TYBFM: Insurance fund Management

nsurance (Fund) Management
Unit I Introduction The insurance mechanism • Fundamental principles of insurance • Importance of life and general insurance • Growth of evolution of business in India with specific reference to post liberalization Unit II Risk Management • Risk identification • Sources of Risk • “Insurance policy” as a financial product Unit III Organising an insurance business • Types of organizations • Role of IRDA • Procedure for setting up an insurance business Unit IV Operational aspects of Insurance business • Marketing insurance products including e-marketing • Acturial role

UNIT 1 : INTRODUCTION
MEANING OF INSURANCE: facilitates reimbursement during crisis situations, insurance means promise of compensation for any potential future losses. There are different insurance companies that offer wide range of insurance options and an insurance purchaser can select as per own convenience and preference. Several insurances provide comprehensive coverage with affordable premiums. Premiums are periodical payment and different insurers offer diverse premium options. The periodical insurance premiums are calculated according to the total insurance amount. The main meaning of insurance is used as effective tools of risk management. Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. Any loss to the insured in case of happening of an uncertain event is paid out of this pool. 1

TYBFM: Insurance fund Management Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type. Insurance is a contract between two parties whereby one party (insurer) agrees to undertake the risk of another (insured) in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'. Concept of Insurance / How Insurance Works The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums. Lets take some examples to understand how insurance actually works:

Example 1 - General
• • • •

Example 2 - Life
• • • •

Houses in a village = 1000 Value of 1 House = Rs. 40,000/Houses burning in a yr = 5 Total annual loss due to fire = Rs. 2,00,000/Contribution of each house owner = Rs. 300/-

Number of Persons = 5000 Age and Physical condition = 50 years & Healthy Number of persons dying in a yr = 50 Economic value of loss suffered by family of each dying person = Rs. 1,00,000/Total annual loss due to deaths = Rs. 50,00,000/-

UNDERLYING ASSUMPTION All 1000 house owners are exposed to a common risk, i.e. fire PROCEDURE All owners contribute Rs. 300/- each as premium to the pool of funds

• Contribution per person = Rs. 1,200/UNDERLYING ASSUMPTION All 5000 persons are exposed to common risk, i.e. death PROCEDURE Everybody contributes Rs. 1200/- each as premium to the pool of funds

Total value of the fund = Rs. 3,00,000 (i.e. 1000 Total value of the fund = Rs. 60,00,000 (i.e. houses * Rs. 300) 5000 persons * Rs. 1,200) 5 houses get burnt during the year 50 persons die in a year on an average

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TYBFM: Insurance fund Management Insurance company pays Rs. 40,000/- out of the Insurance company pays Rs. 1,00,000/- out of pool to all 5 house owners whose house got the pool to the family members of all 50 burnt persons dying in a year EFFECT OF INSURANCE EFFECT OF INSURANCE Risk of 5 house owners is spread over 1000 Risk of 50 persons is spread over 5000 people, house owners in the village, thus reducing the thus reducing the burden on any one person. burden on any one of the owners.

PRINCIPLES OF INSURANCE: A) Insurable Interest
Insurable interest means that the person opting for insurance must have pecuniary interest in the property he is going to get insured and will suffer financial loss on the occurrence of the insured event. This is one of the essential requirements of any insurance contract. Therefore, a person can go for insurance of only those properties where he stands to benefit by the safety of the property, and will suffer loss, damage, injury if any harm takes place to such property. Thus, if you want to insure Taj Mahal or Red Fort, you will not be allowed to do so as you do not have any pecuniary interest in these properties.

B) Principle of utmost Good faith
Like in other contracts, the insurance contract must be based on good faith. If the insurance contract is obtained by way of fraud or misrepresentation it is void.

C) Material Facts Disclosure
In the Insurance contract, the proposer is required to disclose to the insurer all the material facts in respect of the proposed insurance. This duty of disclosing the material facts not only applies to the material facts which are known to him but also extends to material facts which he is supposed to know. Thus, in case of Life Insurance the proposer must disclose the true age and details of the existing illnesses / diseases. Similarly, in case of the insurance of a building against fire, the proposer must disclose the details of the goods stored if such goods are of hazardous nature.

(D) Principle of Indemnity

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TYBFM: Insurance fund Management The insurance contract should always be a contract of indemnity only and nothing more. According to this principle, the insurance contract should be such that in case of loss due to the eventialities mentioned in the contract, the insured should be neither better off nor worse off after receiving the insured amount. The main object of this principle is to ensure that the insured is not able to use this contract for speculation or gambling.

LEGAL ASPECTS OF INSURANCE CONTRACTS Contract of indemnity

Indemnity means that the insured person is placed, financially, in the same position, as he was before the loss..

Implied conditions of a contract

Good faith & Utmost good faith
Both the parties to a contract are expected to observe good faith. However, the good faith assumes utmost importance when Material Facts are concerned and therefore utmost good faith should be observed on matters relating to Material facts.

Insurable Interest
Insurance contracts without insurable interests have no sanction of the law as they amount to speculation. The owner of a property has absolute insurance interest.

Existence of subject matter
Existence of subject matter of insurance is necessary.

Legality of parties to contract
At law, a minor cannot enter into a legal contract. However, so long as the contract is for the benefit of the minor himself, such contract is valid. Contracts entered with person of unsound mind or with a person from alien Country, are illegal.

Proximate cause
A loss could be due to a cause of causes. In the chain reaction, it is the dominant cause, which would be the proximate cause to be considered for the purpose of a claim. It is always the duty of the insured to prove that the loss arose out of the insured peril, which is proximate.

Consensus Ad Idem (of the same mind)

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TYBFM: Insurance fund Management In Insurance contracts only one party - the proposer knows the details of the risk. He has a duty to disclose particularly, material facts and the same should be understood by the other party to the contract - the insurers. In other words, each party should understand what is proposed for insurance and the same should be covered by the insurance contract. As the insurers issue the contract document, any ambiguity in the contract wording will be read against the insurers as they have drafted the contract.

Express conditions of a contract
These conditions are mainly framed to achieve the principle of indemnity and to ensure that the insured does not make any profit out of the loss. The express conditions include

Contribution
Contribution condition is a corollary to the Principle of indemnity. If an insured obtains more than one policy covering the same risk, he cannot recover the same loss from more than one source so that he is not benefited by more than ‘Indemnity’. Contribution condition checks that each policy pays only a ratable portion under each separate policy.

Subrogation
Subrogation condition is another corollary to the principle of Indemnity. A loss may occur accidentally or by the action or negligence of third party (not workmen). The property owners have a right to proceed against the offending third party to recover the loss/damage and also under their insurance policy but not under both. If the insured opts to recover the loss under the insurance policy, which is faster and does not involve litigation, he will surrender his rights against the third parties in favour of the Insurers signing a ‘Letter of subrogation’ on an appropriate stamp paper. An exception to this are life insurance polices wherein insured/ beneficiaries can claim under an insurance policy and also proceed againt the offending third party.

Arbitration When liability under the policy is admitted but the quantum is disputed, the insured
cannot rush to a Court of law without first referring the dispute to Arbitration as per ‘Indian Arbitration and reconciliation Act -1996'. In keeping with the provisions of the Act, the insured may appoint an arbitrator to be followed by appointment of another arbitrator by the insurers. They can also appoint a single arbitrator, to represent both of them. If the two separate arbitrators cannot reach an agreement, both the arbitrators can appoint a third arbitrator called umpire. The award of the Arbitrators is binding on both the parties to the dispute and cannot be challenged unless a point of law is involved. 5

TYBFM: Insurance fund Management

HISTORY OF INSURANCE
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 nonIndian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then.

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TYBFM: Insurance fund Management In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973. This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, 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. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 14 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 14 life insurance companies operating in the country. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

Life insurance Meaning:
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TYBFM: Insurance fund Management Life insurance is a contract between a person called insured and the company or "insurer" that is providing the insurance. If he/she dies while the contract is in force, the insurance company pays a specified sum of money free of income tax that is "cash benefits" to the person or persons he name as beneficiaries. It offers a way to replace the loss of income that happens when someone dies (generally the person who produces the majority of income in a family situation). Life insurance is a contract between the policy holder and the insurer, where the insurer agrees to pay a sum of money upon the happening of the insured individual's death or other event, such as terminal illness or critical illness. In return, the policy owner has to pay a stipulated amount called a ‘premium’ at regular intervals or in lump sums. It insures the life of the person buying the Life Insurance Certificate. Once a Life Insurance is sold by a company then the company remains legally responsible to make payment to the beneficiary after the death of the policy holder. There are designs in some countries where bills and death expenses plus catering for after funeral expenses must be included in Policy Premium.

NEED AND IMPORTANCE OF LIFE INSURANCE Superior to any Other Savings Plan
Unlike any other savings plan, a life insurance policy affords full protection against risk of death. In the event of death of a policyholder, the insurance company makes available the full sum assured to the policyholders’ near and dear ones. In comparison, any other savings plan would amount to the total savings accumulated till date. If the death occurs prematurely, such savings can be much lesser than the sum assured. Evidently, the potential financial loss to the family of the policyholder is sizable.

Encourages and Forces Thrift
A savings deposit can easily be withdrawn. The payment of life insurance premiums, however, is considered sacrosanct and is viewed with the same seriousness as the payment of interest on a mortgage. Thus, a life insurance policy in effect brings about compulsory savings.

Easy Settlement and Protection Against Creditors
A life insurance policy is the only financial instrument the proceeds of which can be protected against the claims of a creditor of the assured by effecting a valid assignment of the policy.

Administering the Legacy for Beneficiaries
Speculative or unwises expenses can quickly cause the proceeds to be squandered. Several policies have foreseen this possibility and provide for payments over a period of years or in a combination of installments and lumpsum amounts.

Ready Marketability and Suitability for Quick Borrowing
A life insurance policy can, after a certain time period (generally three years), be surrendered for a cash value. The policy is also acceptable as a security for a commercial loan, for example, a student loan. It is particularly advisable for housing loans when an acceptable LIC policy may also cause the lending institution to give loan at lower interest rates.

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TYBFM: Insurance fund Management

Disability Benefits
Death is not the only hazard that is insured; many policies also include disability benefits. Typically, these provide for waiver of future premiums and payment of monthly installments spread over certain time period.

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Types of Ordinary Meaning Life Assurance 1. Whole Life In whole life assurance, insurance company collects premium from the TYBFM: Insurance fund Management Assurance insured for whole life or till the time of his retirement and pays claim to the family of the insured only after his death. Accidental Death Benefits endowment assurance, the term of policy is defined for a 2. Endowment In case of Assurance specified period say 15, 20, 25 or 30 years. The insurance company pays the claim to the family of assured in an event of his death within the policy's term or in an event of the assured surviving the policy's term. 3. Assurances for i). Child's Deferred Assurance: Under this policy, claim by insurance Children company is paid on the option date which is calculated to coincide with the child's eighteenth or twenty first birthday. In case the parent survives till option date, policy may either be continued or payment may be claimed on the same date. However, if the parent dies before the option date, the policy remains continued until the option date without any need for payment of premiums. If the child dies before the option date, the parent receives back all premiums paid to the insurance company. ii). School fee policy: School fee policy can be availed by effecting an endowment policy, on the life of the parent with the sum assured, payable in installments over the schooling period. 4. Term Assurance The basic feature of term assurance plans is that they provide death riskcover. Term assurance policies are only for a limited time, claim for which is paid to the family of the assured only when he dies. In case the assured survives the term of policy, no claim is paid to the assured. 5. Annuities A person entering into an annuity contract agrees to pay a specified sum of capital (lump sum or by instalments) to the insurer. The insurer in return promises to pay the insured a series of payments untill insured's death. Generally, life annuity is opted by a person having surplus wealth and wants to use this money after his retirement. There are two types of annuities, namely: Immediate Annuity: In an immediate annuity, the insured pays a lump sum amount (known as purchase price) and in return the insurer promises to pay him in installments a specified sum on a monthly/quarterly/halfyearly/yearly basis. Deferred Annuity: A deferred annuity can be purchased by paying a single premium or by way of installments. The insured starts receiving annuity payment after a lapse of a selected period (also known as Deferment period). Money back policy is a policy opted by people who want periodical payments. A money back policy is generally issued for a particular period, and the sum assured is paid through periodical payments to the insured, spread over this time period. In case of death of the insured within the term of the policy, full sum assured along with bonus accruing on it is payable by the insurance company to the nominee of the deceased.

6. Money Back Policy

NOMINATION Q1. What is nomination? Nomination is a right conferred on the holder of the policy of life insurance on his own life to appoint a person or persons to receive the policy moneys in the event of the policy becoming a claim by death. 2. Who is a nominee? The person designated by the policyholder to receive the proceeds of an insurance policy, upon the death of the insured. 3. Who can nominate? 10 Any policyholder, who is a major and the life insured under a policy can make a Nomination. Nomination is not effective in a policy taken on the life of another person. 4. When can nomination be done?

TYBFM: Insurance fund Management Many policies can also provide for an extra sum to be paid (typically equal to the sum assured) if death occurs as a result of accident.

Tax Benefits
LIC premium paid is allowed as deduction from gross total income under sec 80 C.

TYPES OF LIFE INSURANCE POLICIES: Long-term Insurance
Long term insurance is so called because it is meant for a long-term period which may stretch to several years or whole life-time of the insured. Long-term insurance covers all life insurance policies. Insurance against risk to one's life is covered under ordinary life assurance. Ordinary life assurance can be further clasified into following types:

SURRENDER

VALUE

OF

INSURANCE

Surrender value is the sum of money an insurance company will pay to the policyholder or annuity holder in the event of his policy being voluntarily terminated before its maturity or the insured event occurring. This cash value is the savings component of most permanent life insurance policies, particularly whole life insurance policies. This is also known as 'cash value', 'surrender value' and 'policyholder's equity'. Surrender value is the amount payable to the policyholder should he decide to discontinue the policy and encash it. It is payable only after three full years' premiums have been paid to the insurance company. Moreover, if it is a participating policy, the bonus gets attached to it. Surrender of policy is not recommended since the surrender value will always be proportionately lower. If you decide to go in for another insurance policy at this stage, it will come at a much higher premium because your age will have advanced since taking the earlier policy. Therefore, retention of earlier policies and continuing all policies without allowing them to lapse is the best strategy. Surrender value is what an insurance company will pay an insured, after charges are deducted, if he terminates or surrenders the policy before the original maturity date. The life cover provided by a life insurance policy ends with its surrender as it effects a termination of the contract between the insured and the insurer. On surrender, the insured basically gets the fund value of his investments minus the charges that the insurer levies on account of premature termination.

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TYBFM: Insurance fund Management

Life Insurance Claims What are the situations when claims under life insurance arise? A Life Insurance Policy results into claim in the following situations:

On maturity of the policy i.e. completion of the term for which the insurance was taken in case of endowment policies ; or On death of the life insured, if it occurs before maturity of the policy, provided policy is in force on the date of death or has acquired

What is the procedure to be followed in case of claim by death of the policyholder? The following are the main steps for receiving claims: a. Intimation of death The first requirement of the Corporation in the case of death claim is that an "intimation of death"’ should be sent to the branch office of the LIC from where the policy was issued. The intimation needs to be sent by the person who is entitled to get the proceeds of the policy. It may be: i. ii. iii. the nominee or the assignee of the policy or the deceased policyholder’s nearest relative.

The letter of intimation of death should contain the following information: i. ii. iii. iv. v. vi. vii. viii. ix. name of the life assured a statement that the life assured is dead; the date of death; the cause of death; the place of death; and policy number / s claimant’s relationship with the assured or his status (nominee, assignee, etc.) Submission of death proof Submission of proof of age.

Soon after the receipt of the intimation of the death, the branch office sends the necessary claim forms along with instructions regarding the procedure to be followed by the claimant.

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TYBFM: Insurance fund Management Payment and Discharge After completing all the above formalities, the insurance company issues a discharge form for completion, which is to be signed by the person entitled to receive policy money. That is, it should be signed by:
• • •

the nominee, in case nomination was made under the policy; the assignee, in case the policy was validity and unconditionally assigned; the legal representative or successor.

In due course, LIC sends the cheque for the amount due to the person entitled to receive the same.

MEANING OF GENERAL INSURANCE Insurance other than ‘Life Insurance’ falls under the category of General Insurance. General Insurance comprises of insurance of property against fire, burglary etc, personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. There are also other covers such as Errors and Omissions insurance for professionals, credit insurance etc. Non-life insurance companies have products that cover property against Fire and allied perils, flood storm and inundation, earthquake and so on. There are products that cover property against burglary, theft etc. The non-life companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non-life insurance business.

In respect of insurance of property, it is important that the cover is taken for the actual value of the property to avoid being imposed a penalty should there be a claim. Where a property is undervalued for the purposes of insurance, the insured will have to bear a rateable proportion of the loss. For instance if the value of a property is Rs.100 and it is insured for Rs.50/-, in the event of a loss to the extent of say Rs.50/-, the maximum claim amount payable would be Rs.25/- ( 50% of the loss being borne by the insured for underinsuring the property by 50% ). This concept is quite often not understood by most insureds. Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. The cashless service is offered through Third Party Administrators who have arrangements with various service providers, i.e.,

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TYBFM: Insurance fund Management hospitals. The Third Party Administrators also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims. Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts. Liability insurance covers such as Motor Third Party Liability Insurance, Workmen’s Compensation Policy etc offer cover against legal liabilities that may arise under the respective statutes— Motor Vehicles Act, The Workmen’s Compensation Act etc. Some of the covers such as the foregoing (Motor Third Party and Workmen’s Compensation policy ) are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. Many industries insure against Public liability. There are liability covers available for Products as well. There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For instance, there are package policies available for householders, shop keepers and also for professionals such as doctors, chartered accountants etc. Apart from offering standard covers, insurers also offer customized or tailor-made ones. Suitable general Insurance covers are necessary for every family. It is important to protect one’s property, which one might have acquired from one’s hard earned income. A loss or damage to one’s property can leave one shattered. Losses created by catastrophes such as the tsunami, earthquakes, cyclones etc have left many homeless and penniless. Such losses can be devastating but insurance could help mitigate them. Property can be covered, so also the people against Personal Accident. A Health Insurance policy can provide financial relief to a person undergoing medical treatment whether due to a disease or an injury. Industries also need to protect themselves by obtaining insurance covers to protect their building, machinery, stocks etc. They need to cover their liabilities as well. Financiers insist on insurance. So, most industries or businesses that are financed by banks and other institutions do obtain covers. But are they obtaining the right covers? And are they insuring adequately are questions that need to be given some thought. Also organizations or industries that are self-financed should ensure that they are protected by insurance. Most general insurance covers are annual contracts. However, there are few products that are longterm. It is important for proposers to read and understand the terms and conditions of a policy before they enter into an insurance contract. The proposal form needs to be filled in completely and correctly by a proposer to ensure that the cover is adequate and the right one.

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TYBFM: Insurance fund Management

FIRE INSURANCE
STANDARD FIRE AND SPECIAL PERILS POLICY Coverage under the policy
• • • •

Buildings Machinery and Accessories Stock and stock in process Contents including furniture

Perils Covered

• • • • • • • • • • •

Fire Lightning Explosion/Implosion Aircraft damage Riot, Strike Terrorism Storm, Flood, inundation Impact damage Subsidence , landslide Bursting or overflowing of tanks Bush fire etc.

What is not Covered ? The policy does not cover any loss if
• • • • • • • • •

Loss or damage to property due to : Spontaneous combustion, fermentation Burning of property by order of any Public Authority Its undergoing any heating or drying process Explosion of boilers (other than domestic boilers) Total or partial cessation of work Permanent or temporary dispossession by order of Government Burglary, House breaking, theft Normal Cracking or settlement or bedding down of new structures

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TYBFM: Insurance fund Management
• • • • • •

War or war like operations Defective design, workmanship, defective materials Pollution or contamination Over-running, short circuit etc. Earthquake Spoilage loss

Add on Covers Some Add on covers..
• • • • • • • •

Terrorism Removal Of Debris Architects, Surveyors, Consulting Engineers fees Earthquake (Fire and Shock only) Spontaneous combustion Startup expenses Spoilage Material Damage Cover Leakage and Contamination cover

These additional covers are available by payment of additional premium. Fi Loss of Profit Policy Pre-Requisite for the Policy This policy can be taken only if a Standard fire and Special Perils Policy exists for the risk. What Can Be Insured ?
• • •

Net profit due to the stoppage of business as a result of an insured peril Standing charges which continue to accrue in spite of stoppage of business Additional expenditure incurred by the insured to maintain normal business activity, during the period in which the normal business is affected.

Indemnity Period The indemnity period commences with the date of damage and lasts till such a time as the business is restored to its pre damaged level or the period stipulated policy which ever comes first. The policy insures earnings of the business lost during the indemnity period.

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TYBFM: Insurance fund Management

MARINE INSURANCE MARINE CARGO INSURANCE
Coverage

Any loss or damage to goods in transit by rail, sea, road, air or post. Who can Insure ? Owners or bankers of goods in transit/shipment. Insured against what Risks ? The policy covers loss/damage to the property insured due to:
• • • • • • • • • • •

Fire or explosion; stranding, sinking etc. Overturning, derailment ( of land conveyance) Collision Discharge of cargo at port of distress Jettison General average sacrifice, salvage charges Earthquake, lightning Washing overboard Sea, lake, river water Total loss of package lost overboard or dropped in loading or unloading War and SRCC is specifically covered

Premium Rating The normal basis of valuation for ocean/air consignment will be CIF + incidentals up to a percentage which is agreed upon at the inception of the policy ( normally this is 10 %) Open Cover Open cover is usually issued for import/export. The open cover is a contract effected for a period of 12 months , whereby the insurance company agrees to provide insurance cover to all shipments coming within the scope of the open cover. Open cover is not a policy. It is an unstamped agreement. As and when shipments are declared , specific policies are issued as evidence of the contract and on

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TYBFM: Insurance fund Management collection of premium. Open Policy This policy is issued for transit of goods within India. Policy is valid for one year and all transits during the policy period and declared are automatically covered by the insurance company subject to the availability of the overall suminsured. It is a stamped document. In this case specific policies are not issued for each consignment . Premium can be collected in advance for the entire estimated value during the policy period . Stamp duty is collected in advance along with premium for despatches to be declared periodically Specific Voyage Policy This policy is valid for a single voyage or transit. The policy will be issued before the voyage starts. The coverage will cease immediately on completion of the voyage. The specific voyage policy must show complete details of the risk..It should contain particulars of conveyance/Vessel name/ Bill of Lading or Way bill and date , sum insured ,terms and conditions of cover, voyage , cargo description etc like all other marine policies. Annual Policy This policy may be issued to cover goods in transit by road or rail or sea from specified depots or processing units owned or hired by the insured. The goods covered must belong to or held in trust by the insured . These policies can not be issued to transport operators , clearing , forwarding and commission agents or freight forwarders or in joint names.. They can not be assigned or transferred. For such policies the sum insured should not be less than Rs 5000/-. Marine Hull Insurance Coverage Any loss or damage to ships, tankers, bulk carriers, smaller vessels, fishing boats and sailing vessels.

Who can Insure ? Owners or bankers of ships or vessels. What is Insured The various vessels that are covered under this policy are :

Fishing Vessels

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TYBFM: Insurance fund Management
• • •

Ocean Going Vessels Sailing Vessels Other Vessels

Insured against what Risks ? The policy covers loss/damage to the property insured due to:
• • • •

Fire or explosion; stranding, sinking etc. Overturning, derailment ( of land conveyance) Collusion General average sacrifice, salvage charges

What is not Insured? The policy does not pay any loss/damage caused by, attributable to, due to
• • • • •

Deliberate damage/destruction of the vessel by wrongful act of any person Use of any weapon of war employing atomic / nuclear fission and or fusion Insolvency or financial default of the vessel owner / operators / charterers War / civil war · Strike, Riot or Civil Commotion Any terrorist or person/s acting with political motive

MOTOR INSURANCE Motor Package and Liability only Policies

Motor vehicle which includes private cars, Two wheelers and Commercial vehicles excluding vehicles running on rails

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TYBFM: Insurance fund Management Who can Insure ? • Owners of the vehicle, Financiers or Lessee, who have insurable interest in a motor vehicle. Insured's Declared Value (IDV) (a) In case of vehicle not exceeding 5 years of age, the IDV has to be arrived at by applying the percentage of depreciation specified in the tariff on the showroom price of the particular make and model of the vehicle. (b) In case of vehicles exceeding 5 years of age and Obsolete models (manufacture of those vehicles which have been stopped by the manufacturers), they have to be insured for the prevailing market value of the same as agreed to between the insurer and the insured.

Package Policy - Section I Section I (Own Damage - OD) of Package Policy : Section I of package policy covers loss or damage to the vehicle and / or accessories due to
• • • • • • • • •

Accidental external means Fire, Self ignition, lightning Burglary, house breaking or theft Terrorist activity Riot, Strike and Malicious Damage Earthquake Flood, cyclone and Inundation etc While in transit by rail, road, air, elevator, lift or inland waterways Landslide or workslide

None of the above perils can be excluded from the scope of a policy. Loss or damage to accessories by burglary/house breaking/theft 1. For private car it is covered 2. In case of Motorised Two Wheelers this can be covered on payment of an additional premium at 3% of the IDV of such accessories 3. Loss or damage to Lamp, Tyres, mudguard and / or bonner side parts, bumpers etc., can be covered on payment of additional premium. This is applicatble only to Commercial Vehicles. If the vehicle is disabled in an accident, cover is provided for the reasonable cost of the following :

Its removal to nearest reapirers

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TYBFM: Insurance fund Management

The cost of reasonalble repairs immediately necessary

subject to the limit provided for. (a) Package Policy - Section II Section II (Liability) of Package Policy : 1. Liability to third parties bodily injury and or death and property damage 2. Personal accident cover for the owner driver for a specified sum insured The following are payable under Section II of the Package Policy subject to the limit of liability laid down in the Motor Vehicles Act :
• • • • •

The insured's legal liability for death / disability of third party Loss or damage to third party property Claimant's cost as decided by the court All costs and expenses incurred with company's written consent In case of death of an Insured person, entitled to indemnity for a liability incurred under this policy, his legal representative will be indemnified in place of insured, if he observed all conditions as the insured himself.

IDV Depreciation Schedule The premium is calculated on the basis of something called the Insured Declared Value (IDV) of the vehicle, which is basically the depreciated value of the vehicle agreed upon by the insurer and the policyholder.The IDV of a vehicle reduces with age. Insurers give a depreciation schedule for up to five years, which is the starting point for deciding the IDV of a vehicle: this IDV figure is scaled up or down depending on the condition of the vehicle. The depreciation schedule is identical for two-wheelers and four-wheelers (See table: IDV Depreciation Schedule) You can get your vehicle insured for a value greater than the IDV calculated on the basis of the specified depreciation schedule, on account of, say, better maintenance or highpriced accessories. However, in case of a claim, the onus is on you to justify the higher IDV. Cover for occupants of vehicle. This section provides cover against death or injury to the vehicle driver and passengers. The maximum cover that can be taken under this section is Rs 1 lakh for a driver and Rs 2 lakh for each passenger.

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TYBFM: Insurance fund Management IDV Depreciation Schedule Vehicle Age 6 Months 6 Months - 1 year 1-2 years 2-3 years 3-4 years 4-5 years Depreciation(%) 5 15 20 30 40 50 IDV (Rs) Year 1: 2,00,000 Year 2: 1,60,000 Year 3: 1,28,000 Year 4: 89,600 Year 5: 53,760 Year 6: 26,880

Note: The depreciation rate is charged as a percentage of the cost of a new vehicle, on a reducing balance basis. IDV of vehicles that are more than 5 years oldand of models that manufacturers have discontinued is to be determined on the basis of an understanding between the insurer and the insured. LIABILITIES POLICIES Public Liability Insurance Coverage

The Public Liability Act, 1991 was made effective from 1st April 1991. The object of this Act is to provide through insurance immediate relief to persons affected due to “accident” while “handling” “hazardous substance” by the owners on “no fault liability basis”. This has also been brought under Tariff. The definition of “Owner” is so comprehensive as to cover any person who owns or has control over any hazardous substance at the time of accident. This includes any Firm or its partners. Association or its members, Company or its Directors and all other persons associated and responsible to that Company in the conduct of their business. The various terms like “Accident”, “Hazardous substances” as defined in the Act are given below. “Accident” means an accident involving a fortuitous, sudden or unintentional occurrence while handling any hazardous substance resulting in continuous, intermittent or repeated exposure to death of, or injury to any person or damage to any property but does not include an accident by reason only of war or radioactivity. “Handling”in relation to any hazardous substance, means the manufacture, processing, treatment, package, storage, transportation by vehicle, use, collection, destruction, conversion, offering for sale, transfer or the like of such hazardous substance. “Hazardous Substance” means any substance or preparation which is defined as hazardous substance under the Environment (Protection) Act, 1986 and exceeding such quantity as may be specified by

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TYBFM: Insurance fund Management

notification by the Central Government. “Hazardous Substance”means any substance or preparation which, by reason of its chemical properties or handling is liable to cause harm to human beings, other living creatures, plants, microorganism, property or the environment (as per the Environment (Protection) Act, 1986).

Insurance Limits Any one accident : Minimum equal to Paid up Capital upto a maximum of Rs.5 crores. Any one year : 3 times of `Any one accident’ limit subject to a maximum of Rs.15 crores. Liability beyond Insurance In case of claim/s exceeding the above statutory limit/s, it is to be met by the Environmental Relief Fund to be set up under Section 7A of the Act and managed by the Authority appointed by the Central Government. The liability beyond the total of the insurance and the Relief / Fund is to be borne by the “Owner”. Contribution to the relief fund An amount equal to the insurance premium chargeable is to be paid simultaneously by every owner with the insurance premium to the underwriting Company. All proposals can be rated and accepted at DO level in terms of the rating structure laid down.

LIABILITIES INSURANCE
Product Liability Insurance Coverage This insurance is intended to provide an indemnity to the insured (upto the limit of liability) in the event of a claim being brought against him. This may be caused by anything harmful or defective in the products sold or supplied by the insured in connection with the business specified. The Company in addition will reimburse all costs and expenses incurred with its written consent defending such a claim for compensation. The insurance will however not cover the cost of removing, replacing or repairing defective products or loss of use thereof.

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TYBFM: Insurance fund Management Special Exclusions 1. The policy excludes liability for costs in the repair, reconditioning, modification or replacement of any part of any product which is or is alleged to be defective. 2. For cost arising out of the recall of any product or part thereof. 3. Arising out of any product which is intended for incorporation into the structure, machinery or control of any aircraft. 4. Arising out of deliberate, willful or intentional non-compliance of any statutory provision. 5. Arising out of pure financial loss such as loss of goodwill, loss of market, etc. 6. Arising out of fines, penalties, punitive and exemplary damages. 7. For injury and/or damage occurring prior to the Retroactive date shown in the schedule. 8. Arising out of deliberate, conscious or intentional disregard of the insured’s technical or administrative management of the need to take all reasonable steps to prevent claims. 9. For injury to any person under a contract of employment or apprenticeship with insured where such injury arises out of the execution of such contract. 10. Arising out of contractual liability which would not have existed in the absence of the specific contract. 11. Arising out of any product guarantee. 12. Arising out of claims for failure of the goods or products to fulfill the purpose for which they were intended What will Policy not Pay ? Loss or damage due to
• • • • • •

War and war like perils Wear and tear, depreciation, consequential loss Nuclear group of perils Gross and wilful negligence of Insured Violation of policy conditions Loss/damage/liability where Insured’s family or Insured’s employee are involved as principal/accessory Intentional act/self injury/ influence of drug/intoxicant.

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TYBFM: Insurance fund Management Public Liability Insurance Coverage

The Public Liability Act, 1991 was made effective from 1st April 1991. The object of this Act is to provide through insurance immediate relief to persons affected due to “accident” while “handling” “hazardous substance” by the owners on “no fault liability basis”. This has also been brought under Tariff. The definition of “Owner” is so comprehensive as to cover any person who owns or has control over any hazardous substance at the time of accident. This includes any Firm or its partners. Association or its members, Company or its Directors and all other persons associated and responsible to that Company in the conduct of their business. The various terms like “Accident”, “Hazardous substances” as defined in the Act are given below. “Accident” means an accident involving a fortuitous, sudden or unintentional occurrence while handling any hazardous substance resulting in continuous, intermittent or repeated exposure to death of, or injury to any person or damage to any property but does not include an accident by reason only of war or radioactivity. “Handling”in relation to any hazardous substance, means the manufacture, processing, treatment, package, storage, transportation by vehicle, use, collection, destruction, conversion, offering for sale, transfer or the like of such hazardous substance. “Hazardous Substance”means any substance or preparation which, by reason of its chemical properties or handling is liable to cause harm to human beings, other living creatures, plants, micro-organism, property or the environment (as per the Environment (Protection) Act, 1986).

Insurance Limits Any one accident : Minimum equal to Paid up Capital upto a maximum of Rs.5 crores. Any one year : 3 times of `Any one accident’ limit subject to a maximum of Rs.15 crores. Liability beyond Insurance In case of claim/s exceeding the above statutory limit/s, it is to be met by the Environmental Relief Fund to be set up under Section 7A of the Act and managed by the Authority appointed by the Central Government. The liability beyond the total of the insurance and the Relief / Fund is to be borne by the “Owner”. Contribution to the relief fund

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TYBFM: Insurance fund Management

Procedure for lodging and settlement of Claims in case of general insurance The following steps are involved in general for lodging and settlement of claims :-1. After the occurrence of a loss normally intimation to be given to the Policy issuing office immediately. 2. Above step will be preceded by lodging a FIR to the nearest Police Station , in case the loss has occurred due to any cause like Fire, Burglary, Theft, Damage to third party, Accident etc., i.e. for any reason other than Act of God Peril e.g. Flood, Earthquake, inundation etc. 3. Collect relevant claim form. 4. Fill up the claim form correctly after reading it thoroughly. 5. Submit claim form to the Policy issuing office either directly or by an authorised Agent along with documents required /asked for, such as Police Reports, Doctors Prescriptions, Reports of Pathological tests, Cash Memos from the Chemists Shop for the medicine purchased, Admission and Discharge Certificates, Receipts from Surgeon, Doctors etc. as the case may be. 6. The Policy issuing office may appoint Surveyor/ Loss Assessor or may refer the case to panel Doctors, if necessary. 7. Claim is finally settled by the Policy issuing office and payment is made to the Policy holder as a full and final settlement of claim. 8. Please note in some cases provisional payment is also made to the Policy holder pending the final processing of the claim, depending on the merits of the case. 9. The above list is not exhaustive but only indicative. Further details can be ascertained from the nearest office.

Underwriting : UNDERWRITING PROCESS AND METHODS Underwriting as an art began in the United Kingdom since Victorian times. Where upon a group of sailors/traders began the practice to insure against the perils involved in a sea voyage, it included the insuring of the goods in transit against known perils such as piracy, weather perils and goods getting destroyed in the voyage against the payment of a pre-agreed sum by the trader(s). The practice evolved with the times and the insurance model took shape. In the early days of marine insurance, the details of a ship or cargo to be insured were described on a slip. This slip was taken to Lloyd’s and the person, who was to carry the risk read the details, then signed the slip under the details of the risk. In this way, the person carrying the risk became known as the underwriter. The genesis of the insurance business also evolved from the United Kingdom and the first insurers were the Lloyd’s industries. Underwriting Defined

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TYBFM: Insurance fund Management Underwriting is the prices of selecting and classifying exposures. It is directly related to rate- making or the pricing function of an insurer, because computed rates contemplate some composition of lossproducing characteristics to which they will be applied. Underwriting is the insurance function that is responsible for assessing and classifying the degree of risk a proposed insured or group represents and making a decision concerning coverage of that risk. Underwriting includes all the activities necessary to select risks offered to the insurer in such a manner that general company objectives are fulfilled. The person responsible for evaluation and acceptance/rejection of risks and computation of premium is called as the underwriter. Accordingly, the decision made by the underwriter concerning risk classification and rating is called as the underwriting decision. Underwriting decisions are crucial for insurers since they can make or mar an insurance company. Good underwriting helps the insurance companies in many ways. It make them financially stronger and helps secure competitive advantage. This is obvious in the sense that if risks are assessed properly, pricing will be effective and therefore the company can well compete and build up reputation. In life insurance business, underwriting is performed by home or regional office personnel, who scrutinize applications for coverage and make decisions as to whether they will be accepted, and by agents, who produce the applications initially in the field, but these decisions may be subject to post underwriting at a higher level because the contracts are cancellable on due notice to the insured. In life insurance, agents seldom have authority to make binding underwriting decisions. In all fields of insurance, however, agency personnel usually do considerable screening of risks before submitting them to home office underwriters. 5.2 The Objectives and Principles of Underwriting The primary objective of underwriting is to see that the applicant accepted will not have a loss experience that is very different from that assumed when the rates were formulated. To this end, certain standards of selection relating to physical and moral hazards are set up when rates are calculated, and the underwriter must see that these standards are observed when a risk is accepted. For e.g., a company may decide that it will accept no fire exposures situated in areas where there is no fire department protection or will accept no one for life insurance who has had cancer within the previous five years. When reviewing an application for property insurance for a piece of property, such as a farm, that is located where there is no fire department protection or when reviewing an application for life insurance in which the individual had cancer four and half years ago, the underwriter asks the question, “Can I make an exception for this application, or must I reject it because it does not come within the technical limitations of my instructions?” In answering this question, the underwriter visualises what would happen to the company’s loss experience if a very large number of identical risks were accepted. If the aggregate experience would be very unfavourable, the underwriter will probably reject the application. The objectives of underwriting can be therefore expressed as follows:

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TYBFM: Insurance fund Management 1. Product Equitable to Customer—The underwriter should fairly assess the risk in a proposal and fix the premium justifiable to the consumer. 2. Deliverable to the Customer—Consumers are the final authority for buying the products. If the marketers are not able to sell so that the product becomes undeliverable, the onus is on the underwriters to carry an introspection of the various factors that caused differences between the consumers and company’s expectations. 3. Financially Feasible to the insurance Company—The insurers are not in the business of charity. The underwriting benefit must be reflected by the financial statements. Although, the underwriters are not directly involved in the pricing of insurance products, yet their contribution is as vital as that of actuaries, because they operationalise the business of risk. Most of the insurance companies formulate underwriting policy which provides the framework for underwriting decisions. It is also called as the underwriting philosophy. The underwriting policy specifies the line of insurance that will be written as well as prohibited exposures, the amount of coverage to be permitted on various types of exposure, the area of the country in which each line will be written, and similar restrictions. Generally, the individual who applies the underwriting rules and guidelines, called the desk underwriter, do not involve in forming the company underwriting. The underwriting philosophy also describes in general terms how the underwriter will use reinsurance for its risk management. The underwriting philosophy can be translated into underwriting guidelines which specify the general standards that specify which applicants are to be assigned to the risk established for each insurance product. In life insurance, the underwriter is assisted by medical reports from the physicians that exam med the applicant, by information from the agent, by an independent report (called inspection report) on the applicant prepared by an outside agency created for that purpose, and by advice from the company’s own medical advisor. In property-liability insurance (as well as life insurance), the underwriter has the services of reinsurance facilities and credit departments to report on the financial standing of applicants and also can review loss histories of applicant. 5.3 Underwriting in Life Insurance Life insurance underwriting is mainly concerned with mortality. Mortality risk for an insurer is that the insured will die prior to the stipulated life. An impairment in any respect of a proposed insured’s personal health, medical history, health habits, family history, occupation, or other activities that could increase that person’s expected mortality risk. While underwriting risk of an individual in life insurance, following factors are generally considered by life insurance companies: (a) Age, (b) Sex, (c) Height and weight, (d) Health history (and often family health history—parents and siblings), (e) The purpose of the insurance (such as for estate planning, or business or for family protection), (f) Marital status and number of children, (g) The amount of insurance the applicant already has, and any additional insurance s/he

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TYBFM: Insurance fund Management proposes to buy, (h) Occupation (some are hazardous, and increase the rise of death), (i) Income (to help determine suitability), (j) Smoking or tobacco use this is an important factor, as smokers have shorter lives), (k) Alcohol (excessive drinking seriously hurts life expectancy), (l) Certain hobbies (e.g., race .car driving, hang-gliding, piloting non-commercial aircraft), and (m) Foreign travel (certain foreign travel is risky). Similarly in case of group insurance the following factors are considered: (a) Proposed Coverage—which includes assessment of eligibility, level of benefits which can be offered, administration of the group and the mode of payment to intermediaries. (b) Cause of existence of the relevant group—classified on the basis of the nature of job, specific agendas etc. (c) Size of the group—large groups are always better than small groups for obvious reasons. (d) Nature of Group’s business-based on nature of industry, cement plants and coal mines workers are more prone to respiratory/kidney problems. (e) Geographical location of the group. (f) Stability of the group. (g) Attributes of group members—sex, age and work profile. (h) Level of participation—contribution by members or else, no contribution by members. (i) Persistency and prior experiences. In case of renewals, the most important factor is the claims experience. Underwriters place the potential insureds in the appropriate risk class (based on various criterion) generally classified as follows: (a) Preferred Class where the happening of an adverse event or the possibility of claims is the least, i.e., the inherent risk is lesser than average risk. (b) Standard Class—where the risk exposed is at par with the average risk. Most of the insured belong to this class. (c) Sub-standard Class—where the anticipated risk is -higher than the average risk. Insurance companies typically establish this risk class for proposed insureds that have permanent medical impairments or conditions, are recovering from serious illnesses or accidents, or have occupations or avocations that significantly increase their degree of risk. 5.4 Underwriting in Non-life Insurance The underwriting of commercial, business insurances is a much more complicated and involved task. Commercial insurances range from small shops and factories to large multinational corporations, with operations in many countries throughout the world. The degree of complexity of the underwriting required would obviously vary with the sheer size of the risk, but certain basic principles are fundamental. The essence of the task is that the underwriter has to evaluate the hazard associated with the risk, which is being proposed. In small cases he may be able to do this from reading a proposal form and corresponding with the sponsor. It may be that a local inspector is asked to call and see the shop or factory for himself. In large cases this is simply impossible. Detail of the risk could not be confined to

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TYBFM: Insurance fund Management a proposal form since there is just too much information to condense, no matter how large the form may be. The insurance companies may take the help of brokers in these cases. The broker in these cases will be in a position to prepare the case for the underwriter. This may mean site inspections by the broker and the preparation of plans and reports on the relevant aspects of the risk. This documentation, which may be extremely extensive, is then passed to the underwriter and negotiation can commence on the terms, conditions, cover and price. Several sources of information are available to the underwriter regarding the hazards of a commercial applicant for property and liability insurance: (a) Application Containing the Insurers Statements : The basic source of underwriting information is the application, which varies for each line of insurance and for each type of coverage. The broader and more liberal the contract, usually more detailed information is required. The questions on the application are designed to give the underwriter the information needed to decide whether to accept the exposure, reject it or ask for additional information. (b) Information from the Agent or Broker : In some line of non-life insurance, the agent may exercise his underwriting authority. For commercial insurances, the profit-sharing contracts are also entered with the agents, whereby the agent derives a special incentive if the business brought by him has resulted in a profit to the company. (c) Prior Experiences : The past history of claims is also a source of information. In case of existing clients where the claims experience has been unfavourable, the insurance company penalises i.e. loads premium for new businesses or renewals of the existing ones. (d) Inspection : Surveys are also conducted by the company’s specialists/consultants to find out the accuracy of information as contained in the proposal form. REINSURANCE Although to many, reinsurance is a relatively unknown aspect of the insurance industry, its roots can be traced as far back as the late 14th century. From that time forward, reinsurance evolved into the business as it operates today. While the early focus of reinsurance was in the marine and fire insurance lines, it has expanded during the last century to encompass virtually every aspect of the modern insurance market. Reinsurance is a device whereby the insurance company may reduce its risk by transferring a portion to one or more insurance companies. Reinsurance is a special, highly technical, competitive industry whose existence makes possible a more effective institution of risk. Reinsurance Defined Reinsurance is a transaction in which one insurer agrees, for a premium, to indemnify another insurer against all or part of the loss that insurer may sustain under its policy or policies of insurance. The company purchasing reinsurance is known as the ceding insurer; the company selling reinsurance is known as the assuming insurer, or, more simply, the reinsurer. Reinsurance can also be de scribed as the “insurance of insurance companies”. Reinsurance provides reimbursement to the ceding insurer for losses covered by the reinsurance agreement. It enhances the fundamental objective of insurance—to spread the risk so that no single entity finds itself saddled with a financial burden beyond its ability to pay. Reinsurance can be acquired either directly from a reinsurer or through a broker or reinsurance intermediary. 6.2 Objectives of Reinsurance

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TYBFM: Insurance fund Management Insurers purchase reinsurance for essentially four reasons: (1) to limit liability on specific risks; (2) to stabilise loss experience; (3) to protect against catastrophes; and (4) to increase capacity. Different types of reinsurance contracts are available in the market commensurate with the ceding company’s goals

Types of Reinsurance Following are the important types of Reinsurance 1. Proportional reinsurance 2. Non-proportional 3. Facultative Reinsurance: 1. Proportional reinsurance Proportional reinsurance involves one or more reinsurers taking a stated percent share of each policy that an insurer produces. This means that the reinsurer will accept that stated percentage of each of premiums and will pay that percentage of each loss. The insurer may appear for such coverage for many reasons for example, the insurer may not have sufficient capital to carefully keep all of the exposure that it is capable of producing. There are two types of proportional reinsurance. a. Quota Share Reinsurance The ceding company and the reinsurer take a balanced share of losses and premiums, which is generally expressed as a fixed percentage of loss on each risk. A ceding charge is paid by the reinsurer to the primary insurer to reimburse for the expenses incurred in writing the business. b. Surplus Share Reinsurance Surplus share reinsurance is related to quota share reinsurance, apart from the risks are not ceded to the reinsurer; instead, only risks exceeding a minimum dollar amount, or "line", are ceded 2. Non-proportional Under this type of reinsurance, insurer is responds to the loss suffered by the insurer exceeds a certain amount, it is called as, the retention or priority. 3. Facultative Reinsurance: Facultative reinsurance is coverage where the reinsurer evaluates a particular risk on a case-by-case basis. Facultative reinsurance is negotiated separately for each insurance contract that is to be reinsured. The flexibility of facultative reinsurance allows various ceding insurers to reinsure 31

TYBFM: Insurance fund Management dangerous risks which are not covered by continuing contract, so they can reduce the insurer's responsibility in certain high-risk areas. Facultative reinsurance also allows the prime insurers to get the reinsurer's advice on uncertain risks. This type of reinsurance contract can be in pro-rata form or excess of loss. Advantages of the Facultative Reinsurance:
• • •

Flexibility - The capability to arrange a reinsurance contract to fit any particular case. Stability - Stability in the operations of the insurer as losses can be transferred to the reinsurer. More Business – It Increases the insurer's capability to take on larger amounts of insurance business.

Disadvantages of the Facultative Reinsurance:

Uncertainty - The ceding insurer cannot plan before as it does not know whether the reinsurer will accept the risk.

Delays for the Insurer - The policy will not be issued apart from the reinsurance is obtained, it leads to delay

Unreliability - Dire market circumstances and poor loss outcomes can decline the reinsurance market, making it difficult for the insurer to reach reinsurance.

4. Treaty Reinsurance Treaty reinsurance is a contract between insurers and reinsurers. The ceding company is contractually bound to cede and the reinsurer is bound to assume a particular element or kind of risk insured by the ceding company. Once the negotiations of the contract are over, the reinsurer must automatically allow all business included within the conditions of the reinsurance contract with the ceding company. Advantages of Treaty Reinsurance:
• •

Economical - The insurer does not have to shop for a reinsurer before underwriting the policy so it is economical. Fast - There is no delay or uncertainty involved in Treaty Reinsurance.

Disadvantages of Treaty Reinsurance:

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TYBFM: Insurance fund Management
• •

Expensive - Administrative expenditure can be quite high in Treaty Reinsurance. Complex - Treaty Reinsurance is difficult and requires larger record keeping.

UNIT 2 : IDENTIFICATION OF RISK The Concept of Risk People express risk in different ways. To some, it is the chance or possibility of loss, to others, its may be uncertain situations or deviations or what statisticians call dispersions from the expectations. Different authors on the subject have defined risk differently. However, in most of the terminology the term risk includes exposure to adverse situations. The indeterminateness of outcome is one of the basic criteria to define a risk situation. Also, when the outcome is indeterminate, there is a possibility that some of them may be adverse and therefore need special emphasis. Let us have a look at the popular definitions of risk. According to the Dictionary risk refers to the possibility that something unpleasant or dangerous might happen. “Risk is a condition in which there is a possibility of an adverse deviation from a desired outcome that is expected or hoped for.” “At its most general level, risk is used to describe any situation where there is uncertainty about what outcome will occur. This is obviously risky.” The degree of risk refers to the likelihood of occurrence of an event. It is a measure of accuracy with which the outcome of a chance event can be predicted. In most of the risky situations, two elements are commonly found: 1. The outcome is uncertain i.e. there is a possibility that one or other(s) may occur. Therefore, logically, there are at least two possible outcomes for a given situation. 2. Out of the possible outcomes, one is unfavourable or not liked by the individual or the

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TYBFM: Insurance fund Management analyst. PERILS A peril refers to the cause of loss or the contingency that may cause a loss. In literary sense, it means the serious and immediate danger. Perils refer to the immediate causes of loss. Perils may be general or specific e.g. fire may affect assets like building, automobile, machinery, equipment and also, humans. Collusion may cause damage to the automobile resulting in a financial loss. HAZARDS Hazards are the conditions that increase the severity of loss or the conditions affecting perils. These are the conditions that create or increase the severity of losses. Economic slow down is a peril that may cause a loss to the business, but it is also a hazard that may cause a heart attack or mental shock to the proprietor of the business. Hazards can be classified as follows: (1) Physical Hazards—Property Conditions—consists of those physical properties that increase the chance of loss from the various perils. E.g. stocking crackers in a packed commercial complex increases the peril of fire. (2) Intangible Hazards—Attitudes and Culture—Intangible hazards are more or less psychological in nature. These can be further classified as follows: (a) Moral Hazard—Fraud—These refer to the increase in the possibility or severity of loss emanating from the intention to deceive or cheat. For example—putting fire to a factory running in losses. With an intention to make benefit out of exaggerated claims, deliberately indulging into automobile collusion or damaging it or tendency on part of the doctor to go for unnecessary checks when they are not required, since the insurance company will reimburse the loss. (b) Morale Hazard—Indifference--It is the attitude of indifference to take care of the property on the premise that the loss will be indemnified by the insurance company. So, it is the carelessness or indifference to a loss because of the existence of insurance contract. For example—smoking in an oil refinery, careless driving etc. (c) Societal Hazards—Legal and Cultural—these refer to the increase in the frequency and severity of loss arising from legal doctrine or societal customs and structure. For example, the construction or the possibility of demolition of buildings in unauthorised colonies. Types of Risks Financial and Non-Financial Risks Financial risk involves the simultaneous existence of three important elements in a risky situation— (a) that someone is adversely affected by the happening of an event, (b) the assets or income is likely to be exposed to a financial loss from the occurrence of the event and (c) the peril can cause the loss. When the possibility of a financial loss does not exist, the situation can be referred to as non-financial in nature. Financial risks are more particular in nature. Individual and Group Risks

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TYBFM: Insurance fund Management A risk is said to be a group risk or fundamental risk if it affects the economy-or its participants on a macro basis. These are impersonal in origin and consequence. They affect most of the social segments or the entire population. These risk factors may be socio-economic or political or natural calamities e.g. earthquakes, floods, wars, unemployment or situations like 11th September attack on U.S. etc. Individual/particular risks are confined to individual identities or small groups. Thefts, robbery, fire etc. are risks that are particular in nature. Some of these risks are insurable. The methods of handling fundamental and particular risks differ by their very nature e.g. Social insurance programmes may be undertaken by the government to handle fundamental risks. Similarly, an individual to prevent against the adverse consequences of fire may buy fire insurance policy. Pure and Speculative Risks Pure risk situations are those where there is a possibility of loss or no loss. There is no gain to the individual or the organisation. For example, a car can meet with an accident or it may not meet with an accident. If an insurance policy is bought for the purpose, then if accident does not occur, there is no gain to the insured. Contrarily, if the accident occurs, the insurance company will indemnify the loss. Speculative risks are those where there is possibility of gain as well as loss. The element of gain is inherent or structured in such a situation. For example—if you invest in a stock market, you may either gain or lose on stocks. Static and Dynamic Risks Dynamic risks are those resulting from the changes in the economy or the environment. These risk factors mainly refer to the macro economic variables like inflation, income and output levels, and technology changes. Dynamic risks emanate from the economic environment and therefore, these are difficult to anticipate and quantify. Contrary to this, static risks are more or less predictable and are not affected by the economic conditions. The possibility of loss in a business or unemployment after undergoing a professional qualification, loss due to act of others etc. are static and accordingly suitable for insurance. Quantifiable and Non-quantifiable Risks The risk which can be measured like financial risks are known to be quantifiable while the situations which may result in repercussions like tension or loss of peace are called as non-quantifiable. 1.4 Classifying Pure Risks Since pure risks are generally insurable, the discussion on risk is skewed towards pure risks only. On the presumption that insurable pure risks being static, they can be classified as follows: PURE RISK Liability

Personal

Property

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TYBFM: Insurance fund Management Personal Risks These are the risks that directly affect the individual’s capability to earn income. Personal risks can be classified into the following types: (a) Premature death—death of the bread earner with unfulfilled or unprovided financial obligations. (b) Old age—it refers to the risk of not having sufficient income at the age of retirement or the age becoming so that there is a possibility that the individual may not be able to earn the livelihood. (c) Sickness or disability—the risk of poor heath or disability of a person to earn the means of survival. E.g. the possibility of damage of limbs of a driver due to an accident. (d) Unemployment—the risk of unemployment due to socio-economic factors resulting in financial insecurity Property Risks These are the risks to the persons in possession of the property being damaged or lost. The immovables like land and building being damaged due to flood, earthquake or fire—the movables like appliances and personal assets being destroyed due to fire or stolen. The losses may be direct or indirect/consequential. A direct loss implies the visible financial loss to the property due to mishappenings. Whereas, the indirect ones are the losses arising from the occurrence of an incident resulting in direct/physical damages or loss. The loss to crops due to flood is a direct loss— the destruction of the growing power is a consequential one. Liability Risks These are the risks arising out of the intentional or unintentional injury to the persons or damages to their properties through negligence or carelessness. Liability risks generally arise from the law. e.g. liability of the employer under the workmen’s compensation law or other labour laws in India. In addition to the above categories, risks may also arise due to the failure of others. For example, the financial loss arising from the non-performance or standard performance in a contract—in engineering/construction contracts. Losses and Methods of Handling Pure Risk The various methods of handling pure risk depend upon the nature of losses. The losses from pure risk in an organisation may be categorised as follows: Direct Losses Indirect Losses • Damage to Assets • Loss of Normal Profit (net cash flow) • Injury/Illness to Employees • Continuing and Extra Operating Expense • Liability Claims and Defense Costs • Higher Cost of Funds • Foregone Investment • Bankruptcy Costs

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TYBFM: Insurance fund Management • (legal fees)

Although the various techniques of risk management have been discussed at length in the following chapter, the following discussion will give you a brief idea of how the risk can be handled: • Avoidance—avoid the risk or the circumstances which may lead to losses. For example—not to visit border areas at the time of war tensions. Avoid manufacturing and marketing a product of which patent/copyright is doubtful. • Loss Control • Loss Prevention—Reduce Loss Frequency—for example not to smoke in a factory produc ing inflammable products, getting training before driving etc. • Loss Reduction—Lower Loss Severity—deployment of fire fighting equipment, first aid boxes etc. • Retention—to retain in full or part of the risk. A risk is said to be actively retained if the individual is fully aware of the risk and its implications and prefers to retain it. On the contrary it is said to be passive, if the individual is ignorant of the risk or there is carelessness on part of the exposed. • Transfer—to transfer the risk to another individual or organisation either by: • Contractual Agreements—insurance, derivatives, diversification strategies etc. • Corporatising—converting the sole proprietor/partnership business into a company from an organisation. It is well known that in case of a proprietor firm, the proprietor is individually liable in an unlimited sense and in case of partnership firm, the partners are jointly and severally liable which is also in the nature of unlimited liability. However, in case of companies the liability of the shareholders is generally limited to the extent of capital contributed by them. RISK MANAGEMENT PROCESS The role of risk management The future is largely unknown. Most business decision-making takes place on the basic of expectations about the future. Making a decision on the basis of assumptions, expectations, estimates and forecasts of future events involves taking risks. Risk has been described as the “sugar and salt of life”. This implies that risk can have an upside as well downside. People take risk in order to achieve some goal they would otherwise not have reached without taking that risk. On the other hand, risk can mean that some danger or loss may be involved in carrying out an activity and therefore, care has to be taken to avoid that loss. This is where Risk Management is important, in that it can be used to protect against loss or danger arising from a risky activity. Definition Risk management is an integrated process of delineating specific areas or risk, developing a comprehensive plan, integrating the plan, and conducting ongoing evaluation. The Process The risk management process involves the following logical steps. 1. Defining the objectives of the risk management exercise 2. Identifying the risk exposures

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TYBFM: Insurance fund Management 3. 4. 5. Evaluating the exposures Critical analysis of risk management alternatives and selecting one of them Implementation and review.

The job of risk management can, therefore, be broken down into three elements, which follow each other in a logical sequence: A. Risk analysis B. Risk control C. Risk financing Because the conditions under which firms operate change, the risk management process has a necessity to be dynamic. All three elements of the process have therefore to be continuing reassessment and monitoring of the results. A Risk Manger’s believe that “prevention is better than cure”. It is better not to have suffered a loss than to suffer and collect under an insurance policy. Insurance does not compensate for all losses; for example, time spent dealing with the claim loss of client base and reputation. There is also a growing body of evidence to suggest that a significant proportion of firms never fully recover from the effects of a major loss and have to be wound-up within a short time even if fully insured. A. Risk Analysis The first step in the process is to analyse the risk to which an organisation may be exposed. Risk analysis has to prime elements—the identification of risk and its evaluation. Risk Identification Risk Identification requires knowledge of the organisation, the market in which it operates, the legal, social, economic, political, and climatic environment in which it does it’s business, it’s financial strengths and weakness, its vulnerability to unplanned losses, the manufacturing processes, and the management systems and business mechanism by which it operates. Any failure at this stage to identify risk may cause a major loss for the organisation. Risk identification provides the foundation for risk management. The various methods of risk identification are: • Checklist Method • Financial Statement Method • Flowchart Method • On-site Inspections • Interactions with Others • Contract Analysis • Statistical Records of Losses Risk Evaluation Risk Evaluation breaks down into two parts, the assessment of: • the probability of loss occurring, and • its severity

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TYBFM: Insurance fund Management The probability analysis tells us the various possibilities of the perceived scenarios for a given set of circumstances. The severity refers to the direct and indirect measurable impact of the scenarios being analysed. B. Risk Control Risk control covers all those measures aimed at avoiding, eliminating or reducing the chances of lossproducing events occurring, or limiting the severity of the losses that do happen. Here, one is seeking to change the conditions that bring about loss-producing events or increase their severity. Though some measures call for little more than common sense, often considerable technical knowledge is required, for which the risk manager will need to turn to experts in the particular field. Risk can be controlled either by avoidance or by controlling losses. Avoidance implies that either a certain loss exposure is not acquired or an existing one is abandoned. Loss control can be exercised in two ways. (a) One way is to enhance and monitor the level of precautions taken to minimise the losses due to exposures. (b) Another is to control and minimise the risk operations, internal risk control techniques include diversification and/or investments in getting information of loss exposures so as to control them. The internal risk control measures generally employed are (a) diversification and (b) investment in information. The operational measures fro risk control in an organisation includes—(a) increased precautions and (b) reduced level of activity. C. Risk Financing When the risk exposure for an orgamsation exceeds the maximum limit that the organisation can bear, it becomes necessary to either transfer or reduce risk. However, there is cost involved in both of these exercises. If the method adopted is insurance, the consequential impact on taxes and profits also becomes important. Risk Financing, therefore, refers to the manner in which the risk control measures that have been implemented shall be financed. It has to be recognised that in the long run an organisation will have to pay for its own losses. The primary objective of risk financing is to spread more evenly over time cost of risk in order to reduce the financial strain and possible insolvency which random concurrency of large losses may cause. The secondary objective is to minimise risk costs. Essentially an organisation can finance its risk cost in three ways: • Losses may be charged as they occur to current operating costs; or • Ex-ante provision may be made for losses, either through the purchase insurance or by building up a contingency found to which losses can be charged; or • When losses occur they may be financed with loans, which are repaid over the next few months or years. Risk Financing Techniques

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TYBFM: Insurance fund Management Risk financing includes the following alternatives: Risk Retention Risk retention implies that the losses arising due to a risk exposure shall be retained or assumed by the party or the organisation. Risk retention is generally a deliberate decision for business organisations inherited with the following characteristics: (a) The consequential losses are small; (b) Losses are shown as operating expenses or can be funded with retained profits. Of the various techniques of risk retention, self-insurance and captive insurance and the popular ones. Self-Insurance Self-insurance is one of the forms of planned retention by which the part or full of the exposure arising due to a risk factor is retained by the firm. Self-insurance programmes differ from the other programmes in the sense of the formal arrangements made. It acts as an alternative to buying insurance in the market or when a part of the claim is not insured in the commercial market. It may be done by keeping aside funds to meet insurable losses. The main reason for self insurance is that the organisation believes it has large funds to finance losses and the opportunity cost of transfer is less than the cost of insurance. Benefits of Self-insurance (a) Saves transaction costs—it helps to save cost in the form of amount payable to insurer for overheads and profits, commissions and taxes and the social loading (arising from the statutory requirements) inherent in the premium. (b) Accuracy of predictions—the risk managers in the organisation think that they are better judges of the adverse exposures and can estimate better than the insurers. (c) Investment of funds—since insurance companies invest large chunk of funds m various securities and the returns arising therefrom is not reflected in the rates charged by the insurers, the cost reduction becomes obvious for the insured. (d) Minimisation of disputes—self-managed funds enhances satisfaction to the insured and reduces the conflicts in claims settlement. Also, there is a direct incentive to reduce and control the risk of loss. Captive Insurance Captive insurance companies represent a special case of risk retention. A captive insurance company is an entity created and controlled by a parent, whose main purpose is to provide insurance to its corporate owner. The ideology behind this method is that the parent company may save in terms of overhead costs and profits which would otherwise be charged by the insurance company. Also, the insured companies claim premiums as expenses, which may lead to advantages in terms of differential cash flows. These captives may either be pure captives or group captives. A pure captive is an insurance company established by the parent (generally into non-insurance business) organisation to provide insurance cover to itself or its subsidiary or affiliated organisations.

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TYBFM: Insurance fund Management Group captives are those formed by a group ‘of companies for providing insurance cover to control their respective and collective risks. In U.S. terminology these are also known as “trade association insurance companies.” Motives Behind Captives (a) Optimised loss prevenlion benefits—The benefits enduring from loss prevention are available directly to the insured. (b) Economies of scale—Groups with several subsidiaries can enjoy the benefit of perfectly tailored insurances products made available to cover risks. (c) Non-availability’ of insurance—Captives provide to cover risk exposures for which covers are otherwise not available in the market. (d) Stability of earnings—The captives reduce the chances of adverse impact of sudden fluctua tions in profits on the firm. (e) Cost and tax advantages—Obviously, as said earlier, captives reduce cost of risk financing and provide gains in the regime of differential taxes. Risk Transfer Risk transfer implies that the exposed party transfers whole or part of the losses consequential to risk exposure to another party for a cost. The insurance contracts fundamentally involve risk transfers. Apart from the insurance device, there are certain other techniques by which the risk may be transferred. (a) Insurance—Insurance is a contractual transfer of risk. The insurance company agrees to in demnify the losses arising out an occurrence pre-determined and charges some cost for this act, called as premium. The insurance method of risk transfer is most appropriate when the severity of losses is very high.’° Since the important constraint. i.e. the cost of transfer prevails, the suitability of this method depends upon the size of the organisation and affordability. (b) Non-insurance transfers—Out of the various methods of non-insurance risk transfers, the most common are: (i) Hold-harmless agreements or indemnity agreements are the contractual relationships specifying that all losses shall be borne by the designated party e.g. a landlord contracting that all losses shall be borne by the tenant. These agreements by themselves do not reduce original risk. The form and jurisdiction of hold harmless agreements varies from contract to contract. (ii) Incorporation is another method by which, for example, the sole proprietorship firm or partnership firm can convert themselves into companies and reduce the liability on them. To quote, the liability of a proprietorship firm is unlimited compared to that of a company limited by shares—the liability of the members is limited to the extent of capital contributed by them. (iii) Hedging can be used to transfer speculative risk. The popular of the instruments used in hedging are derivative contracts. (iv) Diversification across business or geographic locations justified or coupled with synergies or economies of scale can also significantly reduce risk in aggregate. : ORGANISING INSURANCE BUSINESS

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TYBFM: Insurance fund Management Legal frame work with respect to insurance

Insurance is a federal subject in India. Two statutes primarily regulate the insurance business— (a) Insurance Act 1938 and (b) Insurance and Regulatory Development Authority Act, 1999. The Insurance business is classified into four classes—(1) Life Insurance, (2) Fire, (3) Marine and (4) Miscellaneous insurance. Life Insurers transact life insurance business and General Insurers transact the rest. Apart from this, GIC and its subsidiaries are regulated by General Insurance Business (Nationalization) Act, 1972 and LIC of India being regulated by The Life Insurance Corporation Act 1956. Need for Regulation The regulator of insurance business in India is IRDA constituted by the IRDA Act, 1999. Regulation of Insurance business provides the insurance market with direction, management control and correction. Insurance, generally, all over the world is widely regulated. This is because of the following reasons: (a) Widespread severe impact of insurer solvency. Since solvency ensures that insurance transactions are certain ad predictable, promotion and maintenance of insurer solvency are at the heart of all regulatory activity. Insureds are generally incapable of self-protection and if the insurance company becomes insolvent, the results may be disastrous. Insurance generally mobilise savings and therefore they bear a kind of fiduciary relationship as that of a banker and customer, and therefore, it requires public regulation. (b) Unequal knowledge and bargaining power of the buyers arid seller—insurance contacts are complex and the insurance itself is an intangible product. (c) Insurance pricing is—typical and unique and requires estimation before the costs are fully known. (d) Social welfare—insurance by definition is a sound device and optimally should be made available to public at large without discrimination. Indian Contract Act, 1872 Insurance contracts are agreements between insurance companies and insured for the purpose of 42

TYBFM: Insurance fund Management transferring from insured to the insurer a part of the risk of loss arising out of contingent event. Therefore all the provisions of Indian Contract Act, 1872, in general are applicable to insurance contracts. Under Section 10 of the Indian Contract Act, following conditions are necessary to form a valid contract: (a) Agreement between two parties (b) Lawful object (c) Capacity to contract (d) Legal purpose (e) Consideration (f) Possibility of performance etc. Insurance Act, 1938 This Act was passed in 1938 and was brought into force from 1st July 1939. Afterwards, the Acy has been amended a number of times including those in 1950 and 1968. Important Provisions in the Act relate to : (A) Conduct of Insurance Business (Part—II) (1) Registration and licensing of insurance (2) Accounts and Audit (3) Licensing of agents and surveyors (4) Submitting of returns (5) Investment norms (6) Amalgamation and transfer of insurance business (7) Authority’s control over management. (B) Insurance Association of India Councils of the Association and Committees thereof (Part IIA) (C) Tariff Advisory Committees and control of tariff rates (Part IIB) (D) Solvency Margin, Advance Payment of premium and restrictions on the opening of a new place of business (Part IIC) (E) Provident Societies (Part III) Registration, working, Investment norms, liquidation etc. (F) Mutual insurance companies and co-operative life insurance societies (Part IV) Working capital norms, loans, membership, deposits etc (G) Reinsurance (Part WA) (H) Penalties (Part V). Section 2c of the Act prohibits persons to carry on insurance business until he is – (a) A public company. (b) A registered society under (c) A body corporate incorporated under the law of any country outside India not being in the nature of a private company. However, the central government is empowered to exempt any insurer or any person for the purpose of carrying on the business of granting superannuation allowances and annuities as per Section 2(111(c) or for the purpose of carrying general insurance business. Exempted insurer after the promulgation of IRDA Act, 1999 only Indian Insurance company can carry insurance business. Licensing conditions Only Indian Insurance companies to be granted licenses : Under the Act, it is mandatory that only an 43

TYBFM: Insurance fund Management Indian insurance company can carry on an insurance business in India. An Indian insurance company is a company registered under the Companies Act 1956 where the aggregate foreign equity shareholding does not exceed 26 per cent and whose sole purpose is to carry on a life, general or reinsurance business. Two-stage licensing process Stage 1—Requisition for Registration An application has to be made to the Authority with all the prescribed disclosure norms. Some of the important items cover 1. Promoter’s back-ground, financial strength, share-holders’ agreement and reasons for entering the sector. 2. Director’s back-ground. 3. Capital structure, initial and future. 4. Financial projections for 5 years. 5. Scenario Building and Sensitivity analyses. 6. Rural and social sector strategy. There is no provision for appeal in the event of a second rejection. A revised application is permissible by the applicant company only after 2 years with an additional condition that this will be with a new set of promoters or for a different class of insurance business. Stage 2—Application for Registration After the requisition is granted by the Authority, the applicant is required to make an application for registration. Information to be disclosed includes : • Proof of paid-up capital of Rs. 100 crore. • Proof of deposit. • Marketing and distribution information. This should include information on Market Research. Product information, Distribution Strategy and Details, Sales promotion, Customer service. • Operations : Information should cover underwriting, information technology, internal controls, Personnel. • Investment Information on investment Philosophy, Strategy and ground level arrangements. • Reinsurance: Information on Approach and Terms. • Expenditure: This should include a description of the manner in which the expenses of administration have been estimated. These expenses will have to be distinguished between first year and renewal, fixed and variable. The proposed expenses as a percent of premium at levels of operational offices; supervisory offices and head office. Licensing Criteria Some of the important parameters include: • Promoter and directors’ background • Promoter financial strength • Volume of business and earning prospects • Rural and social sector focus • Product profit 44

TYBFM: Insurance fund Management • Capital structure • Actuarial and professional expertise • Infrastructure • Public interest Other Licensing Issues An appeal can be made to the Central Government against the decision of Authority, which shall be final. The applicant company can submit, a new application only after two years with the additional condition that it has to be with a new set of promoters or for a different class of insurance business. The Authority will grant more licenses to applicants for life and health insurance than general insurance. Licenses expire on the 31st day of March each year and have to be renewed each year. Capital Requirement and Foreign Stake Minimum paid-up equity capital required for a life insurance is Rs. 100 crore and for a reinsurer Rs. 200 crore. The capital contributed can only be in the form of equity shares as preference shares cannot be issued. The incumbent, LIC, would be required to increase its equity share capital from the existing Rs. 5 crore to Rs. 100 crore within a period of six months from the date of commencement of the IRDA Act. Also, the four GIC subsidiaries would have to increase the equity share capital to Rs. 100 crore from Rs. 40 crore are resent. The GIC will not be required to bring in additional capital since its present capital base is Es. 215 crore. Accounts and Returns An insurer is required to keep a separate account of all receipts and payments in respect of each class of insurance viz., Fire, Marine and miscellaneous Insurance. Every insurer is required to prepare, at the expiration of each financial year, in the prescribed forms, (a) a balance sheet (b) a profit and loss account (c) a revenue account for each class of insurance business These accounts are required to be audited annually by an auditor and printed and four copies to be furnished as returns to the IRDA within 6 months from the close of the financial year. Every Insurer is required to furnish to the authority a certified copy of the minutes of the proceedings of every General Meeting, within 30 days from the holding of the meeting. The Insurance Rules framed under the Act provide that the following items of information shall be maintained in respect of each class of business: • A record of cover notes specifying the identification number, name of party, dates of commencement and expiry, type of cover granted, the amount of premium and cross- reference to the policy. • A record of policies, which should be serially numbered, listing all policies issued, entered in chronological order, stating the number of policy, date of commencement and expiry of risk, name/s of the insured, premium received, cross reference to the relevant bank Guarantee or deposit and the nature of risk granted, cross reference to any cover-note issued prior to the issue to the policy and cross-reference to any endorsement passed subsequent to the issue of the policy. • A record of premiums showing, according to chronological order or receipt of premiums, date of receipt, the amount, and name of party from whom received and with cross- reference to policy number.

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TYBFM: Insurance fund Management • A record of endorsements mentioning the policy number to which attached, dates of commencement and expiry of the endorsement, the type of endorsement and the additional premium charged or refund due and cross reference to the premium register. • A record of bank guarantees and deposits giving particulars of the party, amount and conditions of guarantee or deposits and cross-reference to the relevant policy or policies. • A record of claims intimate mentioning name of claimant, giving reference to policy number, date of intimation of claim, interest covered, nature and cause of the loss or damage, pro visional estimate of loss, amount at which settled, date of settlement of claim, recoveries from salvage or otherwise and whether surveyed. Two separate records, one relating to claims intimated and the other relating to claims paid, may be maintained if there is ad equate cross referring of information between them and if the information required under this clause is readily available from them taken together. The rules framed under the Insurance Act, 1938 also provide that the following items of information shall be maintained for the business of the insurer as a whole. (i) A register of agents. (ii) A record of business procured by each agent and the amount of commission paid thereon. (iii) Records of employees including field workers. (iv) Cash book and disbursement book. (v) A record of investments and assets. (vi) Records of insurance companies with which common and facultative reinsurance arrangements of reinsurance treaties are entered into. (vii) Record of facultative reinsurance ceded and accepted. Further, the Rules provide that receipts for payments received shall be maintained in a systematic manner and documents used for assuming risk are serially numbered and field accordingly. The documents relating to claims settled, including copies of any survey of loss assessment reports, shall be maintained as follows: (i) in respect of every loss or damage on which a claim of less than Its. 5,000 has been made, for a period of three years: (ii) in respect of every loss or damage on which a claim of Rs. 5,000 or more but less than rupees Rs. 20,000 has been made, for a period of five years: (iii) in respect of every loss or damage on which a claim of Rs. 20,000 or more but less than rupees one lakh has been made, for a period of seven years (iv)in respect of every loss or damage on which a claim of rupees one lakh or more has been made, for a period of twelve years; such period being counted from the date on which the claim is settled. Investments Every insurer is required to invest his assets only in those investments approved under the provisions. Returns in the prescribed form are to be submitted to the Authority showing as at 31st March of the preceding year, the investments made out of assets. Limitation on: Expenses of Management The Act prescribes maximum limits of expenses of management including commission that may be incurred by the insurer. The percentages are prescribed in relation to the total gross direct business written by the insurer in India. These provisions do not apply to the General Insurance Corporation 46

TYBFM: Insurance fund Management of India. Prohibition of Rebates No person shall allow or offer to allow as an inducement to any person to take out insurance arty rebate of the whole or part of commission payable or any rebate of the premium shown in the policy. Any person making default in complying with these provisions shall be punishable with fine which may extend to five hundred rupees. Powers of Investigation The Central Government may at anytime, by order £n writing, direct the Authority or any other person specified in the order, to investigate the affairs of any insurer and report to the Central Government. Advance Payment of Premium No insurer shall assume any risk unless and until the premium is received in advance or is guaranteed to be paid or a deposit is made in advance in the prescribed manner. This rule of advance payment of premium may be relaxed in circumstances specified in the rules framed under the Act. Licensing of Surveyor or Loss Assessor A surveyor or a loss assessor must hold a valid licence, which is subject to renewal after a period of 5 years. Before admitting a claim exceeding Rs. 20,000 a general insurance company needs to obtain a report on the loss that has occurred from the surveyor or loss assessor. Penalties The Act has laid down penalties for contravention of the following provisions: • Failure to maintain solvency margins. • Failure to comply with investment norms. • Failure to carry out rural and social sector obligations. • Making a false statement or furnishing a false document. • Failure to comply with the directions of the Authority. • Failure to furnish documents, statements and returns required by the Act. Tariff Advisory Committee The Tariff Advisory Committee (TAC) established under the Act is empowered to control and regulate the rates, terms, etc. that may be offered by insurers in respect of any risk or of any category of risks. It is provided that in fixing, amending or modifying such rates etc. the Committee shall try to ensure as far as possible that there is no unfair discrimination between risks of essentially the same hazard and also that consideration is given to past and prospective loss experience. Every insurer is required to make payment to the TAC of the prescribed annual fees. List of Existing Tariff Business Controlled by TAC Fire Marine : : All India Fire Tariff, Petrochemical Tariff, Industrial All Risks Tariff, Consequential Loss (fire) Tariff Marine Hull Tariff, Fishing Vessels Tariff, Tea Tariff

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TYBFM: Insurance fund Management Engineering : Contractor’s All Risk Tariff (CAR), Contractors Plant and Machinery Tariff (CPM), Electronic Equipments Insurance Tariff (EEI), Machinery Breakdown Tariff (MB), Civil Engineering Completed Risks Tariff (CECR), Storage cum Erection Tariff (SCE), Loss of Profit, Boiler and Pressure Vessels Tariff, Deterioration of Stocks (Potato) Tariff etc. All India Motor Tariff Workmen Compensation Tariff

Motor : Miscellaneous :

Insurance Ombudsman

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TYBFM: Insurance fund Management The institution of Insurance Ombudsman was created by a Government of India Notification dated 11th November, 1998 with the purpose of quick disposal of the grievances of the insured customers and to mitigate their problems involved in redressal of those grievances. This institution is of great importance and relevance for the protection of interests of policy holders and also in building their confidence in the system. The institution has helped to generate and sustain the faith and confidence amongst the consumers and insurers. Appointment of Insurance Ombudsman The governing body of insurance council issues orders of appointment of the insurance Ombudsman on the recommendations of the committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government. Insurance council comprises of members of the Life Insurance council and general insurance council formed under Section 40 C of the Insurance Act, 1938. The governing body of insurance council consists of representatives of insurance companies. Eligibility Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services. Terms of office An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier. Re-appointment is not permitted.. Territorial jurisdiction of Ombudsman he governing body has appointed twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction. The Ombudsman may hold sitting at various places within their area of jurisdiction in order to expedite disposal of complaints. The offices of the twelve insurance Ombudsmans are located at (1) Bhopal, (2) Bhubaneswar, (3) Cochin, (4) Guwahati, (5) Chandigarh, (6) New Delhi, (7) Chennai, (8) Kolkata, (9) Ahmedabad, (10) Lucknow, (11) Mumbai, (12) Hyderabad. The areas of jurisdiction of each Ombudsman has been mentioned in the list of Ombudsman. Office Management The Ombudsman has a secretarial staff provided to him by the insurance council to assist him in discharging his duties. The total expenses on Ombudsman and his staff are incurred by the insurance companies who are members of the insurance council in such proportion as may be decided by the governing body. Removal from office An Ombudsman may be removed from service for gross misconduct committed by him during his term of office. The governing body may appoint such person as it thinks fit to conduct enquiry in relation to misconduct of the Ombudsman. All enquiries on misconduct will be sent to Insurance 49

TYBFM: Insurance fund Management Regulatory and Development Authority which may take a decision as to the proposed action to be taken against the Ombudsman. On recommendations of the IRDA, the Governing Body may terminate his services, in case he is found guilty. Power of Ombudsman Insurance Ombudsman has two types of functions to perform (1) conciliation, (2) Award making. The insurance Ombudsman is empowered to receive and consider complaints in respect of personal lines of insurance from any person who has any grievance against an insurer. The complaint may relate to any grievance against the insurer i.e. (a) any partial or total repudiation of claims by the insurance companies, (b) dispute with regard to premium paid or payable in terms of the policy, (c) dispute on the legal construction of the policy wordings in case such dispute relates to claims; (d) delay in settlement of claims and (e) non-issuance of any insurance document to customers after receipt of premium. Ombudsman's powers are restricted to insurance contracts of value not exceeding Rs. 20 lakhs. The insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months. Manner of lodging complaint The complaint by an aggrieved person has to be in writing, and addressed to the insurance Ombudsman of the jurisdiction under which the office of the insurer falls. The complaint can also be lodged through the legal heirs of the insured. Before lodging a complaint: i) the complainant should have made a representation to the insurer named in the complaint and the insurer either should have rejected the complaint or the complainant have not received any reply within a period of one month after the concerned insurer has received his complaint or he is not satisfied with the reply of the insurer. ii) The complaint is not made later than one year after the insurer had replied. iii) The same complaint on the subject should not be pending with before any court, consumer forum or arbitrator. Recommendations of the Ombudsman When a complaint is settled through the mediation of the Ombudsman, he shall make the recommendations which he thinks fair in the circumstances of the case. Such a recommendation shall be made not later than one month and copies of the same sent to complainant and the insurance company concerned. If the complainant accepts recommendations, he will send a communication in writing within 15 days of the date of receipt accepting the settlement. Award The ombudsman shall pass an award within a period of three months from the receipt of the complaint. The awards are binding upon the insurance companies. If the policy holder is not satisfied with the award of the Ombudsman he can approach other venues 50

TYBFM: Insurance fund Management like Consumer Forums and Courts of law for redressal of his grievances. As per the policy-holder's protection regulations, every insurer shall inform the policy holder along with the policy document in respect of the insurance Ombudsman in whose jurisdiction his office falls for the purpose of grievances redressal arising if any subsequently. Steady increase in number of complaints received by various Ombudsman shows that the policyholders are reposing their confidence in the institution of Insurance Ombudsman. LIFE INSURANCE COMPANIES IN INDIA S.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 NAME OF THE COMPANY
Bajaj Allianz Life Insurance Company Limited . Birla Sun Life Insurance Co. Ltd HDFC Standard Life Insurance Co. Ltd ICICI Prudential Life Insurance Co. Ltd ING Vysya Life Insurance Company Ltd. Life Insurance Corporation of India Max New York Life Insurance Co. Ltd . Met Life India Insurance Company Ltd. Kotak Mahindra Life Insurance Limited SBI Life Insurance Co. Ltd Tata AIG Life Insurance Company Limited Reliance Life Insurance Company Limited. Aviva Life Insurance Company India Limited Sahara India Life Insurance Co, Ltd. Shriram Life Insurance Co, Ltd. Bharti AXA Life Insurance Company Ltd. Future Generali India Life Insurance Company Limited IDBI Fortis Life Insurance Company Ltd., Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd. AEGON Religare Life Insurance Company Limited. DLF Pramerica Life Insurance Co. Ltd. Star Union Dai-ichi Life Insurance Co. Ltd.,

IndiaFirst Life Insurance Company Limited

LIC INSURANCE CORPORATION OF INDIA

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TYBFM: Insurance fund Management LIC had 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Since life insurance contracts are long term contracts and during the currency of the policy it requires a variety of services need was felt in the later years to expand the operations and place a branch office at each district headquarter. Re-organization of LIC took place and large numbers of new branch offices were opened. As a result of re-organisation servicing functions were transferred to the branches, and branches were made accounting units. It worked wonders with the performance of the corporation. It may be seen that from about 200.00 crores of New Business in 1957 the corporation crossed 1000.00 crores only in the year 1969-70, and it took another 10 years for LIC to cross 2000.00 crore mark of new business. But with re-organisation happening in the early eighties, by 1985-86 LIC had already crossed 7000.00 crore Sum Assured on new policies. Today LIC functions with 2048 fully computerized branch offices, 109 divisional offices, 8 zonal offices, 992 satallite offices and the Corporate office. LIC’s Wide Area Network covers 109 divisional offices and connects all the branches through a Metro Area Network. LIC has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. LIC’s ECS and ATM premium payment facility is an addition to customer convenience. Apart from on-line Kiosks and IVRS, Info Centres have been commissioned at Mumbai, Ahmedabad, Bangalore, Chennai, Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a vision of providing easy access to its policyholders, LIC has launched its SATELLITE SAMPARK offices. The satellite offices are smaller, leaner and closer to the customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. LIC continues to be the dominant life insurer even in the liberalized scenario of Indian insurance and is moving fast on a new growth trajectory surpassing its own past records. LIC has issued over one crore policies during the current year. It has crossed the milestone of issuing 1,01,32,955 new policies by 15th Oct, 2005, posting a healthy growth rate of 16.67% over the corresponding period of the previous year. From then to now, LIC has crossed many milestones and has set unprecedented performance records in various aspects of life insurance business. The same motives which inspired our forefathers to bring insurance into existence in this country inspire us at LIC to take this message of protection to light the lamps of security in as many homes as possible and to help the people in providing security to their families.

SBI Life Insurance Company Limited is a joint venture between the State Bank of India and BNP Paribas Assurance. SBI Life Insurance is registered with an authorized capital of Rs 2000 crores and a Paid-up capital of Rs 1000 Crores. SBI owns 74% of the total capital and BNP Paribas Assurance the remaining 26%. State Bank of India enjoys the largest banking franchise in India. Along with its 6 Associate Banks, SBI Group has the unrivalled strength of over 16,000 branches across the country, arguably the largest in the world. BNP Paribas Assurance is the life and property & casualty insurance unit of BNP Paribas - Euro 52

TYBFM: Insurance fund Management Zone’s leading Bank. BNP Paribas, part of the world’s top 6 group of banks by market value and a European leader in global banking and financial services, is one of the oldest foreign banks with a presence in India dating back to 1860. BNP Paribas Assurance is the fourth largest life insurance company in France, and a worldwide leader in Creditor insurance products offering protection to over 50 million clients. BNP Paribas Assurance operates in 41 countries mainly through the bancassurance and partnership model. SBI Life has a unique multi-distribution model encompassing vibrant Bancassurance, Retail Agency, Institutional Alliances and Corporate Solutions distribution channels. SBI Life extensively leverages the SBI Group as a platform for cross-selling insurance products along with its numerous banking product packages such as housing loans and personal loans. SBI’s access to over 100 million accounts across the country provides a vibrant base for insurance penetration across every region and economic strata in the country ensuring true financial inclusion. Agency Channel, comprising of the most productive force of more than 68,000 Insurance Advisors, offers door to door insurance solutions to customers.

General insurance companies in india:
No. 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Name of Company Bajaj Allianz General Insurance Co. Ltd. ICICI Lombard General Insurance Co. Ltd. IFFCO Tokio General Insurance Co. Ltd. National Insurance Co.Ltd. The New India Assurance Co. Ltd. The Oriental Insurance Co. Ltd. Reliance General Insurance Co. Ltd. Royal Sundaram Alliance Insurance Co. Ltd Tata AIG General Insurance Co. Ltd. United India Insurance Co. Ltd. Cholamandalam MS General Insurance Co. Ltd. HDFC ERGO General Insurance Co. Ltd. Export Credit Guarantee Corporation of India Ltd. Agriculture Insurance Co. of India Ltd. Star Health and Allied Insurance Company Limited

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TYBFM: Insurance fund Management

16 17 18 19 20 21 22

Apollo Munich Health Insurance Company Limited Future Generali India Insurance Company Limited Universal Sompo General Insurance Co. Ltd. Shriram General Insurance Company Limited Bharti AXA General Insurance Company Limited Raheja QBE General Insurance Company Limited SBI General Insurance Co. Ltd.

NATIONAL INSURANCE COMPANY LIMITED National Insurance Company Limited was incorporated in 1906 with its Registered office in Kolkata. Consequent to passing of the General Insurance Business Nationalisation Act in 1972, 21 Foreign and 11 Indian Companies were amalgamated with it and National became a subsidiary of General Insurance Corporation of India (GIC) which is fully owned by the Government of India. After the notification of the General Insurance Business (Nationalisation) Amendment Act, on 7thAugust 2002, National has been de-linked from its holding company GIC and presently operating as a Government of India undertaking. National Insurance Company Ltd (NIC) is one of the leading public sector insurance companies of India, carrying out non life insurance business. Headquartered in Kolkata, NIC's network of about 1000 offices, manned by more than 16,000 skilled personnel, is spread over the length and breadth of the country covering remote rural areas, townships and metropolitan cities. NIC's foreign operations are carried out from its branch offices in Nepal. Befittingly, the product ranges, of more than 200 policies offered by NIC cater to the diverse insurance requirements of its 14 million policyholders. Innovative and customized policies ensure that even specialized insurance requirements are fully taken care of. The paid-up share capital of National is Rs.100 crores. Starting off with a premium base of 500 million rupees (50 crores rupees) in 1974, NIC's gross direct premium income has steadily grown to 42799 million rupees (4279.9 crores rupees) in the financial year 2008-2009. NEW INDIA ASSURANCE COMPANY LIMITED

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TYBFM: Insurance fund Management National transacts general insurance business of Fire, Marine and Miscellaneous insurance. The Company offers protection against a wide range of risks to its customers. The Company is privileged to cater its services to almost every sector or industry in the Indian Economy viz. Banking, Telecom, Aviation, Shipping, Information Technology, Power, Oil & Energy, Agronomy, Plantations, Foreign Trade, Healthcare, Tea, Automobile, Education, Environment, Space Research etc. National Insurance is the second largest non life insurer in India having a large market presence in Northern and Eastern India. The steady growth in premium income has been commensurately matched by profits over the years. As of March 2009, NIC's general reserve stood at 13080.5 million rupees (1308.05 crores rupees) with a net worth of 5015.97 million rupees (501.59 crores rupees) signaling strong financial fundamentals. No wonder than that NIC has been accorded “AAA/STABLE” financial strength rating by CRISIL rating agency, which reflects the highest financial strength to meet policyholders’ obligations. New India is a leading global insurance group, with offices and branches throughout India and various countries abroad. The company services the Indian subcontinent with a network of 1068 offices, comprising 26 Regional offices, 393 Divisional offices and 648 branches. With approximately 21000 employees, New India has the largest number of specialist and technically qualified personnel at all levels of management, who are empowered to underwrite and settle claims of high magnitude. New India has been rated "A-" (Excellent) by A.M.Best Co., making it the only Indian insurance company to have been rated by an international rating agency. Rating based on following factors:
• • •

Superior Capital Position Strong Operating Performance Only Company to develop significant International operations, long record of successful trading outside India.

TATA AIG GENERAL INSURANCE Tata AIG General Insurance Company Limited (Tata AIG General) is a joint venture company, formed by the Tata Group and American International Group, Inc. (AIG). Tata AIG General combines the Tata Group's pre-eminent leadership position in India and AIG's global presence as the world's leading international insurance and financial services organization. The Tata Group holds 74 per cent stake in the insurance venture with AIG holding the balance 26 percent. Tata AIG General Insurance Company, which started its operations in India on January 22, 2001, provides insurance solutions to individuals and corporates. It offers a complete range of general insurance products including

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TYBFM: Insurance fund Management insurance for automobile, home, personal accident, travel, energy, marine, property and casualty as well as several specialized financial lines. The Company believes in offering innovative and relevant insurance solutions in the retail and commercial space. Each product offering is backed by expertise and an unparalleled claims service. The Company's products are available through various channels of distribution like agents, brokers, banks (through banc assurance tie ups) and direct channels like Tele Marketing, Digital Marketing, worksite etc. REINSURANCE COMPANIES GENERAL INSURANCE COMPANIES IN INDIA The entire general insurance business in India was nationalised by General Insurance Business (Nationalisation) Act, 1972 (GIBNA). The Government of India (GOI), through Nationalisation took over the shares of 55 Indian insurance companies and the undertakings of 52 insurers carrying on general insurance business. General Insurance Corporation of India (GIC) was formed in pursuance of Section 9(1) of GIBNA. It was incorporated on 22 November 1972 under the Companies Act, 1956 as a private company limited by shares. GIC was formed for the purpose of superintending, controlling and carrying on the business of general insurance. As soon as GIC was formed, GOI transferred all the shares it held of the general insurance companies to GIC. Simultaneously, the nationalised undertakings were transferred to Indian insurance companies. After a process of mergers among Indian insurance companies, four companies were left as fully owned subsidiary companies of GIC (1) National Insurance Company Limited, (2) The New India Assurance Company Limited, (3) The Oriental Insurance Company Limited, and (4) United India Insurance Company Limited The next landmark happened on 19th April 2000, when the Insurance Regulatory and Development Authority Act, 1999 (IRDAA) came into force. This act also introduced amendment to GIBNA and the Insurance Act, 1938. An amendment to GIBNA removed the exclusive privilege of GIC and its subsidiaries carrying on general insurance in India. In November 2000, GIC is renotified as the Indian Reinsurer and through administrative instruction, its supervisory role over subsidiaries was ended. With the General Insurance Business (Nationalisation) Amendment Act 2002 (40 of 2002) coming into force from March 21, 2003 GIC ceased to be a holding company of its subsidiaries. Their ownership were vested with Government of India INTERMEDIARIES IN INSURANCE: BROKER An insurance broker can save us, the insurance buyer, time, money and worry. Insurance is a wasted purchase if it doesn't provide cover when disaster strikes. Many people unwittingly put

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TYBFM: Insurance fund Management their livelihoods at stake, under-insure or over insure, because they did not seek the right advice. Whether you are arranging car, house, life or business insurance, brokers represent us, the buyer. They shop around, provide advice, arrange the insurance and help with claims. It's a broker's job to provide you with the most comprehensive and appropriate protection to suit your needs. Functions of a direct broker - The functions of a direct broker shall include any one or more of the following: (a)obtaining detailed information of the client's business and risk management philosophy; (b) familiarising himself with the client's business and underwriting information so that this can be explained to an insurer and others; rendering advice on appropriate insurance cover and terms; maintaining detailed knowledge of available insurance markets, as may be applicable; submitting quotation received from insurer/s for consideration of a client; providing requisite underwriting information as required by an insurer in assessing the risk to decide pricing terms and conditions for cover; acting promptly on instructions from a client and providing him written acknowledgements and progress reports; assisting clients in paying premium under section 64VB of Insurance Act, 1938 (4 of 1938); providing services related to insurance consultancy and risk management; assisting in the negotiation of the claims; and maintaining proper records of claims; Functions of a re-insurance broker - The functions of a re-insurance broker shall include any one or more of the following: familiarising himself with the client’s business and risk retention philosophy; maintaining clear records of the insurer's business to assist the reinsurer(s) or others; rendering advice based on technical data on the reinsurance covers available in the international insurance and the reinsurance markets; maintaining a database of available reinsurance markets, including solvency ratings of individual reinsurers;

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TYBFM: Insurance fund Management rendering consultancy and risk management services for reinsurance; selecting and recommending a reinsurer or a group of reinsurers; negotiating with a reinsurer on the client’s behalf; assisting in case of commutation of reinsurance contracts placed with them; acting promptly on instructions from a client and providing it written acknowledgements and progress reports; collecting and remitting premiums and claims within such time as agreed upon; assisting in the negotiation and settlement of claims; maintaining proper records of claims; and exercising due care and diligence at the time of selection of reinsurers and international insurance brokers having regard to their respective security rating and establishing respective responsibilities at the time of engaging their services. NEED OF BROKER 1. Insurance broker represents the insurance buyer, and not the insurance company (insurance seller), though the remuneration of insurance broker is paid and borne by the insurance companies. There is no additional cost to the insurance buyer for placing business through insurance broker. 2. Insurance brokers have been introduced into the indian market by insurance regulatory and development authority (i.r.d.a.) as professionals, who will truly represent and service the interests of insurance buyers. 3. Insurance brokers have qualified and experienced insurance experts and can buy insurance for their clients at the most competitive premium rate and terms. 4. Insurance brokers provide a package of services to the insurance buyer, including postinsurance services as well as assisting in submission of claim documents to insurance company. Please see annexure for functions of insurnce brokers. 5. Insurance brokers have to obtain licence from the i.r.d.a. before they carry on insurance broking in india and the operations of insurance brokers are monitored and controlled by i.r.d.a. a copy of code of conduct prescribed by i.r.d.a. for insurance brokers is enclosed. 6. Insurance brokers are different from insurance agents. Insurance agents represent a given insurance company, and not the insurance buyer. Thus, insurance agents sell the insurance policies of a given insurance company, taking care of the interests of the insurance company (insurance seller), and not of the insurance buyers. 7. Insurance brokers are professionals and represent the insurance buyers only, and not the insurance company. Insurance broker can place the insurance of his client with any insurance company, in the best interest of the insurance buyer. Thus, the insurance broker is a single window solution for all insurance problems of the insurance buyer with all insurance companies. 58

TYBFM: Insurance fund Management 8. Importance of the role of insurance broker in the emerging scenario of ‘detariffing’ :

List of insurance brokers: ACME Insurance Broking Services P. Ltd. Helios Insurance Broking Services Pvt. Ltd K.M. Dastur Reinsurance Brokers Pvt. Ltd. Best Insurance Broking Services Pvt. Ltd. A&M Ins. Brokers Pvt. Ltd. Pioneer Insurance & Reinsurance Brokers Pvt Ltd. Aon Global Insurance Brokers Pvt Ltd Marsh India Insurance Brokers Pvt. Ltd M.B. Boda Reinsurance Brokers Pvt.Ltd. Allied Insurance Brokers Ltd INSURANCE SURVEYORS Surveyors are professionals who assess the loss or damage and serve as a link between the insurer and the insured. They usually function only in non life business. Their job is to assess the actual loss and avoid false claims. Surveyors like agents, are not employees but are independent professionals hired by the insurance company. Insurance risk surveyors carry out surveys of buildings, machinery, transport and other sites or items that need to be insured. Suppose a person takes policy for his car against the fire, accident and theft etc. One day the car meets with an accident, the policyholder will lodge a claim with the company for compensation. The insurance company will appoint surveyor to assess the loss in accident. The surveyors will then go and assess the extent of loss. On the basis of the report submitted by the surveyor, the insurance company will liable to settle the claim of insurance A key part of the work is to produce reports, to help an agent who sells insurance, decide on the terms and conditions of insurance policies. Insurance surveyors usually specialize in one of the following areas: • fire and perils – examining plans, construction and fire protection systems to assess the risks to a building and its contents • accidents and liability – assessing the possible risks to employees, customers and visitors to a building or site 59

TYBFM: Insurance fund Management • engineering insurance – surveying mechanical and industrial plants, machinery and equipment for faults and risks • burglary and theft – inspecting business premises to check how goods are stored and improve security. INSURANCE AGENTS Most people have their first contact with an insurance company through an insurance sales agent. These workers help individuals, families, and businesses select insurance policies that provide the best protection for their lives, health, and property. Insurance sales agents who work exclusively for one insurance company are referred to as captive agents. Independent insurance agents, or brokers, represent several companies and place insurance policies for their clients with the company that offers the best rate and coverage. In either case, agents prepare reports, maintain records, seek out new clients, and, in the event of a loss, help policyholders settle their insurance claims. Increasingly, some are also offering their clients financial analysis or advice on ways the clients can minimize risk. Insurance sales agents, commonly referred to as “producers” in the insurance industry, sell one or more types of insurance, such as property and casualty, life, health, disability, and long-term care. Property and casualty insurance agents sell policies that protect individuals and businesses from financial loss resulting from automobile accidents, fire, theft, storms, and other events that can damage property. For businesses, property and casualty insurance can also cover injured workers’ compensation, product liability claims, or medical malpractice claims. Life insurance agents specialize in selling policies that pay beneficiaries when a policyholder dies. Depending on the policyholder’s circumstances, a cash-value policy can be designed to provide retirement income, funds for the education of children, or other benefits. Life insurance agents also sell annuities that promise a retirement income. Health insurance agents sell health insurance policies that cover the costs of medical care and loss of income due to illness or injury. They also may sell dental insurance and shortand long-term-disability insurance policies. The growth of the Internet in the insurance industry is gradually altering the relationship between agent and client. In the past, agents devoted much of their time to marketing and selling products to new clients, a practice that is now changing. Increasingly, clients are obtaining insurance quotes from a company’s Web site and then contacting the company directly to purchase policies. This interaction gives the client a more active role in selecting a policy at the best price, while reducing the amount of time agents spend actively seeking new clients. Because insurance sales agents also obtain many new accounts through referrals, it is important that they maintain regular contact with their clients to ensure that the clients’ financial needs are being met. Developing a satisfied clientele that will recommend an agent’s services to other potential customers is a key to success in this field.

IRDA Composition of Authority under IRDA Act, 1999

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TYBFM: Insurance fund Management As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA,which was constituted by an act of parliament) specify the composition of Authority The Authority is a ten member team consisting of (a) a Chairman; (b) five whole-time members; (c) four part-time members, (all appointed by the Government of India) Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of IRDA..(Role 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 reinsurance business. (2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, Section 14 of IRDA Act, 1999 laysdown 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 sub-section (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 organisations connected with the insurance and reinsurance 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 organisations 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;

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TYBFM: Insurance fund Management (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 organisations 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.

UNIT 4: Operational aspects of insurance business Actuary role in India
Introduction
The Insurance Act 1938 is the basic law that governs the transaction of insurance business in India. This act has been amended from time to time to bring about required changes in the insurance sector as also to push the government agenda. The latest amendment was made in 2000 which created IRDA and vested power with it to issue regulations from time to time to regulate the market and to protect the policyholders interest. This amendment opened up the insurance market in India to private players. This meant a more proactive role for the regulator to ensure the overall health of the sector as also to maintain a strict vigil on the conduct of companies. This amendment will have far reaching consequences. To further liberalise the market and to bring in some more changes, the act is going to be further amended. The draft bill is pending with the parliament. This latest amendment of 2000 brought in its wake for the first time the concept of “appointed Actuary” in general insurance companies operating in India. Every general insurance companies, must now is necessarily required to have an “appointed actuary.” His role has been defined in the regulations issued by IRDA. While the appointed actuary will receive his remuneration from the company, he will also be reporting to IRDA direct on certain matters which are critical and may require immediate IRDA intervention. Why has actuary suddenly become so important in general insurance companies? Why was he not so important earlier? What are the areas where requirement of his services are mandatory? What are the other areas where he can be of help and his services can be utilized with advantage? Actuary – Who? First let us examine who is an actuary and what core function does he perform and why is he relevant to the functioning of general insurance companies? As far as life insurance companies are concerned, he has been there from the very beginning, unlike the general insurance where his entry is of recent origin. The dictionary meaning of the word Actuary is • Someone whose job is to advise insurance companies on how much to charge for insurance after calculating risk. • An expert in statistics and probability specially one who calculates insurance risks and premium.

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TYBFM: Insurance fund Management An actuary is a professional who has passed the examination conducted by Institute of Actuaries of India and who is a Fellow of the Institute of Actuaries. He must also posses a certificate of practice issued by Institute of Actuaries of India. In today’s world, an actuary performs many functions but at the core of all these functions is his ability to make predictions of future outcomes in situations of uncertainty. But for these, he needs to have sufficient credible past data. But how accurate is the prediction made and how likely is this prediction to fall within a defined range need to be looked into before placing any trust in the prediction made. There are reasons why services of an actuary were not being utilized earlier and why these are now being increasingly utilized. Unlike life insurance, general insurance contracts are mostly for one year. The feeling amongst the insurance community was that, if the experience turns out to be bad, there is always an opportunity to rectify the situation at next renewal. For the simple risk, this approach worked well. But with rising complexity of risk and very high value associated with it, there was a need felt to assess the risk on more scientific and logical methods rather than leaving it to the judgment and skill of individual underwriters. High inflation, cutthroat competition, consumerism and more strict regulatory framework further compounded the situation. Pricing suddenly became very important for survival. Fortunately for insurance community in general insurance, there were parallel developments in the field of computers and statistics / actuarial science. This made it possible to have huge storage capacities and to manipulate data. The actuarial principle made it possible to use these data to draw meaningful inferences for taking “informed decisions.” The service of an actuary is being utilized in the following areas of general insurance business. • Pricing • Claim reserving • Reinsurance • Investment IRDA mandated role for appointed actuary But first let’s us examine the areas where actuaries are mandatorily required (under IRDA regulations) to certify certain operations of the companies as “appointed Actuary.” The following regulations / circulars need a mention here: 1. IRDA (Appointed Actuary) Regulations, 2000 2. IRDA (Asset, Liabilities and solvency margins of insurer) Regulations, 2000 3. File and Use System IRDA (Appointed Actuary) regulation clearly mentions the power that the Appointed Actuary will enjoy. It also mentions the duties and obligations of the Appointed Actuary. According to this regulation. Appointed Actuary shall have access to all information or documents in possession of the insurer. He also has the right to attend the meeting of the management including Board meeting and can speak on and discuss matters concerning solvency, actuarial advice, etc. Amongst his duties and obligations the following needs mention. a. rendering actuarial advice to the management of the insurer, in particular in the areas of product design and pricing, insurancecontract wording, investments and reinsurance; b. ensuring the solvency of the insurer at all times Let’s now discuss each in detail and first start with solvency margin which is basically the difference between the values of assets and liabilities. The claims are the biggest liability of a general insurance company and obviously the solvency margin is a good index to measure the ability of the company to

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TYBFM: Insurance fund Management pay claims. The regulators worldwide are concerned about the survival of the insurance companies as also their ability to pay claims. This is essential to protect the policyholder’s interest and ensure the health of the industry. But the valuation of assets and liabilities pose problems e.g. whether to value the assets as book value or as current market value. Liabilities i.e. claims are also based on estimate of future occurrence. Different approaches both for valuation of assets and liabilities will alter the net worth or the solvency margin. There is therefore a need to have a defined valuation method which is to be followed by every company and that this needs to be certified by an independent professional in the field. This became all the more important when the monopoly of the government general insurance companies ended with the liberalization process. Private players came in the picture and tariffs were gradually withdrawn. Under these circumstances IRDA felt and rightly so to have “appointed actuary” to monitor the solvency margin of the companies on a regular basis and to certify the outstanding claims provisions relating to IBNR (incurred but not reported) and IBNER (incurred but not enough reported) as on the date of closing the account. In case of breach of solvency margin at any point of time, the appointed actuary is duty bound to inform the same to IRDA and the company concerned so that corrective measures may be taken in time. The method for working out outstanding claims inclusive of IBNR and IBNER has been spelt out in IRDA regulation mentioned (2) above. In the past in UK most of the bankruptcies in insurance company has taken place because of inadequate provision. It should be appreciated that both higher or lower claims reserve have serious implications on profitability and hence IRDA’s concern. Generating profit is important for insurance companies, they being commercial organizations. Because of withdrawal of tariff and resulting price war, making underwriting profit became almost impossible but because of the buoyant market conditions, companies were in a position to make good investment profits and an overall profits as well. But with the down turn and financial melt-down, investment income is very badly affected. Making profit in such a scenario is very very difficult. Obviously these are challenging times for insurance companies as well as for the regulator. It is in the interest of everybody to guard against “Creative Accounting” to generate profit. A few words on risk based, stochastic models being used by actuaries for making prediction about claims cost which ultimately help in pricing the product. Claims costs are difficult to estimate and price adequacy is dependent upon how accurately this cost has been worked out. Actuary make two predictions based on past data: 1. Likely number of claims to be reported in a particular segment 2. Likely average claim cost of the segment. By multiplying the two, we get the likely claim cost. It should be appreciated that in general insurance, there may not be any claim in a policy and there can be many claims also in a policy. Again the severity of claims may vary. This makes the task all the more difficult. There are theoretical stochastic models for estimating (1) & (2) above. Which model to be used in a particular situation depends upon the past data available, the trend exhibited by the available data and other peculiarities of claim e.g. low severity high frequency claims or high severity low frequency claims. Since most of the stochastic models are based on assumptions, the actuary is the best judge which model to use in particular case. It should be appreciated that if premium takes care of all future claims and all other expenses i.e. if there is price adequacy, there will be no strain on solvency margin. Therefore, the actuaries ensure that the claim cost, inflation, margin for adverse deviation, management expenses, cost of acquisition, margin of profits, reinsurance cost etc. are factored into the pricing. Marketing in issurance

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TYBFM: Insurance fund Management During the nineteenth century during the freedom struggle, British insurance companies dominating the market serving mostly large urban centers. After the independence, the Life Insurance Company was nationalized in 1956, and then the general insurance business was nationalized in 1972.Maximum of 26 per cent of foreign holding (World Bank Economic Review 2000). The entry of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. On July 14, 2000 Insurance Regulatory and Development Authority bill was passed to protect the interest of the policyholders from private and foreign players. The private insurance joint ventures have collected the premium of Rs.1019.09 Crore with the investment of just Rs.3,000 Crore in three years of liberalization. The private insurance players have significantly improving their market share when compared to 50 years Old Corporation (i.e., LIC). The industry is divided into life and non-life. The main driver of growth in the life segment is the Unit Linked products; In the case of non-life insurance, the motor and health insurance portfolios have been expanding rapidly. Inspite of an impressive growth in the life premium, there has been a decline of 8% in the number of policies issued. The decline is primarily attributable to the drop in the number of policies issued by the LIC though it registered a 22% increase in premium. The reasons for this decline in policies require to be examined in detail. In the case of general insurance, out of a total increase in premium of Rs. l900 crores in 2004 - 05 over last year, motor and health account for Rs. 1500 crores. In view of the large increases in these portfolios a proper management of the portfolios is critical to sustain the level of growth. The expanding market demands a large agency force. The insurers have, therefore, been recruiting agency force on a continuous basis. As the end of March 2005, there are 20 lakh individual agents and 4711 Corporate Agents. A significant development during 2004 was the arrangements entered into between the insurers and Commercial Banks for marketing the contracts either as Corporate Agents or on referral basis providing database to the insurers. As per the figures compiled by IRDA, the Life Insurance Industry recorded a total premium underwritten of Rs. 10,707.96 Crore for the period under review. Of this, private players contributed to Rs. 1,019.09 Crore, accounting for 10 percent. Life Insurance Corporation of India (LIC), the public sector giant, continued to lead with a premium collection of Rs. 9,688.87 Crore, translating into a market share of 90 per cent. In terms of number of policies and schemes sold, private sector accounted for only 3.77 per cent as compared to 96.23 per cent share of LIC (The Economic Times, 21 March, 2004). The ICICI Prudential topped among the private players in terms of premium collection. It recorded a premium of Rs. 364.9 Crore and a market share of 25 per cent, followed by Birla Sun Life with a premium under - written Rs. 170 Crore and a market share of 15 percent, HDFC Standard with 132.7 Crore and Max New York Life with Rs. 76.8 Crore with a market share of approximately 15 per cent each. Unlike their counterpart in the life insurance business, private non-life insurance companies have not yet started addressing the retail market. Insurance sector is a major contributor to the financial savings of the household sector in the country, which are further channelized into various investment avenues. As per the Annual Report 2003-04 of IRDA, contribution of insurance funds to the financial savings was 14.9 per cent in 2003-04, viz., 2.2

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TYBFM: Insurance fund Management per cent of the GDP at current market price. The premium underwritten has grown from Rs. 45,677.57 Crore in 2000-01 to Rs. 83,645.11 Crore in 2003-04. After liberalization of insurance sector, insurers have introduced innovative product and tailor made products which are absolutely sit to rural population. Efforts at increasing consumer awareness and putting the regulatory framework for protection of policyholder's interest have been made both the industry and regulatory level. Global market conditions have also resulted in driving down premium rates/charges in respect of certain products and in improving the quality of services offered by the insurer. While estimating the potential of the Indian insurance market we often tempt to look at it from the perspective of macro - economic variables such as the ratio of premium to GDP, which is indeed comparatively low in India. For example, India's life insurance premium as a percentage of GDP is 1.77% against 4.48% in the US, 12.71% in the UK or 9.89% in South Korea. But the fact is that the large part of the India's (the number of potential buyers of insurance) is certainly attractive. However, this ignores the difficulties of approaching this population. Much of the demand may not be accessible because of poor distribution, large distances or high costs relative to returns. The reforms in the insurance sector leading finally to the opening of the insurance sector for private participation have brought in its wake major changes not only in the design of the products available in the market but also the manner in which they are marketed. We have today a host of products coupled with a large number of intermediaries who market them. The post-liberalized insurance industry panorama in India is witnessing dramatic changes in terms of a slew of latest products and services, new channels of distribution, greater use of I.T. as a service facilitator etc. There is also the phenomenon of noticeable shifts in consumer preferences impacting the product mix being offered by insurers. Greater attention is also being bestowed on the areas like Agricultural Insurance and risk coverage of export - import trade. Then there is impact of visible socio-economic changes like greater urbanization, greater job mobility, growth of the services industry, weakening of traditional family structure, impact of globalization, etc. All in all, interesting things are happening in the Indian insurance scene. Insurance underwent rapid and massive changes in all aspects of their business: product and services, sectoral structure, market segmentation, competitive environment. It is believed that the information sharing has not taken its expected shape in the insurance industry for the purposes of practices, research and education. Manpower India today released the Manpower Employment Outlook Survey for the first quarter of 2006 revealing sustained positive hiring intentions of employers in India. India continues to lead all 23 countries surveyed this quarter, with a positive overall Net Employment Outlook of +27%. Even though this figure represents a decrease of 13 percentage points from the fourth quarter of 2005, the employment outlook remains extremely healthy. For the first time since the Survey was launched in India, the Finance, Insurance and Retail industry sector emerged as the most optimistic sector for a quarter with a Net Employment Outlook of +32%, surpassing the Services sector. Privatization of insurance sector has allowed insurance companies to 66

TYBFM: Insurance fund Management work in the market by depositing Rs.100 Crores in the reserve of government. This has encouraged many overseas insurance companies, having a required amount in their reserve, to open their branch in our country. There is no doubt that the potential market for the buyers of insurance is significant in India and offers a great scope of growth. According to Nitin Tanted, the new entrants in order to obtain volumes in the market have to follow certain guidelines. They can introduce innovative products offering a right mix of flexibility / risk / return depending which will suit the appetite of the customers. They can target specific niches, which are poorly served or are not served at all. Being the agrarian economy again there are immense opportunities for the new entrants to provide the liability and risks associated in this sector like weather insurance, rainfall insurance, cyclone insurance, crop insurance, etc. The financial sector is aggressively targeting retail investors. Housing finance, auto finance, credit cards and consumer loans all offer an opportunity for insurance companies to introduce new products like creditor insurance etc. Similarly, organized sector sales of TVs, refrigerators, washing machines and audio systems. Only a negligible portion of these purchases is insured. Potential buyers for most of this insurance lie in the middle class. This may be huge market for new private entrants. The lack of a comprehensive social security system combined with a willingness to save in India will lead to a large demand for pension products. However, current penetration is poor. Making pension products into attractive saving instruments would require only simple innovations already prevalent in other markets. For example, their returns might be tied to index-linked funds or a specific basket of equities. Buyers could be allowed to switch funds before the annuities begin and to invest different amounts at different times. Health insurance is another segment with great potential because existing Indian products are insufficient. By the end of the GIC's Mediclaim scheme covered only 2.5 million people. Indian products do not cover disability arising out of illness or disability for over 100 weeks due to accident. Neither do they cover a potential loss of earnings through disability. The challenges before the Indian insurance companies whether in public or private is that the market is conservative and complex. Even the person with high net worth is not interested in getting insurance due to low awareness. Hence, some of the private players have devised new strategies like: No. Name of the Profile Player 1. ICICI Number of Policies Sold: 12,757 Prudential Distribution Mode: 2,000 agents in six centers Number of Products: 5 Strategies

2.

Royal Sundaram

Banners, hyperlinks on indianfoline.com and rediff.com; call centers. Special training module - Better Prospecting Selling - for agents. Cross-selling across all ICICI personal finance products and tapping the ICICI customer base planned. Number of Policies Sold: 1,227 Integration with Sundaram Finance Distribution Mode: Alliance with products like home and car loans. 4 banks; 105 Sundaram Finance Pick up services in case of accident for 67

TYBFM: Insurance fund Management centers; 50 agents motor insurance clients planned. Number of Products: 65 Road shows and consumer awareness (including variants) workshops for Sundaram Finance customers. Tata AIG Number of Policies Sold: 6,178 Direct mailers; call-centres accessible from (general) 1,688 (life) 60 centres. Distribution Mode: 3,000 agents Awareness workshop in housing societies. in eight centres 15-day 'trial' period with refund; premium Number of Products: 5 (non-life) payment through credit card. 3 (life) Max New Number of Policies Sold: 6,996 Ten-day free-look period with refund in York Life Distribution Mode: 1,400 agents the case of dissatisfaction. in nine centres In-house training of agents at nine centres Number of Products: 5, with 7 run by New York Life. riders Special discount for women; premium receipts issued on the spot. HDFC Number of Policies Sold: 1,629 Corporate agents through HDFC and Standard Distribution Mode: 1,000 agents HDFC Bank planned. Life in 11 towns Agents to provide total financial Number of Products: 3 consultancy. Low cost group insurance schemes for companies and NGOs.

3.

4.

5.

Personal selling is extremely labor intensive but is the best form as far as insurance is concerned, dealing with one customer at a time. This will help in allaying fears over any issues on this subject. Advertising deals with hundreds, thousands, or millions of customers at a time, reducing the cost per customer to mere pennies. In fact, advertising costs are determined in part using a formula to determine not cost per potential customer, but cost per thousand potential customers. Even though Personal selling is the best measure to reach the customers, it is often the advertising that initiates the response from the clients when faced with uncertainties. Some of the major players in Kerala have seemed to opt only for personal selling via financial advisors and agents. Only LIC, ICICI Prudential and MetLife are seen in the advertising hemisphere. The state of Kerala for example covers 1.2% the area of India and is home to 3.1% of the population. The Physical Quality of Life indices in Kerala are much higher than the national averages and indeed the highest in the developing world. Hence it is important to reach the market with prudent insights. In Kerala, Onam marks the beginning of a new season. The season of joy and celebrations. When the educated, fast paced Malayalees go on a shopping spree for weeks on end. And to catch the market savvy Malayalees in the best of their spirits, there is no better way than Malayala Manorama Onam Annual. Packed with articles, features and literary pieces, this collector's edition has long become an indispensable part of Malayalee's Onam feast. So, put Malayala Manorama Onam Annual in your media plan. And relish the taste of Onam with millions of Keralites.Little wonder then, that the World Bank has titled Kerala as 'The Model for Human Development' in the third world which puts onerous task for the sales people in insurance at large.

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TYBFM: Insurance fund Management Some of the other strategies planned include that of Aviva which is an Indian partnership between Aviva and Dabur, is opening the 13 new branches across India in major cities including Delhi and Mumbai. The company has also launched a new unit linked, single premium investment cum protection plan, LifeBond Plus, which offers investment in three unit linked funds - balanced, secure and growth. The LifeBond Plus product offers flexibility on premium allocation within these funds, as well as allowing lump sum investments to be made. Bajaj Allianz sponsored the India-Pakistan Cricket Series, named the Allianz Cup. TBWA, its agency have designed the trophy. When it began advertising, Tata AIG deliberately stayed away from the `trust' platform most other financial companies took and touted its innovative schemes instead. Tata AIG and ICICI-Prudential also have an arrangement with rediff.com by which one can e-mail a request for a visit by company agents. In a special campaign, Tata AIG sent out direct mailers about a personal accident insurance plan (It has used the HSBC database for addresses). Those calling in are told the they won't have to go through any verification because, a pleasant voice informs them, ''we have approached you and not the other way around.'' Premiums can be paid by credit card or the company can even arrange a free courier pick up. The pleasant voice also makes a follow up call. Some of the promotional schemes in Malayalam magazines where insurance companies can take part as joint promotional activities are: 1 . 2 . 3 . 4 . 5 . 6 . Magazine Malayala Manorama Children's Magazines Like Balarama, Kalikkuduka, etc. Fortnightly Like Vanitha Mahilaratnam, etc... Promotional Scheme Contest, lucky dips, story or novel competitions, etc... Free tattoos, stickers, name slips, stationery items, masks, painting competition, and quiz competitions, scholarships.

Public relation programmes involving celebrities, posters, articles on job-oriented courses, free gifts and small sachets of shampoo, Vanitha TV Film Awards, conduct shows like dance fests, cooking contests, etc... Monthly Magazines Supplementary guides on special issues like health care, treatments Like Aarogyamasika, for common diseases. etc. Financial Magazines E-magazines, features on top-100 women entrepreneurs, etc. Like Dhanam. Film Magazines Posters of film stars, etc. Like Vellinakshathram, Nana, etc.

Table 2: Promotional Schemes of Malayalam Magazines 69

TYBFM: Insurance fund Management Some of the following facts reveal the importance of creating promotion and awareness on insurance:  General insurance companies were the third largest spenders (after housing/construction loans and personal/professional loans) on TV advertising in 2005 - they spent Rs. 10.66 Crore compared to Rs. 2.25 Crore in 2004.  Banks, the fifth biggest spenders (after auto loans), spent Rs. 8.31 Crore.  Mutual Funds were the highest spenders with Rs. 38.66 Crore in the print media in 2005.  Banks came third, spending Rs. 6.6 Crore, following Chairmen's speeches (Rs 6.8 Crore).  Fire, travel and agriculture insurance together accounted for Rs. 1.6 Crore spends in print in 2005. In conclusion, the possibility of Mergers and Acquisitions looming large on the Indian insurance sector given its potential, there needs to be immediate activity on the marketing front by all those who have stake in it. In its report titled 'Run for Cover?' KPMG has said 81% of large insurers - with a premium of over $500m - are actively seeking acquisitions. The drive for this growth is being fuelled by insurance companies' expectations of increasing competition and new entrants. Until now, for the past three years, acquisition strategy has been driven by increasing profit and top line growth. The report also points out that with some markets such as Australia losing momentum, companies there are looking at expanding in high-growth markets such as India. The Insurance Australia Group is one such company looking at India among other Asian countries. Recently, the Indian market came close to witnessing one of these possible scenarios with UK insurer Aviva making a bid for Prudential. Global consolidation is good for Indian consumers, as operations of foreign insurers are not significant enough to result in monopolistic power post-acquisition. At the same time, a merger would result in better product range/services being made available to consumers and better market reach for the foreign acquirer. In such an event, then every player in the Indian insurance sector have to offer the best - tune their marketing strategies. Life Insurance Marketing An Introduction To Life Insurance Marketing Life Insurance Marketing is one of the most strenuous jobs for those who are involved in the insurance marketing.. It is because of the ever lasting conflict between the insurance companies which want to profit the most and the insured person who wants to get as much compensation as possible from the insurance company. Commissions for the Life Insurance companies are very high and they seldom make profits out of the policies. Also the insurance policy needs to be transparent so that the potential customer understands it totally and should not feel that they have been treated unfairly by the insurance company. Reasons For Life Insurance Marketing The Life insurance companies were paid very little premiums by young children or healthy people and thus the scope for profit was very small and those who paid high rates of premium were the older beings who died and the Life insurance companies compensate for that. However nowadays the Life insurance premiums are almost the same for an young adult and an old person who just had a major 70

TYBFM: Insurance fund Management operation. As the Life Insurance Marketing Companies already deals with this type of a scenario, what one can do is to change the public perception about the Life insurance companies. One can connect himself or herself with companies whose workers need a plan for Life Insurance. One can also go to crowded places and advertise for the Life insurance company. The Life insurance companies also offer fliers and hanging banners. One can also offer free Life check in a reputed place to the insured for at least once. One should always give the life insurance policy holders existing a chance to prefer the marketing techniques that the insurance company is presenting. If the policy holder does this at a regular basis then the company has a high chance of succeeding. This is making the competition much tougher for the Life insurance companies as most of the companies offer similar types of premiums and facilities. So it has become very important for the life insurance companies to concentrate on Life Insurance Marketing and attract as many people as possible towards their company. The Life Insurance Companies prefer to go for Group Life Insurance for a group of people from a particular company or a family so that they get a group of customers and even if they compensate for some of them for various reasons they usually make it up with other's premiums. They also get less papers to control and also they provide better facilities for their clients. So to promote this type of policy they need to have social and industrial connections. Life Insurance market helps developing that. Even for other policies like term life insurance and permanent life insurance one needs to be aware of making people realize the profits of the policy by various means provided by marketing agencies. So before going for a Life Insurance Marketing one actually needs to know the market target and the desires of the people who are actually seen as potential insurance customers. The confusion about the way a Life Insurance Marketing conductor can draw the potential Insurance holder's attention evaporates fast if he knows his targets and aims clearly. So, it is important to conduct a sound survey and then attract people. Life Insurance Marketing Strategies A very common way to promote a Life insurance company through Life Insurance Marketing is to make the name of the company familiar to others by means of television commercials, handling out pamphlets, hanging banners in populated areas and by providing exciting offers.

Telephone marketing is another way of Life Insurance Marketing. One can see the telephone companies send messages about various offers and they even make phone calls. Web Insurance Marketing is another good strategy to promote insurance policies. The pop ups that one sees while using Internet are actually a very effective way of sending messages across the potential insurance customers.

One should listen to the existing Life Insurance Policy Holders as well as the potential Life insurance policy holders and listen to what people who actually matters have to say. One common problem that the insured persons face is that the insurance companies do not inform its clients about

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TYBFM: Insurance fund Management the hike in the premium rates. These things should be kept in mind. Not only that, a client should be informed about everything related to his policy and the Life insurance company should keep the transparency as much as possible. Community Life Insurance Marketing is another different way to get promotion and a high recognition for the Life insurance company. Eminent workers join local community institutions, such as Chamber of Commerce, and by signing up there one can help out various projects that take place. These kinds of activities and social works on behalf of the Life insurance company helps the company to get free publicity as their names are published in news paper and in media also. Doing charity works also helps the Life insurance companies to come across various people who act as volunteers and can act as their potential Life insurance clients. People also like to deal with like minded people and companies and this is how many deals are made.

A Life Insurance Company should not charge different Life insurance client different charges for the same policy. This kind of policy gives the Life insurance policy holders the feeling that they are being treated unfairly and also that the Life insurance companies are only looking for profits and not the betterment of customer welfare.

When a Life insurance claim is filed, especially for a very big hefty amount, the Life insurance company should help out the policy holder in processing out the paperwork. One should not let bureaucracy enter and make it so difficult for the one making the claim so that he gives his claim .This has always been a common tactic on the insurance company's part to avoid paying claims claimed by the policy holder. This though makes a short term profit for the company but it hurts in the long run as the reputation of the company is hampered severely.

People in this Life insurance industry should always try to keep in constant contact with the existing customers as well. The competition in the insurance market is so fierce today that no company wants to loose out on a customer to another company. Clients who are not contacted for a longer period of time normally fail to remain loyal to the insurance company and look for a different Life insurance company. The company can keep the records of the client's birthday and days like anniversary and sent him or her small tokens of love or loyalty at a regular basis. If the company can afford a little more it can send dinner coupons to the Life insurance policy holder. These things play a major role and can be considered as an effective Life Insurance Marketing strategy.

May be the most crucial thing in insurance marketing is to always speak about unity and honesty while dealing with a business. A Life Insurance Holder can find so many frauds in various life insurance companies today, that life insurance customers are going for products and services which are trustworthy to them. Feeling safe is about insurances and other things are most important as far as the insurance holder is concerned. So, if a company remains loyal to its customers it will itself do Life Insurance Marketing for itself. So, only by remaining loyal to its customers the company can do a world of good to its reputation and this would in itself bring more potential Life Insurance Holders to the company, because the customers prefer safety more than anything else these days.

Insurance Agency Marketing The basic of an Insurance Agency Marketing is to increase the impact of an insurance company's business as much as possible. Insurance Agency Marketing is used to make the project work and 72

TYBFM: Insurance fund Management profit as much as possible. Every insurance company has its own Insurance Agent Marketing budget and the company employs its Insurance Marketing Agent accordingly. Some choose cheap agencies and some choose Insurance Agency Marketing who are renowned in the market better known as branded agencies. Most of the big insurance companies prefer branded agents because the bigger ones have better resource and better employees than the smaller ones. It is important to choose a suitable Insurance Agency Marketing because more than anything else the insurance products would be sold on the basis of its presentation. Any customer today give special emphasis on proper information. Most of the Insurance customers or the potential insurance holders are well informed today and that is why Insurance Agency Marketing should depend mainly on the media that provide information. So the marketing agency should concentrate on providing information in the media like news paper , television magazines and through Internet as well. These Insurance Agency Marketing can also put banners in crowded place so that it attracts the eyes of the people walking on the road. This is a very easy and cheap way to make people aware of one's company. Awareness increases trustworthiness and that increases sales for the insurance company. Another way the Insurance Agency Marketing can go on which is by employing good salesman who can work as individual agent for the company. The agent has to be smart and well spoken and he needs to know most of the things that the insurance company offers. So, when a company sits to evaluate or choose an Insurance Agency Marketing, the company actually needs to look at one particular and important aspect. They should look at the means and results of a particular company and the possibility in them to make the life insurance company a big success and a brand in itself. In a single sentence, the insurance company would look the extent of bang it can create in the market. Insurance Agency Marketing can also be done through committing social works. The Insurance Agency Marketing can use the brand name of the company in various social works in the society. This brings them publicity via media and other means. This also brings the company closer to people who can act as their potential Insurance holders. To know more about Insurance Agency Marketing one can go to insurance.com, chriatianet.com Marketing health insurance is one of the most difficult jobs in insurance marketing. This is because of the perpetual conflict between the insurance companies which want to make a profit and the insured person who wants to get as much compensation as possible from the insurance company. Commissions for the health companies are very low and they seldom make profits from health insurance. Marketing Health Insurance: Reasons In the past, health insurance policies for young children and health people have had low premiums, resulting in little profit. Those who paid high rates of premium were the older people who often got ill, with the result that the health insurance companies 73

TYBFM: Insurance fund Management had to compensate for that. However, nowadays health insurance premiums are almost the same for a healthy young adult and an old person who just has had a major operation. Marketing Health Insurance: Advertising and Informing In order to advertise and market their products, health insurance companies use fliers and banners that inform clients about their range of products. Another strategy in marketing health insurance is to offer free health checks to the insured. It is important that health insurance companies give policyholders, existing or potential, a chance to understand the benefits the insurance company is presenting to them. This makes clients feel comfortable and cared for. If this is done regularly by the company, there are high chances of attracting new customers. Marketing Health Insurance: A Competitive Field Marketing health insurance products has invited tough competition as most health insurance companies offer similar types of premiums and facilities. So it has become very important for life insurance companies to focus on health insurance marketing and attract as many people as possible to their company. Marketing Health Insurance: Know the Target Audience It is hence mandatory for one to know about the market target and the needs of the customers before proceeding with health insurance marketing. It is easy to capture the potential insurance holder's attention if the insurance company knows its targets and aims clearly. So, it is important to conduct a survey (of what?) and then aim at attracting people. Health Insurance Marketing: Strategies  A very common strategy of health insurance marketing is making the name of the company familiar to the public by means of television commercials, pamphlets, banners and exciting offers.  Telephone marketing is another health insurance marketing strategy. One can employ telephone companies to send messages about various offers. Call centers are also used to inform potential clients of the company’s products.  Web insurance marketing is another good strategy to promote insurance policies. The pop ups that one sees while using the Internet are actually a very effective way of sending messages to potential insurance customers.  A health insurance company should charge the same rates for any one policy from all clients. By not doing so, policyholders feel they are being treated unfairly and that the health insurance companies are only looking for profits and not interested in customer welfare.  When a health insurance claim is filed, especially for a large amount, the health insurance company should help the policyholder with the necessary paperwork. Companies should avoid bureaucracy and instead, facilitate the speedy dispensing of claims. There are companies who avoid doing this in order to frustrate beneficiaries who eventually forsake their claim. Although this generates a short term profit for the company; it hurts the reputation of the company in the long run.

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TYBFM: Insurance fund Management  Community health insurance marketing is another way to promote and gain recognition for the health insurance company. Eminent employees join local community institutions, such as the Chamber of Commerce, and by signing up there, one can volunteer with various community projects. Such activities help the health insurance company to get free publicity. They also help the health insurance companies to meet people who can be their potential health insurance clients.  For effective health insurance marketing, one should pay attention to existing and potential health insurance policy holders. It’s important to listen to what people who actually matter have to say. One common problem that insured people face is that insurance companies do not inform clients regarding a hike in premium rates. It is important to keep customers well informed of such developments. The health insurance company should also maintain as much transparency as possible.  The competition in the insurance market is so fierce today that no company wants to lose a customer to another company. While marketing health insurance, people should not ignore their existing policyholders in the race to get new business. Clients who are not contacted for a long period of time normally fail to remain loyal to the insurance company and look for a different health insurance company. It’s therefore wise for the company to maintain records of the client's birthday, anniversaries, etc. and send him/her a small token on a regular basis. If the company can afford it, sending dinner coupons to the policyholder is also a good idea. Such things play a major role and can be considered effective health insurance marketing strategies. Impact of marketing insurance products through banks: Indian Perspective Dr. Hassan A. Shah Abstract Bancassurance in its simplest form is the distribution of insurance products through a bank distribution channel. In concrete term, bancassurance which is also known as ‘Allfinanz’- distributes a package of financial services that can fulfill both banking and insurance needs at the same time. It takes various forms in various countries depend upon the demography, economic and legislative climate of that country. Profile of a country decides the kinds of products bancassurance shall be dealing with. Economic situation will determines the trends in terms of turnover, market share etc. Whereas legislative climate will decide the periphery within which the bancassurance has to operate. The motive behind bancasurance varies: For banks- product diversification, source of additional fee income. For Insurance company- A tool of increasing there market penetration, premium turnover, For Customers- Reduced Price, High Quality Product, Delivery at doorsteps. Actually everybody is a winner. Meaning Bancassurance1 simply means selling of insurance products by banks. In this arrangement, insurance companies and banks undergo a tie-up, thereby allowing banks to sell the insurance products to its customers. This is a system in which a bank has a corporate agency with one insurance company to sell its products. By selling insurance policies bank earns a revenue stream apart from interest. It is called as fee-based income. This income is purely risk free for the bank since the bank simply plays the role of an intermediary for sourcing business to the insurance company. 75

TYBFM: Insurance fund Management Origin & Global Scenario: It is most successful in Europe, especially in France, from where it started, Italy, Belgium and Luxembourg. The concept of bancassurance is relatively new in the USA. As mentioned above bancassurance growth differs due to various reasons in different countries. The Glass-Steagall Act of 1933 prevented the banks of the USA from entering into alliance with different financial services providers, thereby putting a barrier on bancassurance. As a result of this life insurance was primarily sold through individual agents, who focussed on wealthier individuals, leading to a majority of the American middle class households being under-insured. With the US Government repealing the Act in 1999, the concept of bancassurance started gaining grounds in the USA also. Coming to Asia, it has been estimated that bancassurance would contribute almost 16% of the life premium in the Asian markets in the year 2006 primarily due to the growth expected in India and China. Middle-East has probably the lowest penetration of bancassurance products. And this has a lot to do with the cultural and religious attitude of the regions pre-dominantly Muslim customers, for whom life insurance in its purely commercial form has been a taboo. But with the development of Shariah-Compliant Takaful Products, Perceptions are beginning to change and there is a wider acceptance of appropriately developed life products. Development, Growth and Current Scenario of Bancassurance in the Middle East Region2 The legal climate in the Middle East is very conducive to bancassurance and is free from hurdles. It is however quite important to study the market and evolve a suitable product profile for the region. Very low penetration levels of insurance in the Middle East, the prospects for bancassurance there are quite bright. Indian Scenario: Banking is fully governed by RBI4 & Insurance sector is by IRDA5 With effect from October 29, 2002, banks have also been allowed to undertake referral business through their network of branches. However, before entering into insurance business, banks are required to obtain prior approval of the Insurance Regulatory and Development Authority (IRDA) and Reserve Bank of India. It has now been decided that banks need not obtain prior approval of the RBI for engaging in insurance agency business or referral arrangement without any risk participation, subject to the following conditions: i. ii. iii. The bank should comply with the IRDA regulations for acting as ‘composite corporate agent’ or referral arrangement with insurance companies. The bank should not adopt any restrictive practice of forcing its customers to go in only for a particular insurance company in respect of assets financed by the bank. The customers should be allowed to exercise their own choice. The bank desirous of entering into referral arrangement, besides complying with IRDA regulations, should also enter into an agreement with the insurance company concerned for 76

TYBFM: Insurance fund Management allowing use of its premises and making use of the existing infrastructure of the bank. The agreement should be for a period not exceeding three years at the first instance and the bank should have the discretion to renegotiate the terms depending on its satisfaction with the service or replace it by another agreement after the initial period. Thereafter, the bank will be free to sign a longer term contract with the approval of its Board in the case of a private sector bank and with the approval of Government of India in respect of a public sector bank. As the participation by a bank’s customer in insurance products is purely on a voluntary basis, it should be stated in all publicity material distributed by the bank in a prominent way. There should be no ’linkage’ either direct or indirect between the provision of banking services offered by the bank to its customers and use of the insurance products. The risks, if any, involved in insurance agency/referral arrangement should not get transferred to the business of the bank.

iv.

v.

ECGC: Corporate agency arrangement with Commercial Banks Bancassurance is a concept by which the insurance company markets its insurance products through the banks. As the bank has a better network of branches in different places, it is possible for them to market the products of various insurance products at one window. It is also easier for the customers to have one contact point. It is expected that this arrangement besides being mutually beneficial, will benefit the exporting community. Export Credit Guarantee Corporation6 has signed the Corporate Agency Agreements with the following banks for marketing the insurance products of ECGC meant for the exporters: 1. Allahabad Bank. 2. Andhra Bank. 3. Bank of Baroda. 4. Bank of India. 5. Bank of Rajasthan Ltd. 6. Canara Bank. 7. Catholic Syrian Bank. 8. City Union Bank Ltd. 9. Corporation Bank. 10. Dena Bank. 11. Federal Bank. 12. Indian Bank. 13. Indian Overseas Bank. 14. Karnataka Bank. 15. Karur Vysya Bank Ltd. 16. Punjab National Bank. 17. Saraswat Co-op. Bank. 18. South Indian Bank Ltd. 19. UCO Bank. 20. Union Bank of India. 21. United Bank of India. 22. Tamil Nadu Mercantile Bank. 23. Central Bank of India.

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TYBFM: Insurance fund Management 24. Syndicate Bank. 25. Bank of Maharashtra

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