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Origin of Insurance

Whenever there is uncertainty there is risk. We do not have any control over uncertainties
which involves financial losses. The risk may be certain events like death, pension,
retirement or uncertain events like theft, fire, accident, etc.
Insurance is a financial service for collecting the savings of the public and providing
them with risk coverage. It comes under service sector and while marketing this service
due care is taken in quality product and customer satisfaction. The main function of the
Insurance is to provide protection against the possible chances of generating losses.
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 two centuries.

Brief History of the Insurance Sector
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 opening up of Insurance sector was a part of the on going liberalization in the
financial sector of India. The changing face of the financial sector and the entry of
several companies in the field of life and non life Insurance segment are one of the key
results of these liberalization efforts. Insurance business by way of generating premium
income adds significantly to be the GDP.
Over the past three years, more than thirty companies have expressed interest in doing
business in India. The IRDA (Insurance Regulatory Development Authority) is the
regulatory authority, which looks over all related aspects of the insurance business. The
provisions of the IRDA bill acknowledge many issues related to insurance sector.
The IRDA bill provides guidance for three levels of players - Insurance Company,
Insurance brokers and Insurance agent. Life Insurance sector is one of the key areas
where enormous business potential exists. In India currently the life insurance premium
as a percentage of GDP is 1.3 % against, 5.2 per cent in the US.
General Insurance is another segment, which has been growing at a faster pace. But as
per the current comparative statistics, the general insurance premium has been lower
than life insurance. General Insurance premium as a percentage of GDP was a mere 0.5
'per cent in 1996. In the General Insurance Business, General Insurance Corporation
(GIC) and its four subsidiaries viz. New India Insurance, Oriental Insurance, National
Insurance and United India Insurance, are doing major business. The General Insurance
Industry has been growing at a rate of 19 percent per year.
The entry of several private insurance companies, particularly international insurance
companies, through joint ventures, will speed up the process of insurance mobilization.
The competition will unleash new schemes and benefits, which will give consumers a
better Chance to save as well as insure. The regulatory system in India is relatively new
and takes some more time to make the Insurance sector a perfectly competitive one.
Insurance Regulatory Authority of India issued regulations on 15 subjects which
included appointed. Actuary, actuarial report, Insurance agents, Solvency margins, reinsurance,
registration of Insurers, and obligation of insurers to rural and social sector,
investment and accounting procedure. The reform in Insurance in India is guided by
factors like availability of a variety of products at a competitive price, improvement in
the quality of customer services etc. Also the employment opportunities in the Insurance
sector wil1 increase as major players set their business plans in India. The policy of the
government to open up the financial sector and the Insurance sector is expected to bring
greater FDI inflow into the country. The increase in the investment limit in this vital
sector has generated considerable business interests among the foreign Insurance
companies" Their entry wil1 certainly change the Insurance sector considerably.

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 recommend its
future, direction. The Malhotra committee was set up with the objective of
complementing the reforms initiated in the financial sector.
In 1994, the committee submitted the report and some of the key recommendations
1. Government stake in the insurance Companies to be brought down to 50%. 2.
Government should take over the holdings of GlC and its subsidiaries so that these
subsidiaries can act as independent corporations.
3. All the insurance companies should be given greater freedom to operate.
I. Private Companies with a minimum paid up capital of Rs. 1 bn should be allowed to
enter the industry.
2. No Company should deal in both Life and General Insurance through a single entity.
3. Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies.
4. Postal Life Insurance should be allowed to operate in the rural market.
5. Only one State Level Life Insurance Company should be allowed to operate in each
Regulatory Body:
1. The Insurance Act should be changed.
2. An Insurance Regulatory body should be set up.
Controller of Insurance (Currently a part from the Finance Ministry) should be made
1. Mandatory Investments of LIC Life Fund in government securities to be reduced from
75% to 50%.
2. 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.)
Customer Service:
1. LIC should pay interest on delays in payments beyond 30 days.
2. Insurance companies must be encouraged to set up unit linked pension plans.
3. 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 the insurance industry should open 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.
Insurance Regulatory Authority
On the recommendations of the Malhotra Committee, government has set up an interim
Insurance Regulatory Authority (IRA), with a view to activate an insurance regulatory
apparatus essential for proper monitoring and control of the insurance industry. The IRA
is headed by a chairman who is also Controller o0f insurance and chairman of TBC. The
other members of the IRA, not exceeding seven in number of whom not more than three
shall serve full time, shall be nominated by the central government.
Insurance industry, as on 1.4.2000, comprised mainly two players: the state insurers:
Life Insures:
Life Insurance Corporation of India (LIC)
General Insurers
General Insurance Corporation of India (GIC) (with effect from Dec 2000, a
national reinsurer)



4 Is of Insurance Service

The 4 Is refers to the different dimensions/ characteristics of any service. Unlike
pure product, services have its own characteristics and its related problems. So the
service provider needs to deal with these problems accordingly. The service
provider has to design different strategies according the varying feature of the
service. These 4 Is not only represent the characteristics of different services but
also the problems and advantages attached to it.

These 4 Is can be broadly classified as:

Insurance is a guarantee against risk and neither the risk nor the guarantee is
tangible. Hence, insurance rightly come under services, which are intangible.
Efforts have been made by the insurance companies to make insurance tangible to
some extent by including letters and forms
Service quality is often inconsistent. This is because service personnel have
different capabilities, which vary in performance from day to day. This problem of
inconsistency in service quality can be reduced through standardization, training
and mechanization.
Services are produced and consumed simultaneously. Consumers cannot and do
not separate the deliverer of the service from the service itself. Interaction between
consumer and the service provider varies based on whether consumer must be
physically present to receive the service.
No inventory can be maintained for services. Inventory carrying costs are more
subjective and lead to idle production capacity. When the service is available but
there is no demand, cost rises as, cost of paying the people and overhead remains
constant even though the people are not required to provide services due to lack of
In the insurance sector however, commission is paid to the agents on each policy
that they sell. Hence, not much inventory cost is wasted on idle inventory. As the
cost of agents is directly proportionate to the policy sold.

With the opening up of the insurance industry to the private sector, the need for a strong,
independent and autonomous Insurance Regulatory Authority was felt. As the enacting of
legislation would have taken time, the then Government constituted through a
Government resolution an Interim Insurance Regulatory Authority pending the enactment
of a comprehensive legislation.
The Insurance Regulatory and Development Authority Act, 1999 is an act to provide for
the establishment of an Authority to protect the interests of holders of insurance policies,
to regulate, promote and ensure orderly growth of the insurance industry and for matters
connected therewith or incidental thereto and further to amend the Insurance Act, 1938,
the Life Insurance Corporation Act, 1956 and the General insurance Business
(Nationalization) Act, 1972 to end the monopoly of the Life Insurance Corporation of
India (for life insurance business) and General Insurance Corporation and its subsidiaries
(for general insurance business).
Definition and meaning:
Insurance is the means of managing risk and protection against financial loss
arising as a result of contingencies, which may or may not occur.
In other words, insurance is the act of providing assurance, against a possible loss,
by entering into a contract, with one who is willing to give assurance. Through this
contract the person willing to give assurance binds himself to make good such loss, if it

General insurance means managing risk against financial loss arising due to fire,
marine or miscellaneous events as a result of contingencies, which may or may not occur.
General Insurance means to Cover the risk of the financial loss from any natural
calamities viz. Flood, Fire, Earthquake, Burglary, etc.. i.e. the events which are beyond
the control of the owner of the goods for the things having insurable interest with the
utmost good faith by declaring the facts about the circumstances and the products by
paying the stipulated sum , a premium and not having a motive of making profit from the
insurance contract.
Some of the General Rules:
1. Mis-description :
The insurance policy shall be void and all the premiums paid by insured may be
forfeited by the insurance company in the event of mis-presentation or misdeclaration
and/or non-disclosure of any material facts.
2. Reasonable care :
The insured shall take all reasonable steps to safeguard the property insured
against any loss or damage. Insured shall exercise reasonable care that only
competent employees are employed and shall take all reasonable precautions to
prevent all accidents and shall comply with all statuary or other regulations
3. Fraud :
If any claim under the policy may be in any respect fraudulent or if any fraudulent
means or device are used by the insured or any one acting on the insureds behalf
to obtain any benefit under the insurance policy, all the benefits under the
insurance policy may be forfeited.
4. Few basic principles of general insurance are :
1. Insurable interest
2. Utmost good faith
3. Subrogation
4. Contribution
5. Indemnity
5 Risks of loss not covered under general insurance are:
The loss or damage or liability or expenses whether direct or indirect occasion by
happening through or arising from any consequences of war, invasion, act of foreign
enemy, hostilities (whether war be declared or not), civil war, rebellion revolution, civil
commotion or loot or pillage in connection therewith and loss or damage caused by
depreciation or wear and tear. However the risk of loss or damage by war can be insured
by payment of additional premium in some cases only.

Product levels:
In this figure there is a nucleus or core in the center, which is supported by series of
tangible and intangible features and benefits and these form a cluster around the core