12. nsurance {EARNING GOALS "Afr completing the chapter, you will be able to: | 4 Understand the fundamental concepts of insurance. Perceive the role of intermediaries in the insurance industry. Know the functions of the regulator of the industry. we Provide a summary of insurance sector's performance. | 424 Introduction ‘a the BESI framework, insurance finds a prominent place.(FIRAHEMIBEHMERs in general and H80P- in particular are of great importance in an economy. A dynamic insurance industry efficiently to experiment with new ventures. Financial sector ‘forms have made greater changes in the profile of insurance industry. In a historical perspective, itsurance industry in India WS once (fiehelhanals/OR private sector. and the two state-owned behemoths SUBIGMAD Genera! Insaeance Corporation of Indi = enjoyed the "monopoly status in the life insurance and general insurance businesses. The Malhoora Committee's (1994) "commendations lead to opening up of the insurance industry to private sector. Starting. from 2000, { the industry witnessed the enery of many private insurers and competition in the industry became a "ality. Both the life insurance and the non-life insurance businesses found new players and products to c place and registered a significant growth. i in the Indian insurance industry. Devlopmens Authority of India URDADSRM UPS rcanc 0 of Insurance Regulatory au ential has nor yet beet Jia is observed ro b D0 + the insurance marker is gradually expanding and the insurance innovat ive products to w ful Tana give more powers co IRDAI to define the limits x ee mgs for agents, and qualifications of agents and surveyors. a aay fas a separate segment in the insurance re = ri oe See ae concepts, intermediaries, regulators and - In this background, we describe the insura . 89 overview of the industry structure in this chapter new insurance law is expected (0 L ————— ‘Scanned with CamScanner12.2 _ Insurance: Definition ° Insurance is one of the primary risk management devices available to the people, stands for a mechanism to protect against risks, hazards or dangers to life protection against financial less that may occur due to an unexpected event. By insurance a pere able to shift the risk and for this purpose, he has wham cil min Tena asmall amount paid by exchange for a promise by the insurer to insured in case of a large loss. Insurance policy is a contract between the insured and the insurer. The person who takes out insurance policy is the "insured’ and the company chat provides the insurance coves 7 the “insurer. The insurer is also called ‘underwriter’ in insurance terminology. The subject matter gf insurance is the life of a person in the case of life insurance and non-life insurance covers the risks of lon-life insurance is also called general insurance. Insurance can be defined as contract by which the insurer undertakes to make good to th insured any loss that he may sustain due to the risks or perils. The insurer takes upon the tisk himsel id by the insured. The contract of insurance is described as an aleatory contract meaning that the contract depends upon an uncertain event. But it does not imply thar ic is a speculative contract or a wagering contract, nor is it a gamble, The reason is that in an insurance contract, the insured is having an insurable interest and he is indemnified for his loss upon | the happening of the uncertain event. He does not make a profit out of loss Vaughan and Vaughan define insurance from two points of view “insurance is thereby 1 iew, ira the comingency insured against) that would exis if it were not for the insurans Second, from the view point of society, inurance is an economic device for reducing and eliminating rise through the process of combining a sufficient munber of homo ogencauts exposures in to a group to make the loves predictable forthe group as a whole. These ewo points of view leads to two important characteristics of insurance, viz., risk transfer by th insured and pooling of risks by the insurer, Insurance, as already stated, is a protection against financial loss arising on che happening of at unexpected event. Insurance companies collect the Premiums to provide for chis protection and losses are paid out of premiums collected from the insu ng public. The basic principle of insurance is che operation of law of large numbers. The contributions of many people in the form of premium are used ro meet the losses of few people. Thus, insurance is cese, ially an arrangemenc where che loses experienced by a few are spread au to similar risks. 12.3 Why Insurance? The : i need for insurance arises because risks are inherent in one’s life. Insurance is perceived by mat 45 tax saving tol. On the contrary th ‘0 provide: protection to the family (Bos 2! shows certain myths and facts about insurance). Insurance serves asa vehicle t the an individual. It helps one co plan for unforeseen mi or , 7 ve. Insuraine fers an opporeunicy on ee that might happen in fucure. In insurance produces such as ci hae has an impace on che finan goals of an individual. In the case of general insurance, Is of Bel coca Protection againse the risks of fire, Pe A business firm faces seve exposed to the perils of fire, a ral risks in the conduct of its 4 are ccidents and natural calamities are ‘ivities. The assets af « busines S. In che case of exports, the goods ‘Scanned wih CemScannerples of Insurance Mi peinele © 269 ox 12.1 Insurance Myths. gnsurance is for saving tax: Saving tax i just an added an added fhe main objective of INSUEANCE js ¢0 pw a age of insurance policy; ide protect ' * A oa ase amt fry fan MtON oyu ad our amy anc Insurance will benefit only after my death: to you and your family. One of the financial cushion to your family in Insurance policies provide protection Main objectives of taking insurance is to provide S€ YoU are not around but it's not thi ject a a 1 only objective, {surance helps you to build a corpus for yourself; provides you with comfortable retired life and even takes care of your lengthy medical bills 3, My group insurance is adequate: Your group insurance might be adequate but what : Onan e ; ifyou change the job? Once you change the job your group insurance will cancel off and you will not get any insurance benefit. So it is always advisable to take insurance other than the insurance offered by your employer. “4. Only the Breadwinner of the family needs insuranc family member needs insur- | ance. Your work profile changes the insurance needs but certainly does not eliminate eer, ' 5..Tm single and don't have any dependents, therefore I don't need any coverage: “© You might noc need a life insurance policy where your nominee is taken care of but you © certainly need a policy to take care of your health and retirement worries. |) Gaurtesy; HDEC Standard Life Insurance Company Limited. ‘exposed to risks arising from shipping and transporcation. Besides these, employees welfare has to tetaken care of, All the risks arising from the conduct of business operations need co be managed ‘hough insurance. Frum the economy point of view, insurance industry provides huge resources for development and punch, Investments made by the insurance companies in the securities of corporate firms indirectly creibute tothe capital formation in the economy. By undertaking various risks in business, che ‘insurance industry facilitates smooth conduct of business activities Besides this, insurance sector akey role in che social security offered co the weaker sections of the economy. 224 _ Principles of Insurance = Tsu al ‘These contracts are based on ance is basically . ee sees of insurance excepting the principle of a : y co all ¢ rakes nor opal ensure These principles appl xe ere. a discussion on the principles is provided. a contract wlerrimae fide! meaning chat it is a L-Beiaa . js Insurance i Principle of uberrimae fidei: Insuranc ved, As insurance involves cransfer of Bon sas gad fit of ee paris ONY ‘Scanned with CamScannerCh 270+ japter 12 nsutancy risk from one party to another, it is essential that thy the insured and the insurer; information about | disclosed so that the insurer can accordingly. Withhody of any relevant information may result in declaring the contract as void by the insurer oe fe discovers it. This principle applies to all types of insurance. ere must be urmost good faith bets een 2. Insurable interest: The principle of insurable interest in a conteact of insurance distinguish, it from a wagering contract The insured must have a pecuniary ineens the subject matter of insurance; either he must own part or whole of it, or he must be in wx a position that any injury to it would affect him adversely. An owner of a ship, for example runs the risk of losing his ship and the owner of the cargo runs the risk of losing his cargo wn the event of a sea peril. Both the owner of the ship and the owner of cargo have an insu: interest in the subject matter of insurance. 3. Principle of indemnity: Indemnity principle implies chat the loss incurred by the insu: is made good by the insurer. This is embodied in a contract of insurance excepe the le insurance contract. In a life insurance contrac, it ceases to be a contract of indemnity becuse fi payable on the happening of the event insured. “haces asf pce pan by te insurer. An insured cannot make a profit out of the loss through insurance. 4. Mitigation of loss: The principle of mitigation of loss demands chat in the event of 2 mishap, the insured shall act as though he were uninsured efforts that a prudent person will do to prevent the event or the peril. He should do everything the property: He must cake all reason insured property being damaged by the in his power to minimise the loss and to 5. Causa proxima: The principle of causa proxins states that th such a loss must have been proximately caused by the peril insu mate or the nearest Cause and nor the remote cause that must he been a succession of causes. If the cause of the can recover the amount insurer is liable for a loss has ainst, then the insuses ured against. Ie 1s the p sd unto where th imsurance contract is the principle of wndeme indemnity principle. We have stated that Principle of subrogation enables the preservation red Hauer has co indemnity the lass w he isa Wthe insured gets his loss fully undematied ty far the same toss from third parties, the would join the insurer, aul chen he gees compen! be more than tully talemnitied. This ne 0 mot ie insurance. Once the lain is Gnsuted’s) place; a8 insurers are subrogated ne loss trom some 's profit the rights of the insured. If the insured eeveis other person, hie has t0 p85 00 ther amount the 1 ‘our of the loss. compensation fur the Maurers. The insured cannoc make ‘Scanned wih CamScannery «.pistory of Insurance Industry a c “2 bution: Contribution is the ti 2 Cone atibacia ne cigte Of the insurer Coan the esibution arses in the os a iti rom eters sme payment of dou! ce than one contract with reg; le insurance. ie ine tan oe one en reganl to the same subject ee ee eee ance total value ater and the to Be ral val of the los say aE an the al amount of h circumstances, the Smee according to the contri eae to the contribution principle, the afer having pai ,Fecovers the amount that he has paid inoren tyne cha fa bher insurers. paid in excess of his share from 425__History of Insurance Industry a — - Indian insurance ae has a chequered history. It has evolved over time heavily drawing from ee oes rst insurance company (Oriental Insurance Company) was started in Kolkata in 1818 In the next 100 years, the numberof insurance companies operating in India went up co about 30. Both foreign and domestic companies were operating inthe industry. However, the growth of dindustry was not withoue problems. Alarmed by the fallin the ethical standards ofthe insurance conpanes, the Government of India nationalised the industry in ewo phases in 1956 (life insur anc) and 1972 (general insurance). Thereafter, the insurance business was run by two state-owned, ‘arporations - LIC and GIC. "After nationalisation, the insurance business had a solid growth in terms of its reach but ic was felt that insurance industry was not fully responsive to customer needs. Although the Committee on Reforms in the Insurance Sector (known as Malbotra Committed) which went into the question of reforms in the insurance sector recommended in 1994, che throwing open of che ‘ecwor (0 private participation to induce a spirit of competition among the various insurers and to provide a choice to the consumers. The Committee also felt that such a broad basing of the industry will ensure a beceer penecracion of the insurance market (je. ratio of premium to GDP) hich remained at very low levels in comparison to some of the developing countries in the Asian region. | Fee Another notable outcome of the Malhotra Committee recommendation wes the vas oe Inunance Regulatory and Development Authority IRDA) ‘Act in 1999. This Act came Ee cane rd ‘ A vate companies. the ged debate on the issue of opening up the insurance sector to private Cor i teal insurance industry was liberalised and many private sector firms, both foreign and domestic niet the in Pee eee Twas set up as an independent regullacory auchority 2 tents eer in a Big we IRDAT was seu 0 industry fd ¢0 follow dhe eau he functioning of the insurers and other incermediarie enor dhe industry The industry : derly gre 'ons of IRDAL. ‘The establishment of IRDAL ed oe ordi a veere it as seen the Full PY of ich was i id toa : vas passed Compete force in rin March 015, the Insurance Laws (Amendment) Act was Pas fc cess in the : the Ensuring, up he reform proces Ca nee sep in ue new arendents Pave the fue gr Do oil i sgones in the ISTXY ae further growth Ae a tor, Table 12.1 is 9 summary Sf imporcane miles! ad : dian insurance industry. ‘Scanned with CamScannerms SY tra, Table 12.1. Milestones in the Indian Insurance Industry Yeo Important Milestomes im the History of bwveramee mt 1818 Beginning of Inturance Business in India ~ Searting of Onental Inuarance Compa) Kolkata 1870-1900 Dominance of foreign unuarance coenpanics 1 Inehia 1938 Passing of Insurance Act 1938 ~ first lepalacion covering all forms oF tonuracee 1986 Nationalisetion of Life Insurance Formation of Life Insurance Corporation of Lodes (LIC) 1972 Nationalisation of General Insurance business ~ 107 eenpanies grouped in ts 4 companies ws Maltoers Commater Repent ~ Recommended entry of pervatr sector ipte re mm» Insurance Regulatory Development Authority of India (IRDAT! - utomomncus eestty 2000 IRDAL incorporated as warwtory Beaty GIC Restructured and cnewerted teste & eee aon Inwursnce Lows (Amendiment) Act ~ Rasen 12.6 Types of Insurance feefa Siew Insurance business as broadly classified as (2) lle os general i the workd pattem of keeping the life umurace sox words, po composite imvurance business @ allowed os thir tee are offered as nder polices offering the health end accude insurance companies have entered the health inure ener. The range of insurance products offered by us has bought in many changes in the conventions! is ’ plans, pension plans and growth plans in the product catalogues of wnmurae describe the product festures of select items in life a @ Life insurance According to the Insurance Act, 1938, life insurance is the bunness of sace upon human life inchading ary contract, whereby the jseyme The contract requires payment of permis for a term and un cane the omdonndoa of the poticy, he will be paid an amount as per terms of the policy. Life inser tthe family in the event of the unfortunate death of the heestwinoer of the Lide inwurance policies have different roles to play. Fins, insurance p ‘the Gnencial protection wo the insured, Apart from risk protection, like ap jovestment avenue, In life insurance, unlike the non-life insurance products, the b y benefars on survival at the end of the tere of the Policy. In ocher words, of one GAS?” ‘ ce policy for 20 years and survive the term, the aren malt a gall came back ro the insured with edded reruns In che unéort cand general of money ‘Scanned wih CemScannersypes of Insurance e : © 273 re of the policy, the family of the deceased will rec i ici He ive the | * fe insurance policies are eligible for income t he sum assured. Besides this, premiums ax deductions, penefits of Life Insurance \ func os a mumberofaanages ons available under the life policies. In addition, aracteristics similar to other investments, We el peso, ‘The main advantage is the protection fax benefits accrue to the individuals and it pos- or = hed ‘We evaluate the benefits of life insurance as follows: isk cover: Life insurance gives full protection agai i igainst the risk of In the event of death of the holder, the insurance money am a of the pice accrued is paid to the family. along with bonuses . Savings habit: Life insurance encourages the habic of savings or thrift among the public. Premi- ums can be paid in instalments. For example, the monthly deduction from salary on account of premium under the salary savings scheme is a convenient means of savings for che individuals. Liquidity: Life insurance policy can serve asa security o avail the loans. Even for other com- mercial loans, the insurance policy is accepted as a security. The main benefit is that it results in immediate liquidity to the holder. ‘Tax benefits: Insurance is one of the common methods adopted to derive savings in income tax. The premiums paid on life insurance policies are allowed as a deduction in computing the taxable income of the individuals, Because of the tax relief available, he effective cose of the premiums paid by the holder of the policy will be less. 5, Earmarking: Life insurance policies are sometimes taken with 2 specific goal in mind. Ghildrens education, marriage and retirement are some of the specific goals with which the policy is introduced. * Ufe Insurance Policies ; here are differences in the characteristics of each of the Life inurance policies are of different types. There are piles. A diceuesion on the types of insurance policies is as follows: 1. Whole life policy: Life insurance polici ife policy or an endowment rai. . Ff " wi ‘A whole life policy, as the name implies, sins death espn Wee ithappens, Under chi plan, che policyholder pays eeu" Pre an i deh, lowing hich the money is handed over co che family. This PolCy Hower is co ses the alin needs of funds during the post-retirement years. The Sump csr ince pala seyoungaee . fa y co meet Its 5 Usually a small ane and at the time of death it may be too low for che family ro needs. ies may be a whole li is an insurance cover again: rages of risk cover and financial ‘industry. In an endowment the cerm of the policy. In case the sum assured ine che adval he life insurance survives 1 has €0 pay - Endowment policy: Endowment policies con savings, It is a popular insurance policy in 8 Policy, the sum eesured is payable even if the insures of death during the tenure of che policy he nsuranss compa lust as any other pure risk cover. gees ch d Money-back policy: A money-back policy is seruccured er eee a i proves oh Sums at regular intervals for meeting the anticipated €XPe! ; ‘Scanned with CamScanner274+ Chapter 12/Insuraneg is paid at regular intervals and on survival, the remainder of the sum assured is paid. tn the event of death, the sum assured is paid in full. . Term insurance policy: A cerm insurance is a pure tisk cover for a specified term. The sum assured is paid only when the death occurs during the specified etm. If the policyholder survives the tetm of the policy, no amount is paid to him. In this sense, itis a policy for 109%, risk cover. There is no element of savings or investment in such a policy. . Unit-linked insurance plans: ULIPs are currently a popular life insurance product and the insurance companies fiercely compete in selling the ULIPs. A ULIP is one in which the holder is provided with a life insurance cover plus the advantage of getting the returns from a portfolio of securities comprising debt securities or equities or both. Out of the premium received, one portion is meant to face the risk to the life of the holder and the other portion is invested in a portfolio t0 yield higher returns. ‘Table 12.2 shows the life insurance products of LIC. The list is not exhaustive and gives only the names of select schemes. The products of the other competitors in the private sector are almost on the same lines. Table 12.2 Select Life Insurance Products of LIC Answrance Plan Names of Select Schemes Children Plans Jeevan Kishore . Jeevan Anurag Endowment Assurance Plan Jeevan Anand . Jeevan Amrit Plans for High Net Worth Individuals Jeevan Shree . Jeevan Pramukh Money Back Plans Money Back Policy 20 years Money Back Policy 25 years Whole Life Plans Jeevan tarang Term Assurance Plans Anmol Jeevan 1 2-Year Temporary Assurance Policy Joint Life Policy . Jeevan Sathi Plans Pension Plans Jeevan Nidhi Jeevan Akshay Unie Plans Market Plus Profit Plus Special Plans New Bima Gold Jeevan saral Group Schemes Social Security Schemes Source: hetp://wwelicindia.com ‘Scanned wih CemScannertypos of insurance 12 ° 275 Group Insurance ‘surance is an insurance contract that provid Fp i o provides a cover for a group ‘of I i ji the employer SPECT ing dl a ee of employees whose lives ate to be oveed benefits ant te i Ja condos on which ee conta i nee i, et. The atoone of insurance eve eermined 00 the basis of formula and is not decided by the individuals forming the Ge oe deci s cheaper than che ordinary if instance plies. acid Key Man Insurance ao Mey man insurance is very common in the cutrent competitive business environment ‘When 1 ey employee.leaves an organisation, it disturbs the continuity of business. Given the * ad of attrition rates in certain. sectors in the economy, there is a greater need for key man sasurance. Key man insurance is basically a life insurance policy taken on the life of one or more persons whose role in the firm is considered to be important for che conduct of business of the frm, The aim of key insurance policy is to indemnify the firm for the losses caused by the sudden exit or death of key employees. LIC’s Jeevan Pramukh is an example of key insurance policy. Bt Micro Insurance Micro Insurance refers to provision of insurance cover to specific marker segment, that is, low incame persons. Protection of assets and lives againse insurable cisks of target population such se mice entrepreneurs, small farmers and che landless, women and low income people is the urpose of micro insurance. Micro insurance products are often bundled with micro-credit and Miigosavinge, The premiums on the policies are low but the benefits arising fom the policy is comparable co normal insurance. Persons in the non-formal sectors who do not have access to commercial insurance or the social protection schemes offered by employers are benefited by micro insurance. In order to facilitate penetration of micro insurance to lower income segments of population, IRDAL has formulated che Micro Insurance Regulations 2005. This step provides » plaeform co distrib ute insurance products which are affordable to che rutal rand urban poor. Micro insurance is now an integral par ofthe country’s wider insurance system. (The Micro Tnsurance regulations have allowed the NGOs and Self Help Groups (SHGs) to act as agents °© insurance companies in marketing che Mico insrance products ~ both life and ete Since April 2013, several other ences such as distict co-operative banks, regional rural tanks, individuals who are banking cotspondes are led o be appointed ag micro insurance agent feiliaring berer Penson micro insurance ness, . General insurance putanee other than life insurance is called general insurance oF sone insurance. This section i insurance business includes mocor insurance fire insur home insurance, lability insurance, Under insurance, etc. Losses arising co the property due to fire, thefe and perils of sea are covered ‘ke general insurance. Lbs co pay compensation © chird parties due to the occurrence of an PE such as acidene ave covered by gener insurance, OSE [OSES covered under general insurance ‘Scanned wih CemScanner276 + incerruptions and personal losses such as death, sick neg include loss of income, losses due to busines or accident, ‘a contract to indemnify the sured against the loss due to ruction of property caused by fire, Only che actual loss incurred by che insured pers reomidered. even if the property has been insured for a higher value, Loss of prof aoe noni under dhe special cype offre insurance policies. Under this eye, the insured j acre for the loss of profits tha he faces due co interraprion or cessacion of bu resule of fire. 1. Fire insurance: Fire insurance 1eSS.as 2. Marine insurance: A contract of marine insurance js one in which the insurer undertal to indemnify the insured against marine losses, chat is, losses incidental co marine adven. ture, Marine insurance policies may cover different insurable interests such as hull insura freight insurance, oss of hire insurance and loss of profic insurance Marine insurance off protection against perils of the seas such as pirates, war perils, jettison, etc. surance is one of the largest segments of the gene inaueance business. The insurance policy covers only a limited liability to third parc and own damage or damages to the vehicle. Personal accidents cover for owner — driver i another aspect covered by the policy. A comprehensive moror vehicle insurance policy, the other hand, contains an increased cover for the third party liability for bodily injur and/or death, damage to the property of third parties and loss or damage co the vehicl insured 4. Other insurances: Social security insurance in the form of pension plans, disability benef ere. to the weaker sections of the society, crop insurance, flood insurance, earchqual insurance, cattle insurance and personal accident insurance are some of the general insurat products available in the industry. 3, Motor insurance: Motor vehicle Reinsurance Reinsurance is the insurance for insurers. Ic is a mechanism by which an insurance company is a to protect itself against any major risks in its operations. A comparatively large single loss or a lag number of small losses could seriously affect the performance of an insurance company. To prot against catastrophic losses, reinsurance is adopted. Reinsurance serves the purpose of spreading the risks. A portion of risk is passed onto feinsures The act of transferring a part of the risk ¢o the reinsuring company is called ceding and the port of the risk passed onto the reinsurer is called cession. In a reinsurance arrangement, the insura company transfers the premium to the reinsurer. The reinsurer pays a commission ro the insur company called ceding commission. The reinsurance business mainly consists of many foreign reinsurance companies. The Gover men of India has notified the GIC as the ‘Indian Reinsurer’ under Section 101A of the Insurin ‘Act, 1938. As per this Section, every insurer shall reinsure with the Indian reinsurer such percen of the sum insured on each general insurance policy as may be specified by IRDAJ, with the Prev ous approval of the Central Government, after consultation with the Advisory Committee. At pf ent, the Indian re-insurer (GIC) is entitled to receive obligatory cessions of 5% from all the di non-life insurers. - seal ‘Scanned wih CamScannerpegulatory Framework and Market intermediaries wv 2277 reinsurance regulations are intended to improve the solve honoured when Gu arise, The insurance eae Cae insurer so.that claims he are next financial year 45 days in advance. ae fecwired to file thei seinsurance ‘companies outside also. According to IRDAI, the inane can be done with those re- peneral insurance business shall be guided by the Tate ome of very insurer, ciples viz: lle io ntyin | Tomasmise retention within the country 2, Todevelop adequate capacity. 4, Tosecore the best posible protection forthe reinsurance oss incurred i. Tosimplify the administration of business. 1 Bancassurance B Berane’ isa erm chat is coined from banc’ and sssurance Ic cefers to the banks. selling Feeurance products. It is popular in Europe where most of the insurance products are ‘sold by se Banks become a channel of distibucion inthe marketing of insurance proces. According co the erm bancassurance refers co banks acting as corporate agents for isurers o distribu wean products, Banks could sell life insurance products and general insurance products under ameasaurance strategy. This strategy integrates the two sectors to reap the benefits of synergy. wigan sel standalone insurance products or add-ons ¢o the bank products under bancassurance Freeumple,ifa bank extends a housing loan, an insurance cover can also be sold along with that as anadd-on product. Refomts made in the insurance laws in March 2015 contemplate some modificrions fn the anaanane schemes, So far banks had tie up wich one life, non-life and one stand-alone health issuance companies, A change has been made in the insurance laws recently that obligates che banks to have tie up with more than one insurer in each of the segments. 127 Regulatory Framework and Market | termediaries Insurance industry in India is governed by the (a) Insurance ‘Act, 1938; (b) Life Insurance Corporation India Ace, 1956: (0 General Insurance Business (Nationalisation) Act 1972 and (d) Insurance Regulzory and Development Authority Act, 1999. These legislacions concain the necessary legal ovsios concerning the insured, insurer, incermediaries and he regulatory body of te industey 1. Insurance Act, 1938: Insurance ‘Act is the first pice’ of che starurory measure € Fete late che companies carrying on all cypes of insurance busin Ian Act co cns iat and amend the law relating to the business of insurance: The Act lays clown tte ance tegard to registration, compulsory deposits, investmenr™ in agents, surveyors and loss assessors. The Act provides for che estab Sry Committee (TAC) to control and regulate the races, advancages a cies. The that may be offered by che’ insurance firms with regard co general Insurance c ace the changes in the oe ns wie re ro accommodace the < urance Act has been amended from time €0 110 He eae ection, licensing of establishment of Tariff Adei- terms and conditions to nacional Structure of the industry. One such amendmene rel! Pusiness in 1956. ‘Scanned wih CamScanner278 + : Chapter 12/insup, 2. Insurance Regulatory and Development Authority Act, 1999: This Act provides tng establishment of IRDAI, The objective of this Act is to protect the policyholders’ interese Promote an orderly growth of the insurance industry ®@ Insurance Regulatory and Development Authority of India Insurance Regulatory and Development Authority of India was setup 10 2000 as an autoney body to regulate and develop the business of insurance and reinsurance in the country as pep Insurance Regulatoty and Development Authority Act, 1999. The main objective of setting IRDAI was to promote market efficiency and ensure consumer protection The IRDAI was entrusted with the duty to protect the interest of holders of insurance policies to regulate, promote and ensure orderly growth of the insurance industry. The Authority envisiq better insurance coverage to the Indian citizens besides augmenting the flow of long-term fi na resoutors tw finance the growth of infrastructure. Simultancously, efforts are also to be made ine spread of insurance in social and rural sectors. Efforts have been made co bring the Indian insu market to international standards in areas of fi nancial viability, competence, technology and pr tial regulations, ® Mission of IRDAI The mission statement of the IRDAI contains the following objectives with which ic has been IRDAI was established: yholders. To protect the interest of and secure fair treatment to poli 2. To bring about speedy and orderly growth of the insurance industry (including annuity superannuation payments), for the benefit of the common man, and to provide lons-t funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, dealing and competence of those it regulates. 4. To ensure thar insurance customers receive precise, clear and correct information about tacts und services and make them aware of their responsibilities and duties in this tesa a 5. To ensure specdy settlement of genuine claims, co prevent insurance frauds and © talpractices and pur in place effective grievance redressal machinery. 6, To promote fairness, transparency and orderly conduct in financial markees dealing insurance and build 4 reliable management information sy: dani f ystem co enforce high seandat financial soundness among market players, 7. To take sction where such standands are inadequate or ineffec tively enforced 8. To bring about optimum amount of self-regulation in day-to-day working of indusery ¢ tent with the requirements of prudential repulatidn, Figure 12.1 brings out che regulatory domain of IRDAL, I Provides the necessary regulations to" functioning of the various stake holders in the iasurance industry. IRDAL is che regulator, supe and monitor of the insurance industry, ‘Scanned wih CemScanneral en a 279 “Insurance Com 5 panies (Public and Private Sector) Thitd Party ‘Administrators uiveyors and Loss ‘Assessors Insurance Brokers and Consultants Insurance Ombudsman Insurance Associations / Insurance Councils Tariff Advisory Committee Figure 12.1 IRDAI's Regulatory Framework. @ Functions of IRDAI ‘The statutory functions of the IRDAI include the following: 1. Registration (licensing) including renewal of registration of insurance companies. 2. Licensing of insurance intermediaries such as agents, surveyors and loss assessors, ‘Third Party Administrators (TPA) — health services, brokers, etc. 3. Accreditation of agent's training insticutions. 4 Monitoring all non-tatff products (‘ile and use’ including pricing of Conditions thereof, etc. products, terms and , including review of Supervision of the fanctioning of the companies and intermediaries including ‘company annual statements. * Formulation of regulations. Enforcement of discipline. ‘Scanned wih CamScanner__Chaptor 12/Insuray 8. Marker conduct surveillance. 9 Consumer education and assistance. @ Insurance Ombudsman The institution of Inunace Ombudsman has greatet 0 interest of policyholders and also to build up their confidence ; helped to generate and sustain the faith and confidence among the consumers in insurers, ‘The offig of Insurance Ombudiman was creaced by the Government of India in 1998 wich che purpose of quig disposal of the grievances of the insured customers. ‘The Insurance Council which is the adminisry tive body has appointed 12 ombudsmen across the country at different locations and has provi them with the necessary infrastructure. An ombudsman, under the rules, has been cntrusted with two functions — conciliation and award making. The insurance companies are required to honoy the awards passed by an ombudsman within 3 months. The awards are binding on the insurang companies; the customer, however, can resort (0, in case he decides to do so, other methods of grey ance settlement, The Insurance Ombudsman is empowered to recei personal lines of insurance from any person who has any grievance a plaine has co be in writing, and addressed to che jurisdictional ombudsman within who: branch or office of the insurer complained against is located. The complaine can relate co any of th following: 1 importance and relevance for the protection y che system. ‘This institition hy and consider complaints with regard inst an insurer ‘The come territory 1, Grievance against insurer. . Partial or total repudiation of claims by the insurer. . Dispute with regard to premium paid or payable in terms of the policy. 2 3. 4, Dispute on the legal construction of che policy in so far as such dispute relate to c 5. Delay in secclement of claims. 6. . Non-issue of any insurance document to customers after receipt of premium. The limi of an ombudsman's powers is at present prescribed as Rs 20 lakh. The Insurance Ombuds man Scheme is complementary co the regulatory functions of IRDAI that has been mandated take all necessary steps to protect the interest of the policyholders. The institution of ombuds! has evoked a good deal of public appreciation as is evident from media reports and performa appraisal made by IRDAI. M@ Insurance Associations/Insurance Councils about the Insurance Councils of the Insurance Association of India. There are wo councils Life Insurance Council and the General Insurance Council — which will function as a self-regulatin organisation for the life insurance and general insurance businesses, respectively. The Council constitured with representatives from all registered insurers. Two designated members from ‘Scanned with CamScannerpegulator Framework and Market Intermediaries 6 281 cy ss take place regularly are focused on matters of market conduct, ethical pra oss opted and behaviour of the intermediaries in che insurance industry, The Council sponsible £0 aid, advise and assist insurers for setcing up standards of conduct and sound be resrier elicient service to the holders of insurance policies. They are also required © eet IRDAT ie the matter of controlling the expenses of insurers with regard to commissions soak expenses insurance Advisory Committee fhe IRDA ‘Act requires che constitution of Insurance Advisory Committee and at present there are rs in the committee. The membership consists of people drawn from the industry, insur es, wornen's organisations and consumer activists. The object of this committee is to advise SeIRDAL on maters Felating to making of he regulations and therefore it plays a key role in the ae an of policies. The regulations issued by the IRDA comes after due consultation with the committee. a Tariff Advisory Committee M cisascautory commiccee under the Iniance Act to control and regulate the rare, advantages, vipsand conditions that may be offered by che insurers with regard co general insurance business wining to fire, marine, motor, engineering and workmen compensation. With detarifing on the eae now, the role of TAC has changed co collecting data, monitoring the underwriting heal of thecompanies, etc. According to IRDAI, in the new tarff-ftee regime, TAC will perform che func- vee nauh as collection of data on premiums and claims, analysis of such daca and dissemination of fhe maulteto the insurers. Te will repore to IRDAT on the underwriting health of che market and any sberations in market behaviours. Constitution of expert groups at che request of the General nrnare Council to look into underwriting issues and recommend necessary action shall also be che tsponibility of TAC. Ie also organises training to underwriters at the marker level and attends 9 : piblic grievances on the availability of insurance and try co resolve the issues by discussion wich A ‘insurers, ~ y © Intermediaries f Agents and other intermediaries act as the bridges becween the insurer and che insured; they play a vial role in increasing the breadth and depth of the insurance marker. Intermediaries in the insur- ‘nce industry are the insurance brokers, surveyors and loss assessors, and TPAs. Guidelines have isued for the functioning of these intermediaries including the capital requirements for each 1. Agents: Insurance agency is the most common method adopted for selling the insur- ance products. Agents have to obtain a license to carry ‘out their activities. Now, we also have corporate agents wo are permitted r0 do insurance business. The insurance agents and Corporate agents ate Key distribution channels to any insurer. To infuse professionalism in the insurance agency system, the IRDAI has strived hard to shape the development of insurance Aen by providing for che firse time minimum educational qualifications at che poine of f éntry, and practical training followed by an examination. Insurance Insite of India, an institu, «Not eurrendly recognised by IRDAI, conducts the qualifying examination forthe agents and has been asked to bring out books and training material in various vernacular languages. <= ‘Scanned wih CamScanner282 + As per IRDAI regulations, compulsory practical craining for prescribed Sumber of jy approved institutions is necessary for the applicants who want to become agents, Besides the agents have to follow the code of conduct prescribed by che IRDAI regulations 2. Insurance brokers: Insurance broker is the person who, for remuneration, arranges j ance contracts with insurance companies on behalf of clients. IRDAI (Inserane Regulations 2002 concain che provisions relating 0 licensing of brokers, their fur . the amount of capital required and the code of conduct ¢o be followed. The regulatin also describe three categories of insurance brokers — direct broker, reinsurance broker composite broker. A direct broker means an insurance broker who carties out the f tions in che field of life insurance or general insurance or both on behalf of clients, A wm surance broker arranges reinsurance for insurers with insurance companies or reinsurey companies. Composite broker means an insurance broker who arranges insurance ag as reinsurance for his clients. The minimum capital required for a direct broker js Rs lakh; for a reinsurance broker it is Rs 200 lakh and for a composite broker the amoune Rs 250 lakh, Brokers act as representatives of the policyholders although they are paid by the insuren Asa result, chey are expected to bring beter service to the clients in several areas such ae * Monitoring the insurance market, the credibility of the players and the quality of servi they render. Analysing the various products available in the market and assist the clients in the products that suit their requirement. Helping the client in the completion of the proposals, conclusion of the contract and r der subsequent service, if any. * Assisting the client in the sertlement of claims. 3. Surveyors and loss assessors: They are licensed under the IRDAI regulations, The fund tion of the surveyor or loss assessor is to determine the amount of loss suffered by the inst Person due co the occurrence of the peril. No insurance insured gets a report from the approved surveyor or loss ass loss assessors, the IRDAI has done a categorisation based o1 claim can be settled unless th essor. In respect of surveyors am nthe skills and experience oft icensing of TPAs and an imporcant condition a shall be Rs 1 crore and the working capical shal ime. There are about 27 licensed TPAs in Indis the minimum equity of such companies be less than Rs 1 crore at any point of ti services of TPAs are not popular among Jook:into the functioning of TPAs has s1 ‘Scanned wih CemScannerIndustry in India: A Review ja nour w * 283 serve as a selEreBUlatory organisation of pospitals, TPAs wi . ‘TPAs and consumers. ith members from insurance companies, ea ‘ plete transformation ith Fn of private sector into the industry, st fst one widening, of the distribution channel, etc. led to an impressive grows i insures, both life insurance and general insurance has sheets been a spurt in the premiums collected by qensunce market in India are summed up as fol » Fegulation of intermediaries Bone up steadily since the year 2000. the insurance companies. The characteristics of lows: 1, Structural change in the insurance industry: The structure of the insurance industry is depicted in Fig. 12.2. It shows how the structural changes have been effected to bring in ism to the sector. Table 12.3 gives the number of registered insurers in India as of 3lst March 2016. There are 24 life insurance companies, 24 general insurance companies, and 5 stand-alone health insurance companies in India. Adding the one re-insurance company (GIO), the total number of insurers is 54. The total was 42 as of March 2008. Of the 54 com- panies eight are in the public sector-two are specialised insurers - ECGC and AIC, one in life Indian insurance industry Public sector companies [Private sector companies General Re-insurance| Life General Health ‘National United GIC | New India Oriental India. Figure 12. Structure of Insurance Industry in In ‘Scanned wih CemScanner. Chapter 12/losurancy Table 12.3. Number of Registered Insurers in India (as of 31.03.2016) te Sector Total ‘Type of Insurer Public Sector Life 1 24 General 6 24 Health 0 5 5 Re-insurance 1 0 1 Toral 8 46 54 Source: IRDAI Annual Report, 2015-2016, p. 8. jnsurance (LIC), four in nonclife insurance and one in reinsurance. The remaining 46 compa. nies are in che private sector. The increase in che number of companies is evident and wich the changes in the FDI policy the number is expected to grow furcher. Among the private sector insurance companies, five companies (Star Health, Apollo Munich, Mex Bupa, Religare and Cigna TTK) are stand-alone health insurance companies. Most of the private insurance companies are joint ventures with recognised foreign players in the industry. ‘According to Suits Re estimates as quoted in the [RDAI Annual Report 2015-2016, globally the share of life insurance in cotal premium was 55.6%. However, the share of life insurance business for India was very high at 79.6% while the share of non-life insurance business was small at 21%. In life insurance business India is ranked 10th among 88 countries and 18¢h in global non-life insurance business. 2. Level of insurance penetration and insurance density: Two important indicators of the evel of development of insurance sector in any country are: (a) level of insurance penetration which is measured as percentage of insurance premium in GDP and (b) insurance density ratio which is calculated as the ratio of premium to population (per capita premium) The level of insurance penetration and insurance density in India is shown in Table 12.4. During the first decade of liberalisation of insurance sector (2001-2010), the level of insurance penetration in the insurance industry has gone up from 2.7196 in 2001 to 5.10 in 2010. ‘Thereafter, it has declined to 3.9% in 2013 and further to 3.44% in 2015. The world average is 6.3% in 2013. India’s insurance penetration rate of 3.10% is low compared with countries such as USA (7.59%), UK (11.5%), South Africa (15.4%) and Singapore (5.99%) The level of insurance density also shows similar trend. It increased from 115 USD © 64. USD, then declined to 54.7 USD in 2015. Life insurance business exhibits similar trends as that of the overall industry. It peaked to 55.7 USD in 2010 and declined to 43.2 USD ia Tope teen! ane a steady trend as for as the penetration is concer ape DAUSD to 115 USD aa rm etween 0.56 and 0.80. However, the density has a” a See USD 115 USD. 1 hele of insurance density has registered an increase Df cintiderble uider insurance in th industry levels these are coo low implying chae cher u e Indian market. This vhy che foreign insu aie enipasies rush @ dis Lalani his is the reason why che foreig jan insurance market for business. .. Growth in life i . a 3. trends in life insurance: An outstanding feature of che industry in the post liberalisation period was the unprecedented growth in the premium, especially, in life insu ‘Scanned wih CamScannery x surance nausty in Indi: A Review a + 285 if Insurance Densit; 424 Level 0 y and Insurance Penetration i wa A es Netration in India for Life Non-Life Industry Density Penetration Density Penetration Densit enetratic Saar (usD) (Percentage) (USD) (Percentage) a USD? (nae sar 3 215 24 056 us 271 2005 18.3 253 44 0.61 227 3.7 2010 557 440 87 O71 644 5.10 3410 3.10 0 0.80 52.0 390 soi 440 26 10 07 38 33 ns 82 2720. US 072 547 344 Senn IRDAI Annual Report 2015-2016, p. 6 va Only selected yeas’ data from the Source are shown, sector, The first year premium represents the fresh business done by the insurers. The other segment is the renewal premium. The first year premium in 20132014 recorded a growth of 12% over the previous year (2012-2013). During 2015-16 the first year premium registered 253% growth over the previous year. LIC registered a growth of 24.69% while the private secior showed a growth rate of 17.66%. On the basis of premium income, the market share of . LIC decreased from 73.05% in 2014-2015 to 72.61% in 2015-2016, In contrast the market share of private sector life insurance companies increased from 26.95% to 27.39% for the same period. 4, Growth trends in’ general insurance: The general insurance (non-life) business has 29 companies ~ six in the public sector, 18 general insurance companies, and 5 stand-alone health insurance companies in the private sector. The private sector showed a growth of 13.12% and public sector companies showed a growth of 12.08% in 2015-2016 as compared to 2014-2015. 5. Removal of tariffs: General insurance premiums were subject co tariffs or price controls, Premiums were determined by an outside agency and not the insurers. In 2005, the IRDAI announced a road map where it laid stress on an orderly transition from tariff marker to free market “Ie os fele chae detariffing is an essential prerequisite for healthy growth of the market, It was announced chat insurers can determine their rates from 1 January 2007 for all risks that they undertake. In a free market, insurance compan will be permirced: £0 tailor the products co meet specific requirements of the customers, According to IRDA, in a market free of tariffs, any responsible insurer should have in place internal capabilivies to do underwriting, have rating support, and develop policy cerms and conditions, which maintain # fine balance between the interest ofthe insurer and ee insured. Introduction of innovative insurance products: The transition from nationalised sector ‘oa free market system has been smooth and the opening of the sector augured well a the industy, The tae ney market enlarged co offer business for every player the in. petition has brought more product innovation and better customer servicing, Innov ‘Scanned wih CamScanner ccsChapter 12/Insurg 1 to the products (called *riders) 08 well asf tribution channels adopted to market the products, Now, banks and NBECs are allow Corporate agents have come ina big way Co aur dt to announce the ULIP guidelines to enh ted risks. Innovations were geet have come in the form of benefits antached sell insurance produc ‘The popularity of ULIPs made the re whator : ; fed and the assoch transparency on the charges involv retirement plans and pension plans (00. One of the concerns expre sed at the time of up the insurance sector was whether the insurance Frm would serve the tural and sector obligations with the same zeal as it was ia he pre-reforms period, Further, the ore renee and feurs were expressed as (0 the continuation of soci TRDAL played a crucial role in ensuring chae certain minim una areas by the newly started private insure TRDAL to lay down certain obligations on the insu 7. Rural and social sector obligations: seemed to be obligations, In this regard, the business should be done in the ance Act was amended authorising the towards rural areas and weaker sections. e-ingurance and Repositories: e-inimnanee is about digitisation of inst tate improved service'to policy holders. In this direction “Inner: Repasitory’ comy ree from September 2013. An insurance repository is an IRDA registe srance policies in electronic form (e ‘tories in India now. The functioning of reposito «in the case of stock market securities. A reposi a depository doing demat of p ervice requirements, All come i company for maintaining data of ins on behalf of insurers, There are five rep is similar co the functioning of depositori is doing demat of insurance policies in the same way securities, Repositories act as a single stop for several policy health insurance and general insurance policies chat are issued by insurers a insurance ible to be held in electronic form. Blectronic form of policies ensures sale ody of weed it offers the convenience of holding all insurance policies in a single such as change of address by the insured could be macle aa single poi sured with more than one insurance company. Service request respect of all policies held by the the growth of the economy, Insurance provides the nt-with new projects: ricly andl has IRDAL Act, 9 activi industry. Regula and che if market he amoul Insurance industry's role is critical for needed risk cover for the entrepreneurs and encourages them to experimel ance, an industry in the public sector, was opened up for the private sector rece greater strides in the last two decades. The credit goes to IRDAI setup under the Entry nocms for private insurers, | ing of market intermediaries and monitoring ch of insurance companies were all strictly followed for an orderly growth of the with regatd to solvency margins for insurers ensured that they are financially strong ests of policyholders are safe guarded. Insurance market has expanded hugely and the new products to serve differene segments, The growth of the industry is evident from premiums collected, number of offices opened, the number of policies issued, the amount of Premiums and the numberof agents appeinced. In site of ehis growth trend, sell itis fee y has the potential to grow further by exploring new markets. ‘ Ins "ens industr) ‘Scanned with CamScanner