2.

Introduction
The story of insurance is probably as old as the story of mankind. Tendency of a
human being to secure themselves against loss and disaster has been from the
starting of world. They sought to avert the evil consequences of fire and flood and
loss of life and were willing to make some sort of sacrifice in order to achieve
security. Though the concept of insurance is largely a development of the recent
past, particularly after the industrial era – past few centuries – yet its beginnings
date back almost 6000 years as per records.

Insurance business is divided into four classes:

 Life Insurance
 Fire
 Marine
 Miscellaneous Insurance.

Insurance provides:
 Protection to investor.
 Accumulation of savings.
 Channeling these savings into sectors needing huge long term investment.

Functions of insurance:
 Provide protection: The primary function of insurance is to provide
protection against future risk, accidents and uncertainty. Insurance cannot
check the happening of the risk, but can certainly provide for the losses of
risk. Insurance is actually a protection against economic loss, by sharing the
risk with others.

 Collective bearing of risk: Insurance is an instrument to share the financial

loss of few among many others. Insurance is a mean by which few losses are
shared among larger number of people. All the insured contribute the
premiums towards a fund and out of which the persons exposed to a
particular risk is paid.

 Assessment of risk: Insurance determines the probable volume of risk by

evaluating various factors that give rise to risk. Risk is the basis for
determining the premium rate also.

 Provide certainty: Insurance is a device, which helps to change from

uncertainty to certainty. Insurance is device whereby the uncertain risks may
be made more certain.

 Small capital to cover larger risk: Insurance relieves the businessmen

from security investments, by paying small amount of premium against
larger risks and uncertainty.

 Contributes towards the development of industries: Insurance provides

development opportunity to those larger industries having more risks in their
 setting up. Even the financial institutions may be prepared to give credit to
sick industrial units which have insured their assets including plant and
machinery.

 Means of savings and investment: Insurance serves as savings and

investment, insurance is a compulsory way of savings and it restricts the
unnecessary expenses by the insured's For the purpose of availing income-
tax exemptions also, people invest in insurance.

 Source of earning foreign exchange: Insurance is an international

business. The country can earn foreign exchange by way of issue of marine
insurance policies and various other ways.

 Risk free trade: Insurance promotes exports insurance, which makes the
foreign trade risk free with the help of different types of policies under
marine insurance cover.

Life insurance:
Life insurance is a contract under which the insurer (Insurance Company) in
Consideration of a premium paid undertakes to pay a fixed sum of money on
The death of the insured or on the expiry of a specified period of time
Whichever is earlier. In case of life insurance, the payment for life insurance policy
is certain. The Event insured against is sure to happen only the time of its
happening is not known. So life insurance is known as ‘Life Assurance’. The
subject matter of insurance is life of human being. Life insurance provides risk
coverage to the life of a person. On death of the person insurance offers protection
against loss of income and compensate the titleholders of the policy.

Roles of life insurance:

 Life insurance as an investment: - Insurance products yield more than any

other investment instruments and it also provides added incentives or bonus
offered by insurance companies.

 Life insurance as risk cover: - Insurance is all about risk cover and
protection of life. Insurance provides a unique sense of security that no other
form of invest can provide.

 Life insurance as tax planning: - Insurance serves as an excellent tax

saving mechanism too.

Importance of life insurance:-

 Protection against untimely death: - Life insurance provides protection to
the dependents of the life insured and the family of the assured in case of his
untimely death. The dependents or family members get a fixed sum of
money in case of death of the assured.

 Saving for old age: - After retirement the earning capacity of a person
reduces. Life insurance enables a person to enjoy peace of mind and a sense
of security in his/her old age.
  Promotion of savings: - Life insurance encourages people to save money
compulsorily. When life policy is taken, the assured is to pay premiums
regularly to keep the policy in force and he cannot get back the premiums,
only surrender value can be returned to him. In case of surrender of policy,
the policyholder gets the surrendered value only after the expiry of duration
of the policy.
 Initiates investments: - Life Insurance Corporation encourages and
mobilizes the public savings and canalizes the same in various investments
for the economic development of the country. Life insurance is an important
tool for the mobilization and investment of small savings.
 Credit worthiness: - Life insurance policy can be used as a security to raise
loans. It improves the credit worthiness of business.
 Social Security: - Life insurance is important for the society as a whole
also. Life insurance enables a person to provide for education and marriage
of children and for construction of house. It helps a person to make financial
base for future.
 Tax Benefit: - Under the Income Tax Act, premium paid is allowed as a
deduction from the total income under section 80C.

3. Agency business model

In India insurance is sold through mainly four channels.

 Through branch
  Through agency
 Through financial institution
 Through banks

Independent agency system means of selling and servicing property and casualty
insurance through agents who represent different companies. The agents own the
records of the policies they sell.

Insurance is now governed by a blend of statutes, administrative agency

regulations, and court decisions. State statutes often control premium rates, prevent
unfair practices by insurers, and guard against the financial insolvency of insurers
to protect insureds.

In most states, an administrative agency created by the state legislature devises

rules to cover procedural details that are missing from the statutory framework. To
do business in a state, an insurer must obtain a license through a registration
process. This process is usually managed by the state administrative agency. The
same state agency may also be charged with the enforcement of insurance
regulations and statutes.

Administrative agency regulations are many and varied. Insurance companies must
submit to the governing agency yearly financial reports regarding their economic
stability. This requirement allows the agency to anticipate potential insolvency and
to protect the interests of insureds. Agency regulations may specify the types of
insurance policies that are acceptable in the state, although many states make these
declarations in statutes. The administrative agency is also responsible for
reviewing the competence and ethics of insurance company employees.
Insurance agencies:
Insurance agency can be defined as a group of insurance agents or advisor. These
agents or advisors create a distribution channel to sell the different insurance
products. These advisors are the strongest distribution channel for an insurance
agency. An advisor or agent works as a third party or intermediate between
insurance company and customers. All the advisors in an agency work as a team.
Main work of insurance advisor or agent is to promote and sell different insurance
products of company.

Functions of agency manager:

a person who governs a group of insurance advisors is known as agency manager.
Success of an agency manager depends on the success of their advisors. work of
agency manager is to control the advisors in an efficient way. Agency manager is
like a creature of two wings. He has to recruit advisors as well as to give sales to
the insurance company.
 To recruit advisors.
 Make them aware of different insurance products.
 To give them training session.
 To motivate them for efficient work.
 To get maximum and efficient work from their advisors.

Operation work of insurance agency (SBI Life):

Every industry has an operational department which supports the market division.

Front office partners (independent agents)

 Develop insurance products Distribute product
CUSTOMERS Plan and manage company BUSINESS PARTNERS
Fulfill and service product Claims
Back office provider Regulatory institutions

In the reference to the SBI Life insurance, development of insurance products,

distribution, planning services products and claims are taken care by the head
office. Back office providers are those persons who take care of the operational
part of the organization and front office providers are the people who brings sell to
the organization. Back office has its own hierarchy which is connected to head
office, and every policy has to be processed to head office. Unit for the operations
is known as processing centre, and processing centre within the city is known as
mini processing centre. Proposal forms come through front office and the
verification of the proposal is done by manually which is known as scrutiny. After
scrutiny the operational staff enters it in SBI Life website, which is done online.
the entry of a proposal is done in a sequential order starting with scrutiny, inwards,
proposal wise inwards, cashier entry, cashier entry approval, data entry and finally
outwards. After finishing all these operations policy issues from the head office of
the state.

4. Indian insurance industry

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

Indian regulatory development authority:

In 1999, the Insurance Regulatory and Development Authority (IRDA) was
constituted as an autonomous body to regulate and develop the insurance industry.
The IRDA was incorporated as a statutory body in April, 2000. The key objectives
of the IRDA include promotion of competition so as to enhance customer
satisfaction through increased consumer choice and lower premiums, while
ensuring the financial security of the insurance market. The IRDA opened up the
market in August 2000 with the invitation for application for registrations. Foreign
companies were allowed ownership of up to 26%. The Authority has the power to
frame regulations under Section 114A of the Insurance Act, 1938 and has from
2000 onwards framed various regulations ranging from registration of companies
for carrying on insurance business to protection of policyholders’ interests.
Role of IRDA:
 Protecting the interests of policyholders.
 Establishing guidelines for the operations of insurers, and brokers.
 Specifying the code of conduct, qualifications, and training for insurance
intermediaries and agents.
 Promoting efficiency in the conduct of insurance business.
 Regulating the investment of funds by insurance companies.
 Specifying the percentage of business to be written by insurers in rural
sectors.
 Handling disputes between insurers and insurance intermediaries.

Changing perception of Indian customers:

Indian Insurance consumers are like Indian Voters, they are soft but when time is
right and ripe, they demand and seek necessary changes. De-tariff of many
Insurance Products are the reflection of changing aspirations and growing demand
of Indian consumers.

For historical years, Indian consumers were at receiving end. Insurance Product
was underwritten and was practically forced onto consumers on a “Take-it-As-it-
basis”. All that got changed with passage of IRDA act in 1999. New insurance
companies have come into existence leading to open competition and hence better
products for customers.

Indian customers have become very sensitive to Coverage / Premium as well as the
Products (read Risk Solution), that is given to them. There are not ready to accept
any product, no matter even if that is coming from the market leader, should that
product is not serving the purpose. A case in point is ULIP Product / Group Life
and Credit Life in Life Insurance segment and Travel / Family Floater Health and
Liability Insurance in the Non-life segment are new age Avatar. The new products
are constantly being demanded by Indian consumers, which is putting huge
pressures on Insurance companies (Read Risk Under-writers) and Brokers to
respond.

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

Investment of Indian household savings (as a % in different sector)

BANK DEPOSITS 39%
CORP. BANKS 2%
SHARES AND DEBENTURES 1%

MUTUAL FUNDS 2%
NBFC’S 3%
GOVT. BONDS 13%
INSURANCE 13%
PF/ RETIRE FUNDS 21%
CURRENCY 6%

Source: - www. avivaindia.com

Changing face of Indian insurance industry:

After the Insurance Regulatory and Development Authority Act have been
passed there has been establishment of many private insurance companies in India.
Previously there was a monopoly business for Life Insurance Corporation of India
(L.I.C.) who was the only life-insurance company for the people till 2000. L.I.C.
still holds 71.4% of the market share in 2006. But after the introduction of private
life insurance companies there is a great competition in Indian market now .
Everyone is trying to capture the fresh market here and penetrate it with aggressive
marketing strategies. Today life-insurance is not only limited up to just life risk
cover and maturity period bonuses but changed to greater return from the
investments. With the introduction of the unit linked insurance policies these
companies are investing the money in different investment instruments like shares,
bonds, debentures, government and other securities. People are demanding for
higher returns with the life risk cover and private companies are giving 30-40%
average growth per annum. These life-insurance companies have every kind of
policies suiting every need right from financial needs of, marriage, giving birth and
rearing up a child, his education, meeting daily financial needs of life, pension
solutions after retirement. These companies have every aspects and needs of our
life covered along with the death-benefit.

In India only 25% of the population has life

insurance. So Indian life-insurance market is the target market of all the companies
who either want to extend or diversify their business. To tap the Indian market
there has been tie-ups between the major Indian companies with other International
insurance companies to start up their business. The government of India has set up
rules that no foreign insurance company can set up their business individually here
and they have to tie up with an Indian company and this foreign insurance
company can have an investment of only 24% of the total start-up investment.

Indian insurance industry can be featured by:

 Low market penetration.

 Ever growing middle class component in population.

 Growth of customer’s interest with an increasing demand for better

insurance products.

 Application of information technology for business.

 Rebate from government in the form of tax incentives to be insured.

Today, the Indian life insurance industry has a dozen private players,
each of which are making strides in raising awareness levels, introducing
innovative products and increasing the penetration of life insurance in the vastly
underinsured country. Several of private insurers have introduced attractive
products to meet the needs of their target customers and in line with their business
objectives. The success of their effort is that they have captured over 28% of
premium income in five years.

The biggest beneficiary of the competition among life insurers has

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

There are 12 private players in Indian life insurance market.

6 bank owned insurers: - HDFC standard life, ICICI prudential, ING Vysya,
MetLife, OM Kotak, SBI life.
6 independent insurers: - Aviva, ANP sanmar, Birla sun life, Bajaj Allianz, Max
New York life, Tata AIG.
Major international insurers are- Prudential and Standard
life from UK, Sun life of Canada, AIG, MetLife and New York life of the US.

Increasing growth since liberalization:

YEAR LIC (in bn rs.) PRIVATE PLAYER
FY03 110 10
FY04 120 20
FY05 130 40
FY06 140 60
FY07 240 160

Source: - Insurance Industry (ICFAI publication book)

Possibilities for insurance companies in India:

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

5. Global insurance industry

Globally, insurers increasingly are pressured by the demands of their clients. The
development of global insurance industry over the past few years was influenced
by booming stock markets which enabled considerable capital gains to be made in
non life business. Increase in insurers equity capital increased underwriting
capacity, while demand did not develop at the same pace, resulting in decrease in
insurance policies prices. The stock market boom of the past few years led to

demand for unit linked insurance products.

The global insurance industry is growing at rapid pace. Most of the markets
are undergoing globalization. Lot of mergers and acquisition are taking place in the
insurance world. The rapidity in the industry, technological improvement has
resulted in pressures on a few economic parameters. The world insurance industry
is at peak of its globalization process.
Global insurance market is increasing by an average of six percent per
year since 1990. Insurance companies have collected $2443.7 billion premium
world wide according to the global development of premium volume in 144
countries in 2005. $1521.3 has been generated as life insurance premium and
$922.7 as non life insurance premium. The US accounted for 35% of global life
and non life premium, Japan had global share of 21%, and UK was having 10% of
global share.

Influence on Indian insurance industry:

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

Life insurance penetration as a % of GDP

United kingdom 8.9%
Japan 8.3%
Korea 7.3%
United states 4.1%
Malaysia 3.6%
India 3.0%
China 1.8%
Brazil 1.3%
 Source: - www.indianinsuranceresearch.com

6. Functioning of insurance industry:

Insurer’s business model:
Profit = earned premium + investment income - incurred loss - underwriting
expenses

Insurers make money in two ways: (1) through underwriting, the processes by
which insurers select the risks to insure and decide how much in premiums to
charge for accepting those risks and (2) by investing the premiums they collect
from insured.

The most difficult aspect of the insurance business is the underwriting of policies.
Using a wide assortment of data, insurers predict the likelihood that a claim will be
made against their policies and price products accordingly. To this end, insurers
use actuarial science to quantify the risks they are willing to assume and the
premium they will charge to assume them. Data is analyzed to fairly accurately
project the rate of future claims based on a given risk. Actuarial science uses
statistics and probability to analyze the risks associated with the range of perils
covered, and these scientific principles are used to determine an insurer's overall
exposure. Upon termination of a given policy, the amount of premium collected
and the investment gains thereon minus the amount paid out in claims is the
insurer's underwriting profit on that policy.

An insurer's underwriting performance is measured in its combined ratio. The loss

ratio (incurred losses and loss-adjustment expenses divided by net earned
premium) is added to the expense ratio (underwriting expenses divided by net
premium written) to determine the company's combined ratio. The combined ratio
is a reflection of the company's overall underwriting profitability. A combined
ratio of less than 100 percent indicates underwriting profitability, while anything
over 100 indicates an underwriting loss.

Insurance companies also earn investment profits on “float”. “Float” or available

reserve is the amount of money, at hand at any given moment that an insurer has
collected in insurance premiums but has not been paid out in claims. Insurers start
investing insurance premiums as soon as they are collected and continue to earn
interest on them until claims are paid out.

. Naturally, the “float” method is difficult to carry out in an economically

depressed period. Bear markets do cause insurers to shift away from investments
and to toughen up their underwriting standards. So a poor economy generally
means high insurance premiums. This tendency to swing between profitable and
unprofitable periods over time is commonly known as the "underwriting" or
insurance cycle.

Finally, claims and loss handling is the materialized utility of insurance. In

managing the claims-handling function, insurers seek to balance the elements of
customer satisfaction, administrative handling expenses, and claims overpayment
leakages.

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

Revenue =premium.
Expenses =sum of claims + commission payable on procurement of business +
operating expenses.
Operating surplus =revenue-expenses.

Net investment income includes income from trading in and holding stock market
securities including government securities, special deposits with the central
government, loans to several public utilities and service providers in state
government.
 Insurance premium collected is converted in a pool of fund then
divided in to four expenses.
 To pay the expenses of the management.
 To pay agency commission.
 To pay for the claims.
 Surplus money will be invested in govt. securities.

Requirements of an insurance risk

Insurance normally insure only pure risks .However, not all pure risk is
insurable .certain requirements usually must be fulfilled before a pure risk can be
privately insured .From the view point of the insurer, there are ideally six
requirement of an insurable risk

 There must be a large number of exposure units

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

(2) Insurance and hedging compared

The concept of hedging is to transferring the risk to the speculator through
purchase of future contracts .An insurance contract, however, is not the same thing
as hedging .Although both technique are similar in that risk is transferred by a
contract, and no new risk is created, there are some important difference between
them. First, an insurance transaction involves the transfer of insurable risks,
because the requirement of an insurable risk generally can be met .However,
hedging is a technique for handling risks that are typically uninsurable ,such as
protection against a decline in the price agriculture products and raw materials.
A second difference between insurance and hedging is that insurance and hedging
is that insurance can reduce the objective risk of an insurer by application of the
law of large numbers. As the number of exposure units increases, the insurer’s
prediction of future losses improves, because the relative variation of actual loss
from expected loss will decline .thus, many insurance transactions reduce objective
risk. In contract, hedging typically involves only risk transfer , not risk reduction
.The risk of adverse price fluctuation is transferred because of superior knowledge
of market conditions .The risk is transferred, not reduced, and prediction of loss
generally is not based on the law of large numbers.

Various types of life insurance policies:-

 Endowment policies: This type of policy covers risk for a specified
period, and at the end of the maturity sum assured is paid back to
policyholder with the bonuses during the term of the policy.
 Money back policies: This type of policy is for periodic payments of
partial survival benefits during the term of the policy as long as the policy
holder is alive.
 Group insurance: This type of insurance offers life insurance protection
under group policies to various groups such as employers-employees,
professionals, co-operatives etc it also provides insurance coverage for
people in certain approved occupations at the lowest possible premium cost.
 Term life insurance policies: This type of insurance covers risk only
during the selected term period. If the policy holder survives the term, risk
cover comes to an end. These types of policies are for those people who are
 unable to pay larger premium required for endowment and whole life
policies. No surrender, loan or paid up values are in such policies.

 Whole life insurance policies: This type of policy runs as long as the
policyholder is alive and is covered for the entire life of the policyholder. In
this policy the insured amount and the bonus is payable only to nominee on
the death of policy holder.

 Joint life insurance policies: These policies are similar to endowment

policies in maturity benefits and risk cover, but joint life policies cover two
lives simultaneously such as married couples. Sum assured is payable on the
first death and again on the death of survival during the term of the policy.

 Pension plan: a pension plan or annuity is an investment over a certain

number of years but does not provide any life insurance cover. It offers a
guaranteed income either for a life or certain period.

 Unit linked insurance plan: ULIP is a kind of insurance plan which

provides life cover as well as return on premium paid over a certain period
of time. The investment is denoted as units and represented by the value
called as net asset value (NAV).

7. Insurance and economy

 Indian economy is growing in reference to global market. Business of
insurance with its unique features has a special place in Indian economy.
 It is a highly specialized technical business and customer is the most concern
people in this business, therefore this business is able to spur the growth of
 infrastructure and act as a catalyst in the overall development of Indian
economy.
 The high volumes in the insurance business help spread risk wider, allowing
a lowering of the rates of the premium to be charged and in turn, raising
profits. When there is a bigger base, the probabilities become more
predictable, and with system wide risks balanced out, profits improve. This
explains the current scenario of mergers, acquisitions, and globalization of
insurance.
 Insurance is a type of savings. Insurance is not only important for tax
benefits, but also for savings and for providing security. It can be serving as
an essential service which a welfare state must make available to its people.
 Insurance play a crucial role in the commercial lives of nations and act as the
lubricants of economic activities. Insurance firms help to spread the
potentially financial consequences of risk among the large number of
entities, to mobilize and distribute savings for productive use, facilitate
investment, support and encourage external trade, and protect economic
entities against external risk.

Insurance and economic growth mutually influences each other. As the economy
grows, the living standards of people increase. As a consequence, the demand for
life insurance increases. As the assets of people and of business enterprises
increase in the growth process, the demand for general insurance also increases. In
fact, as the economy widens the demand for new types of insurance products
emerges. Insurance is no longer confined to product markets; they also cover
service industries. It is equally true that growth itself is facilitated by insurance. A
well-developed insurance sector promotes economic growth by encouraging risk-
taking. Risk is inherent in all economic activities. Without some kind of cover
against risk, some of these activities will not be carried out at all. Also insurance
and more particularly life insurance is a mobilizer of long term savings and life
insurance companies are thus able to support infrastructure projects which require
long term funds. There is thus a mutually beneficial interaction between insurance
and economic growth. The low income levels of the vast majority of population
have been one of the factors inhibiting a faster growth of insurance in India. To
some extent this is also compounded by certain attitudes to life. The economy has
moved on to a higher growth path. The average rate of growth of the economy in
the last three years was 8.1 per cent. This strong growth will bring about
significant changes in the insurance industry.

At this point, it is important to note that not all activities can be insured. If
that were possible, it would completely negate entrepreneurship. Professor Frank
Knight in his celebrated book “Risk Uncertainty and Profit” emphasized that profit
is a consequence of uncertainty. He made a distinction between quantifiable risk
and non-quantifiable risk. According to him, it is non-quantifiable risk that leads
to profit. He wrote “It is a world of change in which we live, and a world of
uncertainty. We live only by knowing something about the future; while the
problems of life or of conduct at least, arise from the fact that we know so little.
This is as true of business as of other spheres of activity”. The real management
challenges are uninsurable risks. In the case of insurable risks, risk is avoided at a
cost.