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ON INSURANCE SECTOR
SUBMITTED BY: Lloyd’s Club House
History of World Insurance Industry
By the midpoint of the 17th century, insurance was increasingly a focus of the English middle-class business community. Their mobile cash and credit resources challenged the status quo. The emergence of coffeehouses became a dynamic process. They not only posed a challenge to the landed nobility's financial power, but they created opportunities for revolutionary business practices. In the late 1680s, merchants and others who wrote insurance as a sideline were gathering at Edward Lloyd's Coffee House. They actively worked to attract seafarers and Lloyd's soon became a commercial center. In addition to auctioning various items, Lloyd's was particularly hospitable to shipping interests. When Edward Lloyd died in 1712, son-in-law William Newton succeeded him. The Coffeehouse subsequently passed through many hands. Although Marine underwriters gathered there in the early 1700s, it is not clear when it became a true insurance marketplace. The best evidence suggests that Lloyd's developed gradually as it provided increasingly comprehensive world shipping news.
The Growth of Maritime Business
British maritime trade grew significantly from 1690 to 1720. This, in turn, greatly expanded the need for insurance. In 1717, promoters sought government charters for two marine insurance companies—the Royal Exchange Assurance Corporation and the London Assurance. Their strategic goal was to eliminate competing corporations, groups, or partnerships from marine insurance. For several years, the companies' ambitions were thwarted until they made a strategic adjustment. In time-honored fashion, they offered King George I a bribe. The King's influence prevailed and charters were granted under the existing 1720 Bubble Act. The legislation had been passed in response to the "South Sea Bubble." This man-made disaster involved the catastrophic failure of a stock company organized to monopolize Britain's South Sea trade. When its shares became disastrously over-inflated, the company's collapse caused financial panic throughout the country. Royal Exchange and London Assurance also hoped to take over most marine insurance handled by individual underwriters. In a classic case of unintended consequences, under the 1720 legislation, individuals actually received competitive protection from other insurance organizations. Ironically, the chartered companies wrote mostly fire insurance and for years left the marine insurance market to individuals.
Individuals of Dubious Character
By the 1750s, Lloyd's had gained considerable visibility and prominence. Unfortunately, it gradually became infiltrated by persons of dubious character, particularly inveterate gamblers. Gambling was so rampant that when newspapers published names of prominent people who were seriously ill, bets were placed at Lloyd's on the anticipated dates of their death. Reacting against such practices, 79 merchant underwriters broke away in 1769, and 2 years later formed a "New Lloyd's Coffee House" that became know as the "real Lloyd's." The first Lloyd's Committee was established in 1771 to create and monitor a sometimes problematic self-regulating code of behavior. Now a society, Lloyd's consisted of a group of independent men allied by mutual interests. It relocated to the Royal Exchange Building in 1774 where it provided Lloyd's first true underwriting room and where it remained for 50 years. John Julius Auger stein, later called "the Father of Lloyd's," became chairman in 1795 and subsequently initiated many additional organizational changes and efficiencies.
The Question of "Reinsurance"
London's fledgling insurance business faced catastrophic losses like those of today's insurers—but with a crucial difference. There was no "reinsurance" to spread risks among insurers. Various reinsurance methods have come and gone over the centuries; however, the principle remains the same: to spread the risk among insurers.
Although not widely known today, reinsurance actually was illegal in Britain between 1745 and 1864. At that time, the ruling powers believed that reinsurance facilitated gambling by enticing those so inclined to wager. The ban's fallacy became obvious as early as 1780, when French and Spanish fleets captured 55 of 63 vessels traveling in a consolidated convoy of troopships and merchant vessels. The ships belonged to the East India and West India companies. Their capture generated an unprecedented £1.5 million loss and caused many Lloyd's underwriters to default on their obligations.
Early Lloyd's Professionalism
Lloyd's became more cohesive and professional over time. In 1800, its underwriting room was restricted to merchants, underwriters, insurance brokers, and bankers—all of whom needed to be recommended by two or more members. A £15 subscription fee helped control chaotic overcrowding and eliminates "undesirables." Lloyd's prospered with the British economy. During the Napoleonic Wars, insurance rates generated large profits. Prices of goods also moved upward, benefiting underwriters. In 1811 Lloyd's was London's only marine insurance market. However, with the 1812 battle of Waterloo, Lloyd's first golden age began a steep decline.
Hard Times at Lloyd's
By 1818, commodity prices and wartime premiums fell as competition heated up from new, powerful insurers. Another body blow came when
Lloyd's ostensible monopoly on marine insurance was eliminated by decree in 1824, opening up such underwriting to others. Interestingly, nearly all newly formed insurers wrote fire and life insurance, not marine. Although a few strong companies wrote some marine insurance and were competitive with Lloyd's, they were not vibrant enough to constitute a serious threat. For a time, Lloyd's went through a period of considerable difficulty. It had 2,150 subscribers in 1814, but by 1843, membership had fallen to fewer than 1,000 and only 190 of these were professional underwriters. As the 1850s approached, prospects were improving as the last vestiges of the Coffee House were disappearing.
During the middle third of the century, Lloyd's established four subscriber categories: underwriting members, no underwriting brokers, Merchants' Room subscribers, and Captains' Room subscribers. Only underwriting members could sign Lloyd's policies. No underwriting brokers were annual subscribers. Merchants' Room subscribers included merchants, bankers, and traders who were encouraged to make market investments. Captains' Room subscribers were seafaring men who sometimes sold ships and goods at auction. However, changes would soon develop. The Captains' Room became a separate club opened to others for an annual fee but was not successful. Likewise, the Merchants' Room lasted only 10 years because of pressure
for space. This left just two member categories—underwriters and no underwriters; the latter group ultimately declined to only a few. By the 1860s, Lloyd's still remained a small institution providing facilities for marine insurance transactions. It would take another decade before the foundation was laid for building a much stronger organization. The Lloyd's Act of 1871 created its first detailed constitution sanctioned by Parliament and established the Lloyd's Society as a legal entity. This, in essence, certified the economic importance of insurance. The act defined the Committee of Lloyd's authority and duties, delineated rules for underwriting members, addressed punishment of members, and gave the Committee the right to grant Underwriting Room admission to persons (called "associates") not engaged in the insurance business. As a new century approached, Lloyd's improvements in organization and governance paved the way for the decisive leadership of Henry Hozier, Frederick William Marten, and Cuthbert Heath. These individuals of exceptional vision and perseverance would lay the groundwork for Lloyd's 20th century emergence as a creative force in almost every line of insurance.
History of Indian Insurance Industry
The history of insurance in India dates back to the year 1818, when the Oriental Life Insurance Company was formed in Kolkata. The Life Insurance Act of 1912 marked the beginning of a new era in the insurance sector of India.
The Indian Insurance Companies Act was passed in the year 1928. This act empowered the government of India to gather necessary information about the life insurance and non-life insurance organizations operating in Indian financial markets.
The Triton Insurance Company Ltd. formed in 1850 and was the first of its kind in the general insurance sector in India. The Indian Mercantile Insurance Limited was established in 1907, and was the company in India to handle all classes of insurance. 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 360degree 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 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 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.
The Malhotra Committee, 1993
Reform in the Indian insurance sector was initiated with the formation of the Malhotra Committee in 1993. It was named after R.N. Malhotra, the then Finance Secretary and RBI Governor, who headed the committee. The aim of the Malhotra Committee was to assess the functionality of the Indian insurance sector. This committee was also in charge of recommending the future path of insurance in India.
The Malhotra Committee attempted to improve various aspects of the financial sector, making them more appropriate and effective for the Indian market. The recommendations of the committee put stress on offering operational autonomy to the insurance service providers and also suggested forming an independent regulatory body. “Malhotra Committee” was constituted by the government in 1993 to examine the various aspects of the industry. The key element of the reform process was Participation of overseas insurance companies with 26% capital. Creating a more efficient and competitive financial system suitable for the requirements of the economy was the main idea behind this reform.
In 1994, the committee submitted the report and some of the key recommendations included: i)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. ii) Competition Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. 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. iii) Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance- a part of the Finance Ministry- should be made independent iv) Investments 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) v) Customer Service LIC should pay interest on delays in 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 services and increase the coverage of insurance policies, industry should be 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 Insurance Regulatory and Development Authority.
Insurance Act, 1938 to IRDA Act, 1999
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA, since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. The other decisions taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA’s online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations.
Duties, Powers and Functions of IRDA
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. 1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote
and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in subsection (1), the powers and functions of the Authority shall include, (a) issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; (b) protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; (c) specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; (d) specifying the code of conduct for surveyors and loss assessors; (e) promoting efficiency in the conduct of insurance business; (f) promoting and regulating professional organizations connected with the insurance and re-insurance business; (g) levying fees and other charges for carrying out the purposes of this Act;
(h) calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; (i) control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); (j) specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; (k) regulating investment of funds by insurance companies; (l) regulating maintenance of margin of solvency; (m) adjudication of disputes between insurers and intermediaries or insurance intermediaries; (n) supervising the functioning of the Tariff Advisory Committee; (o) specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f); (p) specifying the percentage of life insurance business and general
insurance business to be undertaken by the insurer in the rural or social sector; and (q) exercising such other powers as may be prescribed. The Law Commission has favoured a review and revision of the Insurance Act, 1938 in such a manner that "it should not only promote insurance but also protect the interests of policyholders and strengthen the Insurance Regulatory Development Authority (IRDA) to ensure financial stability in this sector. IRDA has to play a vital role for the regulation and development of insurance business. The report recalled that following a raft of discussion held with the IRDA, the Law Commission prepared an exhaustive Consultation paper in June 2003, identifying thirteen tentative grounds of revision of the Insurance Act, 1938 and the IRDA Act, 1999 ranging from merger of relevant provisions of IRDA Act with the Insurance Act 1938 to harmonising of the Act with rules and regulations. On repudiation of life insurance policy under extant Sec 45 Insurance Act 1938, the Commission has recommended taking into account the suggestion of the Life Insurance Corporation that after the expiry of five years, no policy of life insurance can be repudiated on any ground whatsoever. However, an insurer can repudiate a policy before the expiry of five years on the ground that the insured has made a misstatement of or suppressed a material fact.
While Section 38 of the IA provides for assignment and transfer of life insurance policies, there are certain anomalies in the working of subsections. Hence the Commission has recommended that a clear distinction be made between absolute assignment and conditional assignment. As Section 39 of the IA provides that the policyholder might nominate one or more persons to whom the money secured by the policy should be paid in the event of the death of the policyholder, the Commission has favoured amending this section to make a distinction between a "beneficial" nominee and a "collector" nominee.
Max New York Life Insurance Company
To become the most admired life Insurance Company in India.
Become one of the top quartile life insurance companies in India. Be a national player. Be the brand of first choice. Be the employer of choice. Become principal of choice for agents.
Joint Venture Partner-
Max New York Life Insurance Company is a joint venture between New York Life International Inc., a Fortune 100 company and America's largest life insurance provider and Max India Limited one of the leading multi-business corporations in India. Max New York Life Insurance Co Ltd is a Rs. 250 crore joint venture with a paid up capital of Rs. 807 crore. Max India has raised its economic interest in life insurance joint venture with a foreign partner, Max New York Life (MNYL) from 50% to 74%. It is widely known that as per the agreement signed between the two leading giants in 2003, the New York Life was contributing 26 percent in the 26:74 joint venture for every equity investment made. Max was contributing 50 percent and the remaining 24 percent was funded through an advance paid by New York Life to it. New York Life had an option to raise its shareholding in the JV close to 50 percent at the par value, in case of a relaxation up to 26 percent in the FDI sectoral cap in the insurance segment. These terms were approved by the Insurance Regulatory and Development Authority (IRDA) and were highlighted in the successive annual reports of Max India.
Asset Under Management-
Max New York Life Insurance announced that it has clocked Rs. 2,100 crore in collected premiums for the period Jan - July 2008 recording a growth of 81% over the similar period last year. Of this, first year premiums contributed Rs. 1195crore, while earnings from renewal premium stood at Rs.905 crore. The company has acquired around 27 lakh policies since inception and is ranked number 3 amongst private life insurers in terms of number of policies sold (YTD June). The Assets Under Management have also increased to over Rs.4138 crore on July 31, 2008 as compared to Rs.2271 crore on July 31, 2007. The capital base of the company is expected to expand to Rs.3600 crore from current equity base of Rs.1,232 crore. New York Life is one of the largest and strongest life insurance companies in the world with more than USD$215 billion assets under management and has received among the highest ratings for financial strength from the life insurance industry's principal rating agencies: A.M. Best (AA+), Standard & Poor's (AA+), Moody's (Aa1), Fitch (AAA). According to Moody's, "New York Life's rating reflects the company's good quality investment portfolio, ample liquidity, and sound capitalization, as well as the good growth potential of its international business.”
Max New York Life Insurance is further strengthening its investment function, the growth strategy of the company. The company plans to strengthen its investment desk by adding analysts and fund managers and launching more fund options to provide better value to its customers of both ULIP and traditional products. The company also announced completion of one year of its Growth Super Fund, which has provided a return on investment of 20.2% as on 30th May 2008. At a time when equity markets have been volatile, the Growth Super Fund has performed exceptionally well. During the same period CNX 500 recorded a growth of 11.11% and the BSE Sensex a growth of 12.86%. Growth Super is a fund that has the mandate to invest a minimum of 70% in equity and can scale it up to 100%, with the rest invested in debt and cash instruments.
For future expansion
i) ii) iii) iv)
Recruitment Vertical Health and Retirement Plan Highly Network Individual CEIP Max BUPA:-Max India and BUPA International General Insurance
Max New York Life brings to you specially customized products and services that are flexible and can e customized to suit your needs It now has 30 life insurance products and 8 riders that can be customized to over 800 combinations enabling customers to choose the policy or plan that best fits their need. These include:
• Whole Life • Level Term • Five Year Term R & C • Life Partner Plus
o o o o o Life Gain Endowment Life Pay Money Back Life Gain Plus 20 Life Gain Plus 25 20-Year Endowment
o Life Maker Premium o Life Maker Gold o Life Maker Platinum o Life Maker Pension o Life Invest
o Group Term Life
o o o o o
Group Gratuity Employee Deposit Linked Insurance Credit Shield Unit Linked Group Gratuity Unit Linked Group Superannuation
o o o o Max Suraksha Easy Term Max Mangal Endowment Max Vriksha Money Back
MAX ASSURE o o o o o NAV • Life Maker Investment Plan • Life Maker Pension Plan • Life Maker Premium • Smart Steps • Group Gratuity • Group Superannuation • Max Amsure Secure Returns Builder Max Assure Bonus Builder Max Assure Business Builder Max Assure Money Back Max Assure Future Builder Max Assure Secure Returns Builder
Different Channels of Distribution
i) Agency Channel:- In Max New York Life Insurance, business is done mainly through Agent Advisor. In India it has more than 55000 agents.
Two Programs is run under Agency Channel
i) AAP: - Agency Association Program ii) CEIP
ii) Bancassurance: - Bancassurance is an innovative distribution
channel involving banks to sell insurance products of Insurance Companies. Max New York Life Insurance has tied up with Yes Bank
iii) Direct Sales Team (DST):- Max New York Life Insurance makes
a data base of potential customers; contact them on the telephone to market different policy of the company.
iv) Alternate channels - Business is done through associate partners,
Span of Organization
Max New York Life Insurance has a strong growth focus. The company plans to significantly expand its distribution footprint by opening more than 100 new offices every year for next 3-4 years. The number of agent advisors is expected to touch 2, 00,000 from current 36,500. The growth in agency distribution will be complemented by strong growth in partnership distribution. The company currently has an equity base of Rs.1, 032 crore. To support this growth plan, the shareholders are committed to increase the capital base to Rs. 2,650 crores over the next 3-4 years. There are 13000 employees all over India and 55000 Agent advisors.
CEO (Chief Executive Officer)
2 Vice President
M.P (Managing Partner)
SGO (Senior General Officer)
6 A.P (Associate Partner)
9 ASM/SM (Assistant Sales Manager/Sales Manager)
Investment of Max New York life
18.3% 7.8% 5.30%
G-Sec (Rating: Sovereign) Infrastructure (Rating:AAA /AA+) Corporate Cash & Short Term
Max New York Life invests only in safe debt instruments with the highest credit ratings.
Our current portfolio has almost 70% invested in GOI bonds, 25% in corporate bonds (AAA and AA rated bonds only). The balance 5% is invested in short-term cash instruments to meet working capital requirements. .IRDA has overarching rights to amalgamate companies and change the management to protect policyholder interests.
Actuarial of Max New York Life
Appointed actuaries are a life insurance company’s watchdogs. They are there to ensure that a life insurance company is run properly and that all liabilities towards policyholders are appropriately and correctly recorded in the books .IRDA has mandated that life insurance companies get two auditors to certify the accuracy of accounts. Max New York Life’s auditors are PricewaterhouseCoopers and Ernst & Young. The regulator keeps a close watch on a life insurance company’s assets to ensure that all investments are safe and secure.
Comments:Max New York Life is the first company to be awarded license by IRDA after liberalization of the insurance industry. The Company's paid up capital is Rs. 657 crore, which is more than the norm laid down by IRDA. I think that the company has positioned itself on the quality platform and it has developed a strong corporate governance model based on the core values of excellence, honesty, knowledge, caring, integrity and teamwork. The main strategy is to establish itself as a trusted life insurance specialist through a quality approach to business. Their financial practices are prudent enough to ensure safety of policyholder's funds. Its primary channel of distribution is individual agents. As being the best in class agency distribution model in place, the company is
spearheading a major thrust into additional distribution channels to further grow its business. The five-pronged strategy to pursue alternative channels of distribution includes the franchisee model, rural business, direct sales force involving group insurance and telemarketing opportunities and corporate alliances. It also offers a suite of flexible products. So the company has a strong distribution channel and solid strategies. It also has a wide range of products, which will certainly help the company to grow in the near future.
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