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Indian insurance industry
Life insurance came to India from England in 1818 when oriental life insurance company started in Calcutta by Europeans. After this many insurance companies had been started in India. But these companies were looking after only the needs of European community established in India. Indian people were not being insured by these companies. First Indian life insurance company came as Bombay mutual life insurance assurance. Second company was Bharat insurance company came in 1896. After this the united India in madras, national Indian and national insurance in Calcutta and the co-operative assurance in Lahore were established in 1906. To regulate Indian insurance business first insurance act came in 1912 as life insurance company act and provident fund act. These acts consist of premium rates tables and periodical valuations of companies. In the first two decade of 20th century many life insurance companies were started. So the insurance act came in 1938 to governing life and non life insurance companies and to provide strict state control. In 1956 the life insurance business in India was nationalized. In 1956 life insurance corporation of India (LIC) was created to spreading life insurance much more widely particularly in rural areas. In that year LIC had 5 zonal offices, 33 divisional offices and 212 branch offices. In 1957 the business of LIC of sum assured of 200crores, 1000crores in 1970, and 7000crores in 1986.

Indian regulatory development authority:
In 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders’ interests.

Role of IRDA:
 Protecting the interests of policyholders.  Establishing guidelines for the operations of insurers, and brokers.  Specifying the code of conduct, qualifications, and training for insurance intermediaries and agents.  Promoting efficiency in the conduct of insurance business.  Regulating the investment of funds by insurance companies.  Specifying the percentage of business to be written by insurers in rural sectors.  Handling disputes between insurers and insurance intermediaries.

no matter even if that is coming from the market leader. New insurance companies have come into existence leading to open competition and hence better products for customers. which is putting huge pressures on Insurance companies (Read Risk Under-writers) and Brokers to respond. they are soft but when time is right and ripe. For historical years. De-tariff of many Insurance Products are the reflection of changing aspirations and growing demand of Indian consumers. Indian consumers were at receiving end. should that product is not serving the purpose. There are not ready to accept any product. . Insurance Product was underwritten and was practically forced onto consumers on a “Take-it-As-itbasis”. they demand and seek necessary changes. that is given to them. Indian customers have become very sensitive to Coverage / Premium as well as the Products (read Risk Solution). The new products are constantly being demanded by Indian consumers. A case in point is ULIP Product / Group Life and Credit Life in Life Insurance segment and Travel / Family Floater Health and Liability Insurance in the Non-life segment are new age Avatar. All that got changed with passage of IRDA act in 1999.Changing perception of Indian customers: Indian Insurance consumers are like Indian Voters.

but now customers look at insurance products as an investment as well as life cover.Customers are looking at Insurance for covering Pure Risk now which I have covered in my next section. The Indian customer’s forms the pivot of each company’s strategy. They would not accept any type of insurance product unless it fulfills their requirements and needs. BANKS SHARES AND DEBENTURES 39% 2% 1% MUTUAL FUNDS NBFC’S GOVT. Another good reason why we are seeing quick changes in the buying behavior of Insurance from mere Investment to risk mitigation is the cost of Replacement of Goods (ROG) or Cost of Services (COS). Now Indian customers are aware of insurance industry and insurance products provided by companies. So today’s customers wants good return from the insurance companies. They have become more sensitive. BONDS 2% 3% 13% . Investment of Indian household savings (as a % in different sector) BANK DEPOSITS CORP. In historic day’s customers looking at insurance products as a life cover which can provide security against any unacceptable events.

) who was the only life-insurance company for the people till 2000. giving birth and rearing up a child. avivaindia.4% of the market share in 2006.C.I. still holds 71. debentures. meeting daily financial needs of . But after the introduction of private life insurance companies there is a great competition in Indian market now. L. his education. People are demanding for higher returns with the life risk cover and private companies are giving 30-40% average growth per annum. government and other securities. These life-insurance companies have every kind of policies suiting every need right from financial needs of. Previously there was a monopoly business for Life Insurance Corporation of India (L. marriage. Everyone is trying to capture the fresh market here and penetrate it with aggressive marketing strategies. bonds.www.INSURANCE PF/ RETIRE FUNDS CURRENCY 13% 21% 6% Source: .I. Today life-insurance is not only limited up to just life risk cover and maturity period bonuses but changed to greater return from the Changing face of Indian insurance industry: After the Insurance Regulatory and Development Authority Act have been passed there has been establishment of many private insurance companies in India. With the introduction of the unit linked insurance policies these companies are investing the money in different investment instruments like shares.

To tap the Indian market there has been tie-ups between the major Indian companies with other International insurance companies to start up their business. introducing innovative products and increasing the penetration of life insurance in the vastly . These companies have every aspects and needs of our life covered along with the death-benefit. Today. pension solutions after retirement.  Growth of customer’s interest with an increasing demand for better insurance So Indian life-insurance market is the target market of all the companies who either want to extend or diversify their business. Indian insurance industry can be featured by:  Low market penetration. In India only 25% of the population has life insurance.  Rebate from government in the form of tax incentives to be insured.  Application of information technology for business. The government of India has set up rules that no foreign insurance company can set up their business individually here and they have to tie up with an Indian company and this foreign insurance company can have an investment of only 24% of the total start-up investment. each of which are making strides in raising awareness levels. the Indian life insurance industry has a dozen private players.  Ever growing middle class component in population.

underinsured country. Whatever the developments. The biggest beneficiary of the competition among life insurers has been the customer. and realistic and sustain so people in better position to understand the risk and benefits of the product and they are accepting these innovative products. This provides market linked returns and is among the most flexible policies available today for investment. The success of their effort is that they have captured over 28% of premium income in five years. . and the Indian customer’s forms the pivot of each company’s strategy. There are 12 private players in Indian life insurance market. industry has seen the entry and growth of unit linked products. Apart from the traditional term and saving insurance policies. Several of private insurers have introduced attractive products to meet the needs of their target customers and in line with their business objectives. Now products are priced. the future and the opportunities in this industry will surely be exciting. Life insurance is also now being regarded as a versatile financial planning tool. Penetration of life insurance is beginning to cut across socio-economic classes and attract people who have never purchased insurance before. customer focused service and professional advice has become the mainstay of the industry. So it is clear that the face of life insurance in India is changing. A wide range of products. flexible. but with the changes come a host of challenges and it is only the credible players with a long term vision and a robust business strategy that will survive.

ANP sanmar.Insurance Industry (ICFAI publication book) .Prudential and Standard life from UK. 6 independent insurers: . ICICI prudential.Aviva. Bajaj Allianz. Max New York life. OM Kotak. Major international insurers are. SBI life. Birla sun life.6 bank owned insurers: . Tata AIG. Increasing growth since liberalization: YEAR FY03 FY04 FY05 FY06 FY07 LIC (in bn rs. MetLife and New York life of the US.HDFC standard life. ING Vysya. AIG. Sun life of Canada.) 110 120 130 140 240 PRIVATE PLAYER 10 20 40 60 160 Source: . MetLife.

 Greater concern for the customers.  Convergence of financial services.  Cost effective operations.  Actual operations and distribution.  Technology driven shift in product design.  Restructuring of the public sector.  Newer products and services.  Consolidation of domestic insurance markets. .  Competition and quality consciousness.Possibilities for insurance companies in India:  Further deregulation of the market.

The development of global insurance industry over the past few years was influenced by booming stock markets which enabled considerable capital gains to be made in non life business. Most of the markets are undergoing globalization. The stock market boom of the past few years led to demand for unit linked insurance products. Increase in insurers equity capital increased underwriting capacity. The global insurance industry is growing at rapid pace. Lot of mergers and acquisition are taking place in the insurance world.3 has been generated as life insurance premium and $922. insurers increasingly are pressured by the demands of their clients. Global insurance industry Globally.5.7 billion premium world wide according to the global development of premium volume in 144 countries in 2005. The rapidity in the industry. technological improvement has resulted in pressures on a few economic parameters. and UK was having 10% of global share. while demand did not develop at the same pace. The world insurance industry is at peak of its globalization process. Insurance companies have collected $2443.7 as non life insurance premium. Japan had global share of 21%. resulting in decrease in insurance policies prices. Global insurance market is increasing by an average of six percent per year since 1990. $1521. The US accounted for 35% of global life and non life premium. .

Influence on Indian insurance industry: In this era of globalization. changing customers needs. appearance of new risk. Life insurance penetration as a % of GDP United kingdom Japan Korea United states Malaysia 8. India has a rapidly growing middle class and this section can afford to buy insurance products. Dramatic changes are taking place owing to the internationalization of activities.3% 4. insurance companies face a dynamic global environment. new types of covers to match with new risk situations.9% 8. Now the existing insurers are facing difficulties from non-traditional competitors those are entering the retail market with new approaches and through new channels.3% 7. and unconventional and innovative ideas on customer services.6% . This shows the attraction that the Indian market holds for foreign insurers who have been putting pressure on developing countries as well as on India to open up its market. Low growth rates in developed markets.1% 3. and the uncertain economic conditions in the developing world are exerting pressure on insurer’s resources and testing their ability to survive.

incurred loss .com 6.8% 1. the processes by which insurers select the risks to insure and decide how much in premiums to charge for accepting those risks and (2) by investing the premiums they collect from insured.India China Brazil 3.www. Using a wide assortment of data.0% 1. To this end. The most difficult aspect of the insurance business is the underwriting of policies.3% Source: . Data is analyzed to fairly accurately project the rate of future claims based on a given risk. Functioning of insurance industry: Insurer’s business model: Profit = earned premium + investment income . insurers use actuarial science to quantify the risks they are willing to assume and the premium they will charge to assume them.underwriting expenses Insurers make money in two ways: (1) through underwriting. Actuarial science uses statistics and probability to analyze the risks associated with the range of . insurers predict the likelihood that a claim will be made against their policies and price products accordingly.indianinsuranceresearch.

Naturally. Upon termination of a given policy. So a poor economy generally means high insurance premiums. An insurer's underwriting performance is measured in its combined ratio. . claims and loss handling is the materialized utility of insurance. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. Insurers start investing insurance premiums as soon as they are collected and continue to earn interest on them until claims are paid out. Finally. A combined ratio of less than 100 percent indicates underwriting profitability.perils covered. while anything over 100 indicates an underwriting loss. insurers seek to balance the elements of . the “float” method is difficult to carry out in an economically depressed period. Insurance companies also earn investment profits on “float”. The combined ratio is a reflection of the company's overall underwriting profitability. “Float” or available reserve is the amount of money. and these scientific principles are used to determine an insurer's overall exposure. In managing the claims-handling function. This tendency to swing between profitable and unprofitable periods over time is commonly known as the "underwriting" or insurance cycle. the amount of premium collected and the investment gains thereon minus the amount paid out in claims is the insurer's underwriting profit on that policy. at hand at any given moment that an insurer has collected in insurance premiums but has not been paid out in claims. Bear markets do cause insurers to shift away from investments and to toughen up their underwriting standards.

Investment management: Investment operations are often considered incidental to the business of insurance. These funds arise out of policyholder funds in the case of life insurance. .customer satisfaction. whereas today the focus has shifted to fund management. Insurance is a business of large numbers and generates huge amount of funds over time. Investment income has to compensate for underwriting results which are increasingly under pressure. and technical and free reserves in the non-life segments. In the case of insurance. the difference between revenue and the expenses is known as operating surplus. Returns on investments influence the premium rates and bonuses and hence investment income will continue to be an important component of insurance company profits. In the past risk management was the most important part of business. and claims overpayment leakages. skilful and careful management of funds. Investment income is a large component of insurance revenues. In non life insurance the benefits are indirect and mostly by the creation of an investment portfolio. Time lag between the procurement of premium and the payment of claim provides an interval during which the funds can be deployed to generate income. Assets managed by insurance companies are estimated to account for over 40% of the world’s top ten asset managers. benefits from insurance profits accrue directly to policy holders when it is passed on to him in the form of a bonus. administrative handling expenses. Insurance companies are among the largest institutional investors in the world. In life insurance. and have traditionally viewed as secondary to underwriting.

not all pure risk is insurable . Insurance premium collected is converted in a pool of fund then divided in to four expenses. Net investment income includes income from trading in and holding stock market securities including government securities. Expenses =sum of claims + commission payable on procurement of business + operating expenses.  To pay for the claims.certain requirements usually must be fulfilled before a pure risk can be privately insured . securities.However. special deposits with the central government.Revenue =premium.  To pay the expenses of the management. Operating surplus =revenue-expenses.From the view point of the insurer. there are ideally six requirement of an insurable risk . loans to several public utilities and service providers in state government.  Surplus money will be invested in govt. Requirements of an insurance risk Insurance normally insure only pure risks .  To pay agency commission.

In contract .  The loss should not be catastrophic.In contract.while insurance is a technique for handling an already existing pure risk .the risk of fire is already present and is transferred to the insurer by a contract.a new speculative technique is created . The insurer and the insured have a common interest in the prevention of a loss.  The premium must be economically feasible Comparison of Insurance with other Similar Factors (1) Insurance and gambling compared Insurance is often erroneously confused with gambling . The second difference between insurance and gambling is that gambling is socially unproductive. No new risk is created by the contracts restore the insured’s financially in whole or in part if a loss occurs .thus . Both parties win if the loss does occur .Moreover.if you bet Rs 300 on a horse . because neither the insurer nor the insured is placed in a position where the gain of the winner comes at the expense of the loser. consistent gambling transaction generally never restore the losers to their former financial position .  The loss must be determinable and measurable. insurance is always socially productive. There must be a large number of exposure units  The loss must be accidental and unintentional.First .gambling creates a new speculative risk .but if you pay Rs 300 to an insurer for fire insurance .There are two important differences between them .  The chance of loss must be calculable. because the winner’s gain comes at the expense of the loser .

such as protection against a decline in the price agriculture products and raw materials. however. is not the same thing as hedging . not reduced. not risk reduction . the insurer’s prediction of future losses improves. hedging is a technique for handling risks that are typically uninsurable . many insurance transactions reduce objective risk.The risk of adverse price fluctuation is transferred because of superior knowledge of market conditions .(2) Insurance and hedging compared The concept of hedging is to transferring the risk to the speculator through purchase of future contracts . . First.An insurance contract. an insurance transaction involves the transfer of insurable risks. because the requirement of an insurable risk generally can be met . In contract. and at the end of the maturity sum assured is paid back to policyholder with the bonuses during the term of the policy. and prediction of loss generally is not based on the law of large numbers. because the relative variation of actual loss from expected loss will decline .However.  Money back policies: This type of policy is for periodic payments of partial survival benefits during the term of the policy as long as the policy holder is alive.thus.The risk is transferred. and no new risk is created. Various types of life insurance policies: Endowment policies: This type of policy covers risk for a specified period. hedging typically involves only risk transfer . As the number of exposure units increases. A second difference between insurance and hedging is that insurance and hedging is that insurance can reduce the objective risk of an insurer by application of the law of large numbers. there are some important difference between them.Although both technique are similar in that risk is transferred by a contract.

but joint life policies cover two lives simultaneously such as married couples. co-operatives etc it also provides insurance coverage for people in certain approved occupations at the lowest possible premium cost. No surrender. Group insurance: This type of insurance offers life insurance protection under group policies to various groups such as employers-employees.  Term life insurance policies: This type of insurance covers risk only during the selected term period. loan or paid up values are in such policies. These types of policies are for those people who are unable to pay larger premium required for endowment and whole life policies.  Whole life insurance policies: This type of policy runs as long as the policyholder is alive and is covered for the entire life of the policyholder.  Joint life insurance policies: These policies are similar to endowment policies in maturity benefits and risk cover. If the policy holder survives the term. Sum assured is payable on the first death and again on the death of survival during the term of the policy. professionals. . In this policy the insured amount and the bonus is payable only to nominee on the death of policy holder. risk cover comes to an end.

 Unit linked insurance plan: ULIP is a kind of insurance plan which provides life cover as well as return on premium paid over a certain period of time. raising profits. This explains the current scenario of mergers. and with system wide risks balanced out. Insurance and economy  Indian economy is growing in reference to global market. Insurance is not only important for tax benefits. and globalization of insurance. acquisitions.  It is a highly specialized technical business and customer is the most concern people in this business.  Insurance is a type of savings. therefore this business is able to spur the growth of infrastructure and act as a catalyst in the overall development of Indian economy. Business of insurance with its unique features has a special place in Indian economy. 7. allowing a lowering of the rates of the premium to be charged and in turn. It can be serving as . Pension plan: a pension plan or annuity is an investment over a certain number of years but does not provide any life insurance cover. the probabilities become more predictable.  The high volumes in the insurance business help spread risk wider. profits improve. but also for savings and for providing security. The investment is denoted as units and represented by the value called as net asset value (NAV). When there is a bigger base. It offers a guaranteed income either for a life or certain period.

There is thus a mutually beneficial interaction between insurance and economic growth. It is equally true that growth itself is facilitated by insurance. To some extent this is also compounded by certain attitudes to life. As the economy grows. Without some kind of cover against risk. as the economy widens the demand for new types of insurance products emerges. some of these activities will not be carried out at all. The low income levels of the vast majority of population have been one of the factors inhibiting a faster growth of insurance in India. the demand for life insurance increases. to mobilize and distribute savings for productive use. the living standards of people increase. As the assets of people and of business enterprises increase in the growth process. facilitate investment. The . A well-developed insurance sector promotes economic growth by encouraging risktaking.  Insurance play a crucial role in the commercial lives of nations and act as the lubricants of economic activities. support and encourage external trade. they also cover service industries. As a consequence. In fact. the demand for general insurance also essential service which a welfare state must make available to its people. and protect economic entities against external risk. Insurance and economic growth mutually influences each other. Insurance is no longer confined to product markets. Insurance firms help to spread the potentially financial consequences of risk among the large number of entities. Risk is inherent in all economic activities. Also insurance and more particularly life insurance is a mobilizer of long term savings and life insurance companies are thus able to support infrastructure projects which require long term funds.

risk is avoided at a cost. He wrote “It is a world of change in which we live. it is non-quantifiable risk that leads to profit. This is as true of business as of other spheres of activity”. We live only by knowing something about the future. arise from the fact that we know so little. According to him.1 per cent. He made a distinction between quantifiable risk and non-quantifiable risk. it is important to note that not all activities can be insured. The average rate of growth of the economy in the last three years was 8. Professor Frank Knight in his celebrated book “Risk Uncertainty and Profit” emphasized that profit is a consequence of uncertainty. At this point.economy has moved on to a higher growth path. it would completely negate entrepreneurship. The real management challenges are uninsurable risks. . In the case of insurable risks. If that were possible. This strong growth will bring about significant changes in the insurance industry. while the problems of life or of conduct at least. and a world of uncertainty.