Finance. The Ordinance provided for the transfer of the control of 154 Indian insurers, 16 non Indian insurers and 75 provident societies. These arrangements were designed to ensure that no inconvenience whatsoever was caused to the policy holders. With the Government take over the management aimed towards the evolution of a common uniform premium rate, policy conditions and service and working procedures and above all to help promote team spirit. The corporation, a body corporate shall consist of not more than 15 members appointed by the Central Government, one of them being appointed by the government as chairman. The capital of the corporation was at Rs 5 crore provided by the central government.

INSURANCE SECTOR REFORMS

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian Insurance industry and recommended its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the over all financial system where it was necessary to address the need for similar reforms...". In 1994, the committee submitted the report and some of the key recommendations included:
(1) STRUCTURE

- Government stake in the Insurance Companies to be brought down to 50%. - Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. - All the insurance companies should be given greater freedom to operate
(2) COMPETETIO

Private Companies with minimum paid up capital of Rs.1 bn should be allowed to enter the industry. No Company should deal in both Life and General Insurance through a single entry. Foreign Companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

(3) REGULATORY BODY

The Insurance Act should be changed An Insurance Regulatory Body should be set up. Controller of Insurance (Currently a part from the Finance Ministry)should be made independent

(4) I VESME TS

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).

(5) CUSTOMER SERVICE

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 LIC should pay interest on delays on payments beyond 30 days. Insurance Companies must be encouraged to set up unit linked pension plans Computerization of operations and updating of technology to be carried out in the insurance industry. The committee emphasized that in order to improve the customer service and increase the coverage of insurance industry should opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs. 100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

THE BUSINESS OF INSURANCE :

Insurance companies are called insurers. The business of insurance is to (a) bring together persons with common insurance interests (sharing the same risks), (b) collect the share or contribution (called premium) from all of them, and (c) pay out compensation (called claims) to those who suffer. The premium is determined on the same lines as indicated in the examples above, but with some further refinements. In India, insurance business is classified primarily as life and non-life or general. Life insurance includes all risks related to the lives of human beings and General insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire related risks), Marine (dealing with all transport related risks and ships) and Miscellaneous (dealing with all others like liability, fidelity, motor crop, personal accident, etc.). Personal accident and sickness insurance, which are related to human beings, is classified as is classified as life , in many other countries. What is Non-life in India is termed as non-life in India, but in

Property and Casualty

some other countries. The premium is based on expectations of the losses. These expectations are based on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a law of large numbers . When you toss

a coin, the chance of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the case of 10. The variation will be less as a percentage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring, which is the basis of premium calculation, will be realized in practice. In order to be amenable to statistical predictions, insurers have to insure large numbers of risks. Larger the spread of business better is the experience in relation to expectations.

The business of insurance is nothing but one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because their loss is made good. People who do not suffer loss are relieved because they were spared the loss. The insurer is in the position of a trustee as it is managing the common fund, for and on behalf of the community of policyholders. It has to ensure that nobody is allowed to take undue advantage of the arrangement. That means that the management of the insurance business requires care to prevent entry (into the group) of people whose risks are not of the same kind as well as paying claims on losses that are not accidental. The decision to allow entry is the process of underwriting of risk. Underwriting includes assessing the risk, which means, making an evaluation of how much is the exposure to risk. The premium to be charged depends on this assessment of the risk. Both underwriting and claim settlements have to be done with great care.

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT :

For economic development, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. As on 31.3.2002, the total investments of the LIC exceeded Rs. 245000 crores, of which more than Rs. 130000 crores were directly in Government (both State and Centre) related securities, more than Rs. 12000 crores in the State Electricity Boards, nearly Rs. 20000 crores in housing loans and Rs. 4000 crores in water supply and sewerage systems. Other investments included road transport, setting up industrial estates and directly financing industry. Investments in the corporate sector (shares, debentures and term loans) exceeded Rs. 30000 crores. These directly affect the lives of the people and their economic well-being.
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A life insurance company will have large funds. These amounts are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are collected and held in trust for the benefit of the policyholders. The management of life insurance companies are required to keep this aspects in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large. Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact to major perils like fire, earthquake, floods, etc. Financiers, like banks, collapse if the factory, financed by it, is reduces to ashes by terrible fire. Insurers cover also the loss to financiers, if their debtors default.

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CHAPTER 2 RESEARCH METHODOLOGY

RESEARCH OBJECTIVES:
1. To compare the performance of LIC and private insurance companies in India. 2. To find out the performances of LIC and private insurance companies in each category (size. growth, productivity and efficiency) 3. To compare grievance management of LIC and private insurance companies.

RESEARCH DESIGN :
a. Type of research design : Analytical Research b. Data collection : Secondary Sources c. Statistical Tools : Ratio Analysis, Bar Graph

RESEARCH PROCESS
In this research my research objective was to compare the performance of LIC and Private insurance companies. For this purpose I decided the four broad categories under which I have compared the LIC and Private insurance companies. Under these Broad Categories I have analyzed 13 factors which are: 1. Size (25%) Total Premium Total Income Size of Balance Sheet Total number of Policies Total number of Branches 2. Growth (40%) Growth in Premium Growth in Income
. Growth in number of Policies

Growth in Market share 3. Productivity (15%) Business per Branch Income per Branch New Premium per Branch 4. Grievance Handling (20%)

I have used the Secondary data of last five financial years. I have collected data from the various balance sheet of LIC and other private insurance companies, web sites and in some cases I personally met some employees of some insurance companies. I tried to find out most of the information required to compare the LIC and private insurance companies. In Analysis I have found all the required data and on the basis of performance gave the rank to LIC and Private Insurance Companies on each factor and then points. Now these Points have been multiplied with the weightage of that factor. And then after the analysis of each factor a consolidated point table has been prepared to know that which sector is performing better than other.

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CHAPTER 3 ANALYSIS AND INTERPRETATION

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CHAPTER 4 FINDINGS & CONCLUSIONS

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