CHAPTER-I

INTRODUCTION

1.1 INTRODUCTION

Insurance is the outcome of man‟s constant search for security and finding out ways

and means of something to meet the hardships arising out of uncertainties of future. Here, the

persons exposed to similar risk contribute some amount periodically and those who actually

face the loss are indemnified out of these funds.

General Insurance deals with the exposure of risk of goods and property whereas; life

insurance is a way to meet the contingencies of physical death and economic death. In case of

pre-matured death of the assured the proceeds of the policy are paid to the beneficiaries and

annuities protect the assured against economic death when he lives too long to arrange for his

necessities.

Life insurance is a contract for payment of sum of money to the person assured on the

happening of the event insured against. Usually the contract provides for the payment of an

amount on the date of maturity or a specified date at periodic intervals or at unfortunate

death, if it occurs earlier. Among other things, the contract also provides for the payment of

premium periodically to the insurer by the assured. Life insurance is universally

acknowledged to be an institution which eliminates „risk‟, substituting certainty for

uncertainty and comes to the timely aid of the family in the unfortunate event of death of the

breadwinner. By and large, life insurance is civilization‟s partial solution to the problems

caused by death. Life insurance, in short, is concerned with two hazards that stand across the

life-path of every person: that of dying prematurely leaving a dependent family to fend for

itself and that of living to old age without visible means of support. Life insurance guarantees

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full protection against risk of death of the assured. In case of death, full sum assured is

payable. Life insurance encourages long-term saving. By paying a small premium in easy

installments for a long period a handsome saving can be achieved. Loan can be obtained

against a policy assured whenever required. Tax relief in income tax and wealth tax can be

availed on the premium paid for life insurance.

The business of insurance is related to the protection of the economic values of assets

and every asset has a value. The assets are valuable to the owner because he expects to get

some benefits from it. The benefit may be an income or something else. Every assets lasts for

certain period of time during which it perform. None of them will last forever. Human life is

a great asset to a family and has immense value. There is an adverse or unpleasant situation in

human life. Saving through life insurance guarantee full protection against risk of death of the

saver also in case of demise, life insurance assures payment of the entire amount assured with

bonuses wherever applicable. Thus insurance is a mechanism that helps to reduce the effect

of such adverse situations.

Life insurance is a contract that pledges payment of an amount to the person assured

or his nominee on the happening of the event insured against. The contract is valid for

payment of insured amount during:

a) The date of maturity of policy

b) Specified dates at periodic intervals of policy terms

c) Unfortunate death, if it occurs earlier

Among other things, the contract also provides for the payment of premium

periodically by the insurer by the policyholder. Life insurance is universally acknowledged to

be an institution, which eliminates „risk‟, substituting certainty for uncertainty and comes to

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the timely aid of the family in the unfortunate event of death of the breadwinner. By and

large, life insurance is civilization‟s partial solution to the problems caused by death. Life

insurance, in short, is concerned with two hazards that stand across the life-path of every

person:

1) That of dying prematurely is leaving a dependent family to fend for itself.

2) That of living till old age without visible means of support.

The definition of insurance can be seen from two view points:

(a) Functional Definition

(b) Contractual Definition

(a) Functional Definition

Insurance is a co-operative device of distributing losses, falling on an individual or his

family over large number of persons each bearing a nominal expenditure and feeling secure

against heavy loss.

(b) Contractual Definition

Insurance may be defined as a contract consisting of one party (the insurer) who

agrees to pay to other party (the insured) or his beneficiary, a certain sum upon a given

contingency against which insurance is sought.

1.2 PRINCIPLES OF INSURANCE

Insurance is based upon:

(a) Principles of Co-operation

(b) Principles of Probability

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(a) Principles of Co-operation

Insurance is a co-operative device. If one person is providing for his own losses, it

cannot be strictly insurance because in insurance the loss is shared by a group of persons who

are willing to co-operate.

(b) Principles of Probability

The loss in the form of premium can be distributed only on the basis of theory of

probability. The chances of loss are estimated in advance to affix the amount of premium.

Since the degree of loss depends upon various factors, the affecting factors are analyzed

before determining the amount of loss. With the help of this principle, the uncertainty of loss

is converted into certainty. The insurer did not have to suffer loss as well as gain windfall.

Therefore, the insurer has to charge only so much of amount which is adequate to meet the

losses. The insurer, on the basis of past experience, present conditions and future prospects,

fixes the amount of premium. Without premium, no co-operation is possible and the premium

cannot be calculated without the help of theory of probability, and consequently no insurance

is possible.

1.3 FUNCTIONS OF INSURANCE

The functions of insurance can be bifurcated into two parts:

(a) Primary Functions

(b) Secondary Functions

(a) Primary Functions

The primary functions of insurance include the following:

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 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 losses of risk. Insurance is actually a protection against economic loss, by sharing

the risk with others.

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.

Collective bearing of risk

Insurance is a device to share the financial loss of few among many others. Insurance

is a means by which few losses are shared among large number of people. All the insured

contribute premiums towards a fund, out of which the persons exposed to a particular risk,

are paid.

Savings and investment

Insurance serves as a tool for savings and investment, insurance is a compulsory way

of savings and it restricts the unnecessary expenses by the insured. For the purpose of

availing income-tax exemptions, people invest in insurance also.

(b) Secondary Functions

The secondary functions of insurance include the following:

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 Prevention of Losses

Insurance cautions individuals and businessmen to adopt suitable device to prevent

unfortunate consequences of risk by observing safety instructions; installation of automatic

sparkler or alarm systems, etc. Reduced rate of premiums stimulate more business to go for

safety and security.

Small capital to cover large risks

Insurance relieves the businessmen from investment in securities by paying small

amount of premium against larger risks and uncertainty.

Contributes towards the development of large industries

Insurance provides development opportunity to large industries having more risks. Even the

financial institutions may be prepared to give credit to sick industrial units which have

insured their assets including plant and machinery.

Source of Earning Foreign Exchange

Insurance is an international business. The country can earn foreign exchange by way

of issue of insurance policies.

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.

1.4 IMPORTANCE OF INSURANCE

The process of insurance has been evolved to safeguard the interests of people from

uncertainty by providing certainty of payment at a given contingency. Insurance not only

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serve the needs of individuals or of special groups of individuals, it tends to pervade and

transform our modern social order, too. The role and importance of insurance here discussed

from an individual, business and society‟s view:

(A) Individual

Insurance provides security and safety

Insurance provides safety and security against the loss on a particular event. In case of

life insurance, payment is made when death occurs or the term of insurance expires. The loss

to the family at a premature death and payment in old age are adequately provided by

insurance. In other words security against premature death and old age sufferings are

provided by life insurance. In other insurance, too, this security is provided against the loss at

a given contingency. For e.g. property of insured is secured against loss due to fire in fire

insurance.

Insurance affords peace of mind

Insurance provides security which is the prime motivating factor. It tends to stimulate

an individual do more work.

Insurance protects mortgaged property

At the death of the owner of the mortgaged property, the property is taken over by the

lender of money and the family is deprived of the use of the property. On the other hand, the

mortgagee wishes to get the property insured because at the damage or destruction of the

property he may lose his right. Insurance provides adequate amount to the dependents at the

early death and the property-owner to pay off the unpaid loans. Similarly, the mortgagee gets

adequate amount at the loss of the property.

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 Insurance eliminates dependency

At the death of the husband or father or earning mother, the loss sustained by the

family needs no elaborate explanation. Similarly, at destruction of property and goods, the

family would suffer a lot. The economic independence of the family is reduced or,

sometimes, lost totally. Insurance tries to eliminate dependency.

Life Insurance encourages saving

The elements of protection and investment are present only in case of life insurance.

In property insurance, only protection element exists. In most of the life policies elements of

saving predominates. Systematic saving is possible because regular premiums are required to

be compulsorily paid. In insurance the deposited premium cannot be withdrawn easily before

the expiry of the term of the policy. The compulsion to pay premium in insurance is so high

that if the policy-holder fails to pay premiums within the days of grace, he subjects his policy

to lapsation and may get back only a very nominal portion of the total premiums paid on the

policy. For the preservation of the policy, he has to try his level best to pay the premium.

Life Insurance provides profitable investment

Individuals unwilling or unable to handle their own funds are pleased to find an outlet for

their investment in life insurance policies. The elements of investment i.e. regular saving,

capital formation, and return of capital along with certain additional return are perfectly

observed in life insurance. Life insurance fulfils all these requirements at a low cost.

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(B) Business

Business efficiency is increased with insurance

When the owner of a business is free from botheration of losses, he was certainly

devote much time to the business. The carefree owner can work better for the maximization

of the profit. The new as well as old businessmen are guaranteed payment of certain amount

with the insurance policies at the death of the person; at the damage, destruction or

disappearance of the property or goods. The uncertainty of loss may affect the mind of the

businessman adversely. Insurance removes the uncertainty and stimulates the businessman to

work hard.

Enhancement of Credit

Business can obtain loan by pledging the policy as collateral for the loan. A person

can avail more loans due to certainty of payment at their deaths. The insurance properties are

the best collateral and adequate loans are granted by the lenders.

Business continuation

In partnership, business may discontinue at the death of any partner although the

surviving partners can re-start the businesses, but in both the cases the business and the

partners was suffer economically. Insurance policies provide adequate fund at the time of

death. Each partner may be insured for the amount of his interest in the partnership and his

dependents may get that amount at the death of partner. With the help of property insurance,

the property of the business is protected against disasters and the chance of closure of the

business is reduced.

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 Welfare of Employee

The welfare of employees is the responsibility of the employer. The former works for

the latter. Therefore, the latter has to look after the welfare of the former which can be

provision for early death, provision for disability and provision for old age. These

requirements are easily met by life insurance, accident and sickness benefit and pensions

which are generally provided by group insurance. The premium for group insurance is

generally paid by the employer. This plan is the cheapest form of insurance for employers to

fulfill their responsibilities. The employee was devoting their maximum capacities to

complete their jobs when they are assured of the above benefits. The struggle and strife

between employees and employer can be minimized easily with the help of such schemes.

(C) Society

Wealth of the society is protected

The loss of a particular wealth can be protected with insurance. Life insurance

provides for loss of human wealth. The human force, if it is strong, educated and care-free,

will generate more income. Similarly, the loss of damage of property at fire, accident etc., can

well indemnified by property insurance , cattle, crop, profit and machines are also protected

against their accidental and economical losses. With the advancement of the society, the

wealth or the property of the society attracts more hazard and so new types of insurance are

also invented to protect them against possible losses. Through the prevention of economic

losses, insurance protects the society against degradation. Through stabilization and

expansion of business and industry, the economic security is maximized. The present, future

and potential human and the property resources are well protected.

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 Economic Growth of the country

For the economic growth of the country, insurance provides protection against loss of

property and adequate capital to produce more wealth. Welfare of employees creates

conducive atmosphere to work. Adequate capital from insurers accelerates production cycle.

Similarly in business, too, the property and human materials are protected against certain

losses; capital and credit are expanded with the help of insurance. Thus, insurance meets all

the requirements for the economic growth of a country

1.5 FEATURES OF LIFE INSURANCE CONTRACT

Human life is an income generating asset. This asset can be lost through unexpected

death or made non functional through sickness or disability caused by an accident. On the

other hand there is a certainty that death will happen, but its timing is uncertain. Life

insurance protects against loss. Life insurance contract may be defined as the contract,

whereby the insurer in consideration of a premium undertakes to pay a certain sum of money

either on the death of the insured or on the expiry of a fixed period. The definition of the life

insurance contract is enlarged by Section 2(ii) of the Insurance Act, 1938 by including

annuity business. Since, the life insurance contract is not an indemnity contract; the

undertaking on the part of the insurer is an absolute one to pay a definite sum on maturity of

policy at the death or an amount in installment for a fixed period or during the life.

Features of Life Insurance Contract:

Followings are the features of life insurance contract:

i. Nature of General Contract

ii. Insurable Interest

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 iii. Utmost Good Faith

iv. Warranties

v. Proximate Cause

vi. Assignment and Nomination

In life insurance contract the first three features are very important while the rest of

them are of complementary nature.

(i) Nature of General Contract

Since the life insurance contract is a sort of contract it is approved by the Indian

Contract Act. According to Section 2(H) and Section 10 of Indian Contract Act, a valid

contract must have the following essentialities:

(a) Agreement (offer and acceptance)

(b) Competency of the parties

(c) Free consent of the parties

(d) Legal consideration

(e) Legal objective

(ii) Insurable Interest

Insurable interest is the pecuniary interest. The insured must have insurable interest in

the life to be insured for a valid contract. Insurable interest arises out of the pecuniary

relationship that exists between the policy-holder and the life assured so that the former

stands to lose by the death of the latter and/or continues to gain by his survival. If such

relationship exists, then the former has insurable interest in the life of the latter. The loss

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should be monetary or financial. Mere emotion and expectation do not constitute insurable

interest in the life of his friend or father merely because he gets valuable advices from them.

Insurable interest in life insurance may be divided into two categories.

(a) Insurable interest in own life and

(b) Insurable interest in other‟s life.

The latter can be sub-divided into two classes:

(a) Where proof is not required and

(b) Where proof is required

Again this insurable interest where proof is required can be divided into two classes:

(i) Insurable interest arising due to business relationship, and

(ii) Insurable interest in family relationship

(A) Insurable interest in owns Life

An individual always has an insurable interest in his own life. Its presence is not

required to be proved. Bunyon says, “Every man is presumed to possess an insurable interest

in his estate for the loss of his future gains or savings which might be the result of his

premature death”. The insurable interest in own life is unlimited because the loss to the

insured or his dependents cannot be measured in terms of money and, therefore, no limit can

be placed to the amount of insurance that one may take on one‟s own life. Thus, theoretically,

a person can take a policy of any unlimited amount on his own life but in practice no insurer

will issue a policy for an amount larger than amount seems suitable to the circumstances and

means of the applicant.

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(B) Insurable interest in other’s life

Life insurance can be affected on the lives of third parties provided the proposed has

insurable interest in the third party. There are two types of insurable interest in others life.

(a) Proof is not required

There are only two such cases where the presence of insurable interest is legally

presumed and therefore need not be proved.

Wife has insurable interest in the life of her husband

It is presumed and decided by Reed vs. Royal Exchange (1795) that wife has an

insurable interest in the life of her husband because husband is legally bound to support his

wife. The wife will suffer financially if the husband is dead and continue to gain if the

husband is surviving. Since, the extent of loss or gain cannot be measured in this case; the

wife has insurable interest in the husband‟s life up to an unlimited extent.

Husband has insurable interest in the life of his wife

It was decided in Griffith vs. Fleming (1909) that the husband has insurable interest in

his wife‟s life because of domestic services performed, by the wife. If the wife is dead,

husband has to employ other person to render the domestic services and other financial

expenditures will emerge at her deaths which are not calculable. The husband is benefited at

the survival of his wife, so it is self-proved that husband has insurable interest in his wife‟s

life. Since the monetary loss at her death or monetary gain at her survival cannot be

measured, he has unlimited insurable interest in the life of his wife.

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(b) Proof is required

Insurable interest has to be proved in the following cases:

Business Relationship

The policyholder may have insurable interest in the life of assured due to business or

contractual relationship. In this case, the amount of insurance depends on the amount of risk

involved. Example, a creditor may lose money if the debtor dies before the loan is repaid.

The continuance of debtor‟s life is financially meaningful to the creditor because the latter get

all his money repaid at the former‟s survival. The maximum amount of loss to a creditor may

be the amount of outstanding loan plus interest thereon and the amount of premium paid. So,

the maximum amount of insurable interest is limited to the outstanding loan, plus interest and

amount of premium expected to be paid. The interest is calculated on the estimation of

duration of debt to be paid. The full amount of policy is payable irrespective of the payment

of loan and interest. Since it is life insurance, the full policy amount is paid. A trustee has

insurable interest in respect of the interest of which he is trustee because at the survival of the

other person, the trustee is benefited and at his death he suffers. A surety has insurable

interest in the life of his principal. If the principal (the debtor) is dead, the surety is

responsible for payment of outstanding loan, or obligated amount. At the survival of

principal, he had not suffered this loss. Insurable interest is limited, up to the amount of

outstanding loan, interest and premium paid. A partner has insurable interest in the life of

each partner. At the death of a partner, the partnership be dissolved and the surviving partner

lose financially. Even if the firm continues at the death of the partner, the firm has to pay

deceased partner‟s share to his dependents. This was involving a huge financial loss to the

partnership. Therefore, the firm collectively can purchase insurance policies in the life of

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each partner of the firm. Similarly all the partners have insurable interest in life of each

partner because they will financially suffer at the death of partners.

Family Relationship

The insurable interest may arise due to family relationship if pecuniary interest exists

between the policyholders and life assured because mere relationship or ties of blood and of

affection does not constitute insurable interest. The proposer must have a reasonable

expectation of financial benefit from the continuance of the life of the person to be insured or

of financial loss from his death. The interest must be based on value and not on mere

sentiments. Similarly, mere moral obligation is not sufficient to warrant existence of

insurable interest although legal obligation to get support from insurable interest of the

person who is supported in life of the person. Thus a son can insure his father‟s life only

when he is dependent on him and the father can take insurance policy on his son‟s life only

when he is dependent on his son.

General Rules of Insurable Interest in Life Insurance:

Time of Insurable Interest

Insurable interest must exist at the time of proposal. Policy, without insurable interest,

will be wager. It is not essential that the insurable interest must be present at the time of

claim.

Services

Except the services of wife, services of other relatives will not essentially form

insurable interest. There must be financial relationship between the proposer and the life-

assured. In other words, the services performed by the son without dependence of his father,

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will not constitute insurable interest of the father in the life of his son. Vice-versa is not

essential for forming insurable interest.

Insurable Interest must be valuable

In business relationship the value or extent of the insurable must be determined to

avoid wager contract of additional insurance. Insurance is limited only up to the amount of

insurable interest.

Insurable interest should be valid

Insurable interest should not be against public policy and it should be recognized by

law. Therefore, the consent of life assured is very essential before the policy can be issued.

Legal responsibility may be basis of insurable interest

Since the person will suffer financially up to the extent of responsibility, the proposer

has insurable interest to that extent.

Insurable Interest must be definite

Insurable interest must be present definitely at the time of proposal. Mere expectation

of gain or support will not constitute insurable interest.

Legal Consequence

Insurable interest must be there to form legal and valid insurance contract. Without

insurable interest, it would be null and void.

(iii) Utmost Good Faith

Life insurance requires that the principle of utmost good faith should be preserved by

both the parties. The principle of utmost good faith says that the parties, proposer (insured)

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and insurer must be of the same mind at the time of contract because only then the risk may

be correctly ascertained. They must make full and true disclosure of the facts material to the

risk.

Material facts

In life insurance material facts are age, income, occupation, health, habits, residence,

family history and plan of insurance. Material facts are determined not on the basis of

opinion, therefore, the proposer should disclose not only those matters which the proposer

may feel are material but all facts which are material.

Duty of both parties

It is not only the proposer but the insurer also who is responsible to disclose all the

material facts which are going to influence the decision of the proposer. Since the decision is

taken mostly on the basis of subject-matter, the life to be insured in life insurance, and the

material facts relating to the subject-matter are known or is expected to be known by the

proposer; it is much more the responsibility of the proposer to disclose the material facts.

Full and True Disclosure

Utmost good faith says that there should be full and true disclosure of all the material

facts. Full and true means that there should be no concealment, misrepresentation, half

disclosure and fraud of the subject matter to be insured.

Legal Consequence

In the absence of utmost good faith the contract will be voidable at the option of the

person who suffered loss due to non-disclosure. The intentional non-disclosure amounts to

fraud and the unintentional non-disclosure is voidable at the option of the party not at fault.

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Once the voidable contract has been validated by the party not at fault, the contract cannot be

avoided by him later on. For instance, if the insurer has continued to accept the premium

when, certain non-disclosure, say miss-statement of age, has been disclosed the insurer

cannot invalidate the contract and cannot refuse to pay the amount of claim. If the party not at

fault does not exercise its option, the contract will remain valid.

Indisputability of Policy

The doctrine of utmost good faith works as a great hardship for a long period on the

plea of miss-statement at the time of proposal. In such cases, it would be very difficult to

prove or disapprove whether a particular statement made, at the time of policy was true.

Therefore, to remove this hardship, certain sections in the concerned Act are provided. In

India, Section 45 of the Insurance, Act 1938 deals with such dispute. It is called indisputable

clause, No policy of life insurance, after expiry of two years from the date on which it was

effected, be called into question by an insurer on the ground that a statement made in the

proposal for insurance or in any report of a medical officer or referee or friend of the insured

or in any other document leading to the issue of the policy was inaccurate or false, unless the

insurer shows that such statement was on a material matter or suppressed facts which it was

material to disclose and that it was fraudulently made by the policy-holder and that the

policyholder knew at the time of making it that the statement was false or that it suppressed

facts which it was material to disclose. Provided that nothing in this section shall prevent the

insurer from calling for proof of age at any time if he is entitled to do so.

(iv) Warranties

Warranties are an integral part of the contract, i.e., these are the basis of the contract

between the proposer and insurer and if any statement, whether material or non-material, is

untrue, the contract shall be null and void and the premium paid by him may be forfeited by

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the insurer. The policy issued was containing that the proposal and personal statement shall

form part of the policy and be the basis of the contract. Warranties may be informative and

promissory. In life insurance the informative warranties are more important. The proposer is

expected to disclose all the material facts to the best of his knowledge and belief. Warranties

relating to the future may only be statements about his expectation or intention, for instance,

the insured promises that he not take up any hazardous occupation and will inform the insurer

if he takes the hazardous occupation.

Breach of Warranty

If there is breach of warranty, the insurer is not bound to perform his part of the

contract unless he chooses to ignore the breach. The effect of a breach of warranty is to

render the contract voidable at the option of the other party provided there is no element of

fraud. In case of fraudulent representation or promise, the contract will be Void.

(v) Proximate Cause

The efficient or effective cause which causes the loss is called proximate cause. It is

the real and actual cause of loss. If the cause of loss (peril) is insured, the insurer will pay;

otherwise the insurer will not compensate. In life insurance the doctrine of Causa Proxima

(Proximate Cause) is not applicable because the insurer is bound to pay the amount of

insurance whatever may be the reason of death. It may be natural or unnatural. So, this

principle is not of much practical importance in connection with life assurance, but in the

following cases the proximate causes are observed in the life insurance, too.

War-risk

Where policy is issued on exclusion of war and aviation risks, the proximate cause of

death is important because the insurer waives his liability if death occurred, in this case,

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while the insured was in field or is engaged in operation of war and aviation. Only premium

paid or surrender value whichever is higher is payable and the total policy amount is not

payable.

Suicide

If suicide is committed within one year of the policy, or there was intention to commit

suicide, the payment of policy would be restricted, only up to the interest of the third party in

the policy provided, the interest was expressed at least one month before the suicide.

Accident Benefit

A problem arises when an insured under an accident policy is killed or suffers an

injury which has an immediate cause and also a remote cause. In accident benefit policy,

double of the policy amount is paid. So, the cause of death in this policy is of paramount

importance.

(vi) Assignment and Nomination

The policy in life insurance can be assigned freely for a legal consideration or love

and affection. The assignment shall be complete and effectual only on the execution of such

endorsement either on the policy itself or by a separate deed. Notice for this purpose must be

given to the insurer who will acknowledge the assignment. Once the assignment is

completed, it cannot be revoked by the assignor because he ceases to be the owner of the

policy unless reassignment is made by the assignee in favor of the assignor. An assignee may

be the owner of the policy both on survival of the life assured, or on his death according to

the terms of transfer. The life policies are the only policies which can be assigned whether the

assignee has an insurable interest or not. The holder of a policy of life insurance on his own

life may, either at the time of affecting policy or at any subsequent time before the policy

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matures, nominate the person or persons to whom the money secured by the policy shall be

paid in the event of his death. A nomination can be cancelled before maturity, but unless

notice is given of any such cancellation to the insurer, the insurer will not be liable for any

bonafide payment to a nominee registered in the records. When the policy matures, or if the

nominee dies, the sum shall be paid to the policy-holder or his legal representatives.

1.6 ECONOMIC THEORIES OF INSURANCE

Individuals occupy their time in activities that produce income or in those which do

not. For the sake of simplicity, economists label these two states of nature as work and

leisure. One‟s investment in self i.e., human capital, one‟s preferences, time, wealth, income

and a host of other factors influence how a given individual will divide his or her work and

leisure time. Work gives rise to income which in turn seeks to explain consumer consumption

and saving behavior over one‟s lifetime.

The Human Life Value (HLV) concept therefore, provides a normative economic

approach to life and health insurance planning. It suggests how one ought to behave. It

provides an economic rationale for life and health insurance purchase from a cost perspective.

The HLV concept provides an economic rationale for the purchase of life insurance, but not

an explanation for its purchase. Insurance purchases reduce current consumption by virtue of

the premium payment to protect the later consumption ability of individuals or their

dependents. Every consumption theory begins with the assumptions that rational consumers

seek to maximize their lifetime utility. Utility is a measure of consumer satisfaction derived

from economic goods. The maximization of lifetime utility therefore involves attempts by

consumers to allocate their lifetime incomes in such a way as to achieve an optimum lifetime

pattern of consumption. This means planning for the future and not living only for today. The

concept is rational but on what basis would we expect individuals to make allocations

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between present and the future or stated differently between present consumption and

consumption for the future. The economic literature has four hypotheses: The absolute

income hypothesis, the relative income hypothesis, the life cycle hypothesis, the permanent

income hypothesis.

1.7 LIFE INSURANCE VS OTHER SAVINGS

Contract of Insurance:

A contract of insurance is a contract of utmost good faith. The doctrine of disclosing

all materials facts is embodied in this important principle, which applies to all form of

insurance. At the time of taking a policy, policyholder should ensure that all questions in the

proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any

document leading to the acceptance of risk would render the insurance contract null and void.

Protection:

Savings through life insurance guarantee full protection against risk of death of the

saver. Also, in case of demise, life insurance assures payment of the entire amount assured

with bonuses wherever applicable whereas in other savings schemes, only the amount saved

with interest is payable.

Aid to Thrift:

Life insurance encourages „thrift‟. It allows long-term savings since payments can be

made effortlessly because of the „easy installment‟ facility built into the scheme. Premium

payment for insurance policy can be in any such mode as single, monthly, quarterly, half-

yearly and yearly basis. Like the Salary Saving Scheme popularly known as SSS, provides a

convenient method for paying premium each month by deduction from one‟s salary. In this

case the employer directly pays the deducted premium to Life Insurance Companies (Insurer)

23
Liquidity:

In case of insurance, it is easy to acquire loans on the sole security of any policy that

has acquired loan value. Besides, a life insurance policy is also generally accepted as

security, even for a commercial loan.

Tax Relief:

Life insurance is the best way to enjoy tax deductions on income tax and wealth tax.

This is available for amounts paid by way of premium for life insurance subject to income tax

rates in force. Assesses can also avail benefits of provisions in the law for tax relief. In such

cases the assured in effect pays a lower premium for insurance than otherwise.

Money When You Need It:

A policy that has a suitable insurance plan or a combination of different plans can be

effectively used to meet certain monetary needs that may arise from time-to-time. Children‟s

education, start-in-life or marriage provision or even periodical needs for cash over a stretch

of time can be less stressful with the help of these policies. Alternatively, policy money can

be made available at the time of one‟s retirement from service and used for any specific

purpose, such as, purchase of a house or for other investments. Also, loans are granted to

policyholders for house building or for purchase of flats etc.

Insurance is nothing but a contract between two parties, one party called insurer and

the other called insured or assured. Insurer agrees to indemnify the other party from loss

arising from certain specified events and the insured pays and agreed sum of money, called

premium or consideration. The business of insurance is related to the protection of the

economic value of assets. Every asset has a value. The assets, having been created through

the efforts of the owner, are valuable to him, because he expects to get some benefits from it.

24
The benefit may be an income. It is a benefit because it meets some of his needs. Every asset

is expected to last for a certain period of time during which it will perform. After that, the

benefit may not be available.

A human life is an income generating asset. This also can be lost unexpectedly by

early death or made non functional through sickness and disabilities. Death will happen, but

the timing is uncertain. If it happens around one‟s retirement, then it could be expected that

the income will normally cease, and the person concerned could have made some other

arrangements to meet the contingency needs. But if it occurs earlier without any alternative

arrangements only insurance can provide financial help to his dependents.

Insurance may be described as a social device to reduce or eliminate risk of life and

property. Under the plan of insurance a large number of people associate themselves by

sharing risk, attached to individual. The insurance sector in India has come full circle from

being an open competitive market to nationalization and back to a liberalized market again.

The insurance industry affects money, capital markets and the real estate sectors in an

economy, making insurance facility necessary to ensure the completeness of a market. It is an

industry with strategic importance for any country as it contributes to the financial sectors as

well as social benefits on the society. At the micro level an insurance policy protects the

insured against financial loss arising from a specified set of risks at some cost. India was one

of the least insured countries in the last few decades of the 20th Century.

Life insurance in its modern form came to India from Europe, the USA and England

where modern form of life insurance appeared in the sixteenth century and the first life policy

providing temporary cover for a period of twelve months was issued as early as 1583 A.D. As

mortality tables had not yet been developed, writing of life business tended to be a gamble. It

was therefore only from the 18th Century onwards that attempts were made to treat insurance

25
scientifically. The early history of modern insurance in India is somewhat obscure. The first

organized effort to establish a life assurance office in India was made in 1870 with the

formation of the Bombay Mutual Assurance Society Ltd. The persons who took insurance at

that time were clerks, government servants, advocates, barristers and some merchants who

had adapted to some extent European ways of life. So Indian companies charged the same

premium rates in Indian lives as were being charged by non-Indian companies on European

lives. In the initial years after the formation of Bombay Mutual Assurance Society Ltd.,

„Oriental Government Security Life Assurance Company Ltd.‟ (1874), „Bharat (1896) and

the „Empire of India‟ (1897) were established.

Prior to 1912, India had no legislation for regulation of Insurance. In the year 1912,

the Indian Assurance Companies Act and the Provident Insurance Societies Act were passed

dealing with life Insurance only. These Acts closely followed the British Assurance

Companies Act, 1909. These did not prevent certain malpractices and it was obvious for the

Government that some definite action was necessary to protect the public. So, the insurance

Act of 1938 was passed which kept insurance under authority of Superintendent of Insurance

for the administration of the Act.

1.8 NATIONALISATION OF LIFE INSURANCE BUSINESS:

The reasons for the nationalization of life insurance industry are rather well known

and concerned mostly with the unethical practices adopted by some of the players against the

interests of the customers. Nationalization had lent the industry solidity, growth and reaches

which is un-parallel. Moreover, along with these achievements there also grew a feeling of

insensitivity to the needs of the market, traditions in adoption of modern practices to upgrade

technical skills coupled with a sense of lethargy, which probably led to a feeling amongst the

26
public that the insurance industry was not fully responsive to customer needs. Nationalisation

of life Insurance Business becomes necessary with a view to:

Provide cent percent security to policyholders.

Ensure the use of life insurance funds for nation-building activities.

Avoid wasteful efforts in competition.

Save the dividends paid to shareholders of insurance companies

Avoid certain undesirable policies adopted by the management of some of the

insurance companies.

Spread the gospel of life insurance into the neglected rural areas.

The Government of India took the first step towards nationalisation of life assurance

business in India on 19th January, 1956 by promulgating an ordinance vesting the

management and control of life insurance business of Indian, Non-Indian insurers and

Provident Societies operating in the country. Moreover, the companies continued to exist as

separate entities and the ownership continued to exist with respective shareholders. On June

18, 1956 they put a bill through the parliament which emerged as Life Insurance Corporation

Act (XXXI of 1956) which was gazette the next day. It comes into force in July, 1956. By

this act all the assets and liabilities pertaining to the life assurance business in India of all

registered Indian Insurers, were to be transferred to and vested in the Life Insurance

Corporation of India from the appointed day. According to this Act, a corporation called the

Life Insurance Corporation of India (LIC) was established which started its career on

September 1, 1956. Since nationalisation, life insurance business in India is coterminous with

the state owned LIC, which has a dominant position in the economy in two ways. Firstly, as a

national insurance agency it serves to pool and redistribute risks associated with the death of

27
policyholders in million of households. In many cases, insurance policies provide for savings

for old age. Life insurance is thus important from social point of view. Secondly, as a major

collective saving institution, LIC is a dominant financial intermediary in the economy,

channelising the investible funds to the productive sectors. Thus, insurance provides means to

mobilize household savings on a large scale for rapid industrialisation and self-reliance in

heavy industries for the development of the country and also conducting the business in the

spirit trusteeship and providing protection to the people in every part of the country.

The life insurance business shows a rapid growth throughout the country during the

last decade. The economic scenario in our country is rapidly changing. Since the entry of

private insurers the insurance penetration has increased. During the pre-nationalized period,

LICI enjoyed monopoly in Life Insurance sector and later on, the private players with foreign

tie-up came into Indian market. Consequent to the implementation of government policies on

globalization and liberalization, the consumers have become more critical of the quality of

services. Consumers are now aware of the alternatives available in relation to services and

their expectations are rising hence, the provider organizations should be aware of these

expectations. In such an environment, it is time that the industry paid attention to the

untapped market opportunities before them.

1.9 LIFE INSURANCE COMPANIES IN INDIA

In Public Sector:

Life Insurance Corporation in India, w.e.f.1st September‟1956.

In Private Sector:

The various laws relating to the business of insurance were amended in 1999. The

Insurance Regulatory and Development Authority (IRDA) were established in December

28
1999, to regulate and ensure the orderly growth of the insurance industry. The IRDA was

authorized to allow companies incorporated in India to transact life insurance business,

provided the foreign shareholding was not more than 26%.

In private sector, up to 31st March‟2014, there are 23 private sectors life insurance

companies operating in India.

1. HDFC Standard Life Insurance Company Limited, w.e.f. 23rd October‟2000.

2. Max New York Life Insurance Company Limited, w.e.f. 15thrd November‟2000.

3. ICICI Prudential Life Insurance Company Limited, w.e.f. 24th November‟2000.

4. Kotak Mahindra Old Mutual Life Insurance Company Limited, w.e.f. 10th Jan‟2001.

5. Birla Sun Life Insurance Company Limited, w.e.f. 31st January‟2001.

6. Tata AIG Life Insurance Company Limited, w.e.f.12th February‟2001.

7. SBI Life Insurance Company Limited, w.e.f. 30th March‟2001.

8. ING Vysya Life Insurance Company Limited, w.e.f. 2rd August‟2001.

9. Bajaj Alliance Life Insurance Company Limited, w.e.f. 3rd August‟2001.

10. Met Life India Insurance Company Limited, w.e.f. 6th August‟2001.

11. Reliance Life Insurance Company Limited, w.e.f. 3rd January’2002.

12. Aviva Life Insurance Company Limited, w.e.f. 6th February‟2004.

13. Sahara India Life Insurance Company Limited, w.e.f. 6th February‟2004.

14. Shriram Life Insurance Company Limited, w.e.f. 17th November‟2005.

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 15. Bharati AXA Life Insurance Company Limited, w.e.f. 14th July‟2006.

16. Future Generali India Life Insurance Company Limited, w.e.f. 4th September‟2007.

17. IDBI Federal Life Insurance Company Limited, w.e.f. 19th December‟2007.

18. Canara HSBC OBC Life Insurance Company Limited, w.e.f. 8th May‟2008.

19. Aegon Religare Life Insurance Company Limited, w.e.f. 27th June‟2008.

20. DLF Pramerica Life Insurance Company Limited, w.e.f. 27th June‟2008.

21. Star Union Dai-ichi Life Insurance Company Limited, w.e.f.26th December‟2008.

22. India First Life Insurance Company Limited, w.e.f. March‟2010

23. Edelweiss Tokio Life Insurance Company Ltd.

1.10 STATEMENT OF THE PROBLEM

Since the establishment of LICI in 1956 it was the only player in the Insurance sector

and was enjoying cent percent market share. The performance during that period was good

because it was the only life insurance company selling this product. But the performance was

surely not up to the mark as it should have been. But after the amendment of Insurance Act in

1999 and passing of IRDA Act 1999 the whole picture changed. The insurance sector in India

has undergone significant changes during the last decade. Insurance industry contributes to

the financial sector of the economy and also provides social security net in developing

countries. This study identifies the enhancement of insurance industry after the entry of

private insurers in the Indian market. In today‟s challenging business environment,

profitability, customer satisfaction in terms of claims settlement, product awareness, service

quality and maximum number of lives covered are most important. Customer loyalties are

arising as key competitive advantages. The companies are no longer making platitudes about

30
the theory “The customer is the king” but they thought the significance of stellar customer

satisfaction sometimes above their drive for more market share.

In regard to the above context, it was felt necessary to study the performance of Life

Insurance Companies and a comparative study between public and private sectors was

proposed.

1.11 RATIONALE OF THE STUDY

The structure of insurance industry has undergone a drastic change since

liberalization, privatization and globalization of Indian economy, in general, and the

insurance sector in particular. For almost four decades LIC had been the sole player with

virtual monopoly in life insurance sector. In the early 90‟s the Government of India ventured

into policy of liberalization, privatization and globalization. This policy envisaged opening

up the economy along with most of its core sectors to the private entrepreneurs. Along with

this the entry of International Corporation into various business and service sectors was also

planned. This decision of the Government attracted some private and international players in

the Insurance sector also because insurance sector has been one of the major financial sector

earners.

Privatization aims at providing benefits of the growth of the industry to the society by

providing better customer service and variety of quality products at reasonable prices. It

focuses on penetrating the insurance business to the rural and semi-urban areas. Consequently

by the year 2000-01, 12 private players entered the Life Insurance sector. The entry of so

many companies in this sector was likely to affect the performance of Life Insurance

Corporation. Thus, the Life Insurance public sector giant, i.e. LIC, which never faced

competition earlier, now had to compete with the private players who boast of rich

experience of their partners from the developed countries of the world. They have also

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introduced different types of innovative policies and other strategic plans. It was quite

expected that the total business of Life Insurance Corporation, in terms of premium, sum

assured and number of policies and its market share would be affected. The Life Insurance

Corporation had to change its strategies of marketing and incorporate new, bolder and

aggressive marketing policies to hold its position in the market. It had to improve its

customer service and increase the level of training to its agents. It is, therefore, necessary to

study the business performance of Life Insurance Companies after liberalization policy

regime to study the change that might have occurred or any restructuring that might have

been done by the Life Insurance Corporation in the wake of entry of private players in the life

insurance sector. Hence, it becomes imperative to evaluate the performance of Public &

Private Life Insurance companies.

1.12 REVIEW OF LITERATURE

This research work with the aforesaid statement of problem has been proposed and

undertaken after the brief review of some earlier studies both at the national and international

level relating to different aspects of insurance research works and their findings. There is an

intensive range of articles, books, journals and other available study materials relating to the

insurance sector in India. Some of the studies that have been reviewed by the researcher are

as follows:

Anderson and Nevin (1975), in their study looked at the life insurance purchasing

behavior of young newly married couples. The relationship between two dependent variables,

amount of life insurance purchased and type of life insurance purchased, was tested against a

number of explanatory variables. The independent variables, psychographic variables and

other explanatory factors, some of which have not been investigated before, are examined by

means of multiple classifications analysis. Six independent variables were statistically

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significant in explaining the amount of life insurance purchased: education of husband,

current household income, expected household income (10 years), net worth of household,

husband‟s insurance before marriage and wife‟s insurance before marriage. The purchase of a

larger than average amount of life insurance was found to be much more likely in households

were: the husband did not attend college, current and expected household incomes were in

the low and high ranges, net worth was greater, the husband had purchased no life insurance

before marriage and the wife had purchased term insurance before marriage. Three of the

independent variables were found to be statistically significant in explaining the type of life

insurance purchased: net worth, wife‟s insurance portfolio before marriage and influence of

insurance agent. The purchase of term insurance was found to be much more likely in

households where: net worth was greater, the wife purchased term insurance before marriage

and the insurance agent did not influence the decision. This suggests that wife and the

insurance agent are playing an influential role in the type of insurance purchased by young

married households.

Goldsmith (1983), in the paper developed and investigated the relation between a

wife‟s human capital accumulation and household purchases of life insurance on the husband.

The degree of which households substitute the wife‟s human capital for life insurance on the

husband was empirically investigated using data on the buyers and non-buyers of insurance

in 1980. The two bit estimating technique was utilized to eliminate the problem of selectivity

bias. Households with a more educated wife, ceteris paribus, were found to have a lower

likelihood of purchasing term insurance on the husband. Additionally factors that reduce

uncertainty associated with the marketability of the wife‟s human capital appear to enhance

the substitutions of her human capital for life insurance and reduce likelihood of a purchase.

The results also provide support for the hypothesis that households substitute accumulated,

marketable, non-human capital assets for life insurance. Current household‟s income, existing

33
coverage, current non-term insurance purchase, household characteristics and the decision-

making environment were all found to have significant influences on the decision to purchase

term insurance on the husband. The stock of human capital embodied in the wife is opting to

vary over her life cycle. Health, education and on-the-job training enhance the stock, while

depreciation and obsolescence reduce human capital. As a result, the level of life insurance

coverage desired by the household is expected to vary over time. Unfortunately, the existing

structure of the insurance relation prevents households from altering their insurance holdings

along a complete continuum. The level of coverage can be increased on the desired level by

purchasing an additional policy. However, once a long-term contract is approved, the

coverage level can only be reduced by terminating premium payments and hence, coverage.

This institutional constraint, limited downward adjustment flexibility, may account for the

lower likelihood to purchase term life insurance on the husband among households with

better-educated wife.

Golok Ch. Deka, (1987), in his Ph. D. Thesis on “Role of Life Insurance Corporation

of India”: identified that the development of life insurance in NE Region in an organized way

started only after the nationalization period. The study analyses the progress of life insurance

business in NE Region during 1st September 1956 to 31st March 1984.

Rao (1989), in his article titled „Life Insurance Business in India: Analysis of

Performance‟ analyzed the growth of Life Insurance Business in terms of new business and

coverage area. Life insurance business has shown a steady progress in relation to a range of

macro-economic aggregates. The numerical values of various indicators point to a vast scope

for improvement. Growth has been due to the organizational changes that have taken place

with the decentralization of functioning of divisional offices and decentralization of policy

servicing of branch offices. There is also increase in rural business and group insurance

business since mid-1970. The analysis of Zonal business reveals that business is greater in the

34
more urbanized Zones. In spite of all this life business continues to be low in terms of

coverage and contribution to national income and savings. There is a large potential for future

development of life insurance business in India. Considering the trend towards liberalization,

LIC can equip itself to compete in global world with other private insurers.

Many newspaper articles have from time to time provided valuable information about

insurance. Besides, the textbooks published by National Insurance Academy, Pune also

offer a good deal of information about insurance. The Journal, published by the Insurance

Institute of India, Pune which is a remarkable publication in the field of insurance has also

been a valuable source on literature review as it contains articles on all the latest

developments in the field of insurance. At the same time, the IRDA Journal, and ICFAI

Press books and journals on Insurance, which contain a lot of articles and valuable

information on insurance, have been referred to. The various legislations viz. Insurance Act

(1938), Life Insurance Corporation Act (1956), General Insurance Business Nationalisation

Act (1972) and Insurance Regulatory and Development Authority Act (1999) have also been

reviewed to have a full view of the changes in the insurance sector.

Patki (1989) in his article entitled “Rural Marketing” discussed the problems

involved in selling life insurance particularly in rural areas.

Shotick and Showers (1994), augment the empirical literature on insurance demand

by examining the impact of selected economic and social factors on the purchase of

insurance. To account for the fact that not every household purchases insurance, to bit

procedure is used to estimate marginal impacts on purchases, as well as the changes in the

probability of purchasing insurance. Demand effects are dominated by the marginal impacts

from existing purchasers of insurance. Although income and number of earners are both

positively related to the demand for insurance, the marginal effect from an increase in income

35
is grater for single earner households than for multi-earner households. Also, as either family

size or age increases, the marginal increase in insurance expenditure diminishes. As the

composition of U.S. households evolves, change in household‟s characteristics will affect the

demand for insurance. Specific changes in many cases, impact various type of insurance

differently. Although the total insurance demand model provides insight into the overall

demand of households, dis-aggregated demand models must also be examined in the future,

as they have in the past. Understanding how insurance is important for policy making in both

the private and public sectors with the issue of socialized insurance, governments must be

aware of different effects on the types of insurance from socio-economic factors. A better

understanding of the factors that affect total insurance, as well as individuals insurance

demand, can provide valuable insights for the both the public and private sectors concerning

future insurance needs and alternatives.

The Malhotra Committee in its report (1994), on reforms in the insurance sector,

stressed that „professional regulation in areas relating to expenses, customer service, claims

settlement, resolution of disputes, reasonableness of tariffs and prevention of restrictive trade

practice‟ was urgently needed. It proposed that capital adequacy, solvency margins, quality of

reinsurance and its performance, management expenses, adequate technical reserves, assets

distribution, accounting and transparency of financial statements and disputes resolution

forums should engage the attention of the regulator to be appointed with full functional

autonomy and operational flexibility. He was expected to publish an annual report on the

state of the insurance industry for the public to make an assessment of how fair and efficient

the sector was IRDA has now been functioning with statutory backing to regulate and bring

about reforms in the market in the best interests of all players. It is universally recognized

that a well functioning insurance market is a vital national asset that contributes significantly

to its economic development. Regulation aims at keeping the market competitive, protecting

36
consumers, raising revenues to support social objectives and ensuring its smooth and orderly

functioning. Competition enhances product value and choice for the consumer, encourages

corporate efficiency and continuations innovation and improvement. Even as the regulator

has to keep his eyes and ears close the ground, he has to keep the regulated insurers at arm‟s

length to demonstrate his impartiality and efficiency in his dealings with them. It is the extent

of intervention by the regulator to correct these market imperfections that can cause major

differences among the players concerned.

A. Rai, (1996), “Cost Efficiency of International Insurance Firms‟, Journal of

Financial Services Research, Kluwer Academic Publishers, 1996, pg 213-233: In his article

examined the cost efficiency of insurance firms located in 11 countries over a five year

period i.e. from 1988-1992. In the study two x-efficiency measures were calculated, one from

stochastic cost frontier model and two others from the distribution free model. The results

vary not only for countries but also by size and specialization. Firms in Finland and France

have the lowest x-inefficiency, while firms in UK had the highest. Small firms on an average

were more efficient than large firms worldwide. Also firms offering single or specialized

services were more cost-efficient than those offering both (life and non-life) services.

D T Rao, (1998), “Operational Efficiency of Life Insurance Corporation of India‟,

Journal of Indian School of Political Economy, Vol.10, No. 3, 1998, pg 473-480: In his paper

examined the efficiency of LIC on the basis of physical and financial parameters. According

to his study there had been a good improvement in the physical performance of LIC but

financial performance was not up to the mark. The reasons put forward for limited financial

performance were statutory regulations, government control, high costs of transacting rural

business etc.

37
 S Esipov and I Vaysburd, (1999),”Dynamic Investment Strategic Portfolio

Insurance Vs Efficient Frontier‟, July, 1999: In their working paper, have analyzed selected

dynamic investment strategies of insurance companies with a unifying theoretical framework.

They have applied Kolmogorov-type partial differentiation equation for profit and loss

distribution of strategies contingent on the current value of the basic asset as well as on a

balance of a trading account. Using the equation, they have built a dynamic efficient frontier

and have demonstrated that an attempt to minimize variance for a given expected profit leads

to a better trading strategy. Similar analysis has also been performed for Constant Proportion

Portfolio Insurance (CPPI). It is shown that both dynamic efficient frontier and CPPI belong

to a special class of power option replicating strategies. A special part of the strategy is

devoted to discrete analysis and risk capital consideration for non-replicating strategies.

S.K. Sharma (2000), “A comparative study on the attitude of the employees of LICI

with other employees of private Insurance companies in Guwahati”: It‟s discussed the

employee‟s attitude towards the organization and the customers. Finally it was found that

attitude of the employees of private insurance companies is much better than the attitude of

the employees of LICI.

D Forbes, (2000),”Delivering Customer Service Excellence‟, Insurance Research

and Practice, Vol.15, Pt. 1, 2000, pg 19-23: In his paper, emphasized upon the importance of

excellent customer service in the insurance industry. He stressed that it was difficult to render

outstanding customer service on the part of a company and needed long time and

perseverance to be achieved. Companies have to lay down mechanism for this by introducing

new products, processes and delivery channels.

S K Mathur, (2001), “Insurance Regulation: Some Issues‟, The Geneva Papers on

Risk and Insurance, and Vol.26, and No.1, January, 2001, pg 54-68: In his paper, stressed on

38
the importance of regulation in insurance in India. The paper highlights the need for

regulatory principles of insurance sector in respect of market supervision and solvency

requirements of insurance companies. The study reveals that world insurance is basically

dominated by industrially developed economies. The study suggests that in India, IRDA has

to be more concerned with the entry guidelines and capital requirement rather than the

regulatory details of market supervision in the beginning.

E Rudolf, (2001), “Profitability of Non-life Insurance Industry: Its-Back-to-Basics-

Time ‟, Swiss Re, Sigma, 2001, No. 5, pg 1-38: In his paper, stressed that underwriting

results and investment incomes were the two key factors in determining profitability of

general insurance companies. The study was conducted in respect of seven countries for the

period 1996-2000. The results indicate that except Japan and Germany other countries had

underwriting losses and profitability was high in U.K., moderate in Canada and U.S. and low

in France and Germany. The conclusion of the study was that underwriting results and

investment incomes are negatively correlated and that an insurance company should focus on

the underwriting results to increase profits as investment incomes are uncertain.

D C Srivastava and S Srivastava, (2001),” Indian Insurance Industry; Transition

and Prospects, New Century Publications, New Delhi, 2001: The editors made an attempt to

trace the growth of insurance industry in India, to examine its existing structure and explore

its potential in the backdrop of liberalized scenario. The study is diversified encompassing the

relation between insurance services and economic development, role of state in regulating

insurance activities, prospects of insurance industry compared to other countries, marketing

strategies, product designing, product pricing, tariff structure, reinsurance and risk

management.

39
 A. Bora, (2001), “A comparative study of LICI with other private Insurance

companies, a case study in Guwahati city”: The researcher found that there was little focus on

the employees rather more emphasis was given on financial growth. She also found,

employees of LICI are not so much happy as compared to the other employees of the private

sector insurance companies.

Rangachary, Chairman IRDA (2002), participated in the 4th Global Conference of

Actuaries. During the course of discussion, several issues were raised and a need to bring in

risk-based capital with emphasis on fair value accounting system for insurers was felt. The

IRDA Chairman also expressed the need to develop the health and the pension sectors which

have not got their due share of importance as life insurance.

Shilpa and Runa (2002), “Enhancing competitiveness: The case of the Indian Life

Insurance Industry” : The researchers identified the causes and the objectives with which the

sector was reformed in 2000 to conclude that only in the last decade and the hybrid model of

privatization with regulation adopted by government has yielded positives results. The sector

in its present form looks promising for the consumers, the insurer and the nation as a whole.

P K Gupta, (2003), “Branding in Insurance: An Indian Exposition‟, The Insurance

Times, Vol. XXIII, No. 10, Oct., 2003, pg 29-34 : In his paper, highlighted the importance of

brand differentiation among insurance companies. According to his study, claims settlement,

service quality and security of investments were the most important factors affecting

customer‟s perception.

T. Shah (2003) believes that simply selling insurance products through banking

channels and vice-versa does not symbolize a good banc assurance and is bound to fail

sooner or later. A banc assurance strategy can succeed only if it provides a cost-effective way

to build distribution capacity, especially for new market entrants. It provides a shift from total

40
dependence on tied-agency for existing insurers. It helps to penetrate new market segments

across channels abroad and it increases quality of business. By successfully mining their

customer databases, leveraging their reputation and distribution systems to make

opportunities and utilizing sales techniques and products tailored to the middle market, banks

can easily provide and convert a huge number of insurance leads in to sales and achieve

outstanding sales productivity for higher than traditional distribution channels alone-more

than enough to make banc assurance a viable alternative. Banc assurance need to have a

comprehensive understanding of themselves and the banc assurance feel that „banc

assurance‟ is their corporate strategy.

V Verma, (2003),”Building Profitability in Auto Insurance‟, The Journal, July-Dec,

2003, pg 52-70: In his research paper, pointed out the problems faced by insurers in respect

of auto (motor) insurance market and suggested measures to turn this loss making portfolio

into a profitable one. The study found that although motor portfolio was the biggest cash-

earning portfolio yet it was prone to huge underwriting losses. At the same time, there were

allegations against the insurance companies that they earn a lot on the investment on

policyholder‟s funds and hence are capable of honoring the claims. The study also threw light

on the aspects that in this respect the new private companies in India are cautious and avoid

motor insurance of commercial and old vehicles.

Arunachalam (2004), emphasis on the significance of data mining in the insurance

sector when new products are introduced. In the fast changing and competitive market in

insurance, executives require all sorts of information that were not predicted earlier. Such

information is to be supplied in a timely manner. In critical situations, it assumes greater

importance; functional managers require time-critical information. Often such demands are

either impossible or difficult to meet and result in inadequate or incorrect information. MIS

41
include percentage of claims processed in time, in force business, comparative profitability as

compared to its competitor‟s products analysis of customer feedback and cycle time for

critical operations. The key drives for modern organizations in a competitive environment

will be business intelligence derived out of consolidated data available with insurance

companies. Business intelligence is implemented through Online Analytical Processing

(OLAP) and data mining. Analytical processing answers business questions and therefore

helps in decision support. The price of insurance products is dependent upon, inter alia, the

insurance industries claims experience, which would be available from the database of

premium and incurred claims. The highest level of precaution needs to be taken for pricing

can help the insurer because complex formulae go into insurance rate making techniques and

manual computations are error prone and subject to limitations and constraints. In manual or

semi-manual systems the scope for errors is very high. New technologies are helping insurers

analyze and control exposure to fraud. These are powerful analytical software that can detect

patterns buy collusion by individuals working together. If the right kinds of Information

Systems and database are in place, information production whether for internal analysis or

regulatory submission should be a matter of a simple process.

C V Banu, (2004), “Quality of Service in Non-life Insurance‟, Insurance Customer

Service, ICFAI University Press, Hyderabad, Edited by KBS Kumar, 2006, pg 23-31: In an

article, analyzed the current and future standards of service prevailing in the non-life

insurance sector in India. The author broadly classified the services in the non-life sector into

five categories as product based, people based, client based, personal needs based and

business needs based. He used various management tools like six sigma, SWOT Analysis,

Service Quality Model (SERVQUAL) etc. to justify the customer service standards.

42
 R Ahuja, (2004),”Health Insurance for the Poor in India‟, Indian Council for

Research on International Economic Relations, and March, 2004: In his working paper, has

stressed on the importance of Community Based Health Insurance (CBHI) especially the

Universal Health Insurance Scheme, recently launched by the Government of India. The

study explores, how insurance sector reforms alter health insurance prospects for the poor in

India and what is likely to happen as a result insurance sector reforms. The study states that

the development of private health insurance market will provide greater insurance coverage

to the poor sections of the society. Insurance sector reforms can affect the poor through their

impact on the provision of health insurance services used by the low-income people as well

through its access to financing of health care. The study concludes that CBHI has an

important role to play and hence should be encouraged by the Government of India through

necessary intervention and insurance companies should also be reined by the government to

serve low income population.

R K Uppal, (2004)„”Profitability Behavior of Major banking Groups in the Post-

Liberalization and Globalization Era‟, Indian Management Studies Journal, Vol. 8, No. 2,

2004, pg 107-129 : In his research paper, undertook a comparison of the profitability of five

major bank groups in the post liberalization period. The time period for the study was 1997-

2001 and the comparison was done on the basis of ten parameters by using mean, SD, co-

efficient of variation, correlation and co-efficient matrix to find out the effect of each variable

on group profitability. The results of the study were that savings deposits and credit deposit

ratio had a positive impact on profits but the burden of priority sector credit and fixed

deposits ratio has a negative impact. The profitability of public sector banks was lower as

compared to foreign banks and new private banks.

43
 Sen (2004) analyzed the Indian Life insurance industry after the privatization of the

insurance market. The entry of privately owned firms forming joint ventures with foreign

heavy weights in Life Insurance providing was expected to raise both price competition and

service competition. As debates increase regarding the dominance of LIC to persist and that

of struggle among privately owned firms to continue to gain market share, concentration

indices are constructed on the basis of theoretical underpinnings to see whether or not there is

any change in the competitive structure of the life insurance market. Using regression model,

the relation between different concentration indices with premium and policy figures have

been analyzed to obtain the most appropriate measure of concentration. The study concludes

that there is a hint of movement towards a more competitive regime but there is a good level

of competition among the private companies to capture the market share.

Agarwal (2005), in his article, deals with the insurance status in India for the poor.

Insurance is more concentrated in relatively financially stable urban areas, but the

requirement for a cushion to absorb risks is greater among rural and urban poor. Even after

the opening of insurance to private players in India, its penetration is very low compared to

that in developed nations. Therefore for the development of the economy, insurance

penetration in India should grow, but that growth will be possible only when suitable

products become available.

T Sinha (2005), “An Analysis of the evaluation of Insurance in India”: It has been

highlighted that the importance of insurance is mainly in the rural sector where the majority

of the Indians still live. It shows how the recent privatization is playing a significant role in

the market. Based on recent economic estimates, the study provides projections for different

segments of the market.

44
 C Jampala, J Rajesh and V Rao, (2005), “Claim Settlement: The Key Success

Factor of LIC‟, Insurance Chronicle, July, 2005 : In their case study assert that in insurance

sector; the Key Success Factors (KSF) are product benefits, competitive premiums,

products/plan differentiations through promotions and claims settlements. Claim settlement is

the major success factor for the success of LIC. According to the study, the claim settlement

operations are transparent and fair as the corporation looks for reasons to settle claims rather

than to avoid making payments on claims.

T Sinha, (2005)„”Banc assurance in India‟, Insurance Chronicle, July 2005: In his

research paper, presented a study on the growth of the banking sector in India and lack of co-

ordination between banks and insurance regulations, bad loans and problems of overstaffing

in banc assurance which had created confusions in implementation of banc assurance in

Indian banks. The paper highlights the reasons why banks are entering into banc assurance

and finally describes a model for banks to enter into the insurance industry.

T Sinha, (2005), “The Indian Insurance Industry: Challenges and Prospects‟, Sep.

2005: In his paper throws light on the prospects and challenges of Indian insurance industry.

It provides an overview of the Indian insurance sector highlights the phenomenal growth

experienced recently and benchmarks the Indian insurance market against other regional

counterparts. On the basis of insurance penetration, insurance density and other variables it

can be shown that while India is still an underdeveloped insurance market yet it has a huge

catch-up potential. The paper also contains a detailed dissection of current regulatory issues,

banc assurance and detoxification in detail. The study also summarizes the potential and

pitfalls of rural insurance in India. The study suggests that insurance companies should target

the vast sector of rural population in India for their overall development.

45
 T Sinha, (2005), “An Analysis of the Evolution of Insurance in India‟, CRIS

Discussion Paper Series-2005.III, and The University of Nottingham: In his working paper,

has projected India as a global economic power and an attractive insurance market. This

paper examines the insurance industry in India before independence, highlights the

importance of rural sector and the role played by privatisation in the Indian insurance market.

Based on economic estimates, the paper provides projections of statements of the insurance

market for the year 2025.

B L Sharma, (2005), “General Insurance, its Contribution to Industrial Development:

A Study of North East Region‟, Ph.D. Thesis, Submitted to Gauhati University, 2005: In his

thesis, attempted to study the contribution of general insurance in the industrial development

of India with special reference to the north eastern region. According to his study general

insurance has contributed a lot for industrial development of north-east and has far more

potential to do so.

V V Gopal, (2005), “Indian Insurance Industry: Embracing the CRM Philosophy‟,

Insurance Chronicle, and Dec., 2005: In his article has given an overview of insurance in the

pre-liberalization era in India and narrates the growing significance of customer relationship

management (CRM) with the liberalization and globalization of insurance sector. The article

discusses the various CRM strategies that are in place and suggests a few that could be

implemented which include campaign management in retail insurance, top-down CRM etc.

D Chenappa, (2006), “Results of Liberalized India‟s Insurance sector, Challenges

and Opportunities‟, The ICFAI Journal of Risk and Insurance, Col. III, No.3, July 2006, pg

65: Its compared the premium collection and growth of various public and private sector

insurance companies to study the result of liberalization of India‟s insurance sector. However,

growth of premium is not the sole criteria for determining the status of the insurance

46
companies and there could have had been other criteria as well which could be taken into

consideration. The comparative premium structure of the companies revealed a lot of

regression.

R Kasturi, (2006), “Performance Management in Insurance Corporation‟, Journal of

Business Administration Online, Spring, Vol. 5, No.1, 2006, pg 1-30: In an article, focused on

the performance management system of insurance companies. According to the study the

success of an insurer depends upon identification of markets, assessment of risks, market

penetration, control over operating costs and investments. The financial parameters used for

measuring the performance of a company were net premiums, underwriting results, return on

investment, return on equity etc. The non-financial parameters included were growth in the

number of policies, market share, branch network, claims processing speed, timely reminder

to customers, number of dropouts from the policies, growth in product line, customer

satisfaction, research and development, etc.

H S Sandhu and N Bala, (2006), “Marketing of Life Insurance Services Revisited‟,

Indian Management Studies Journal, Vol. 10, No. 2, 2006, pg 1-33: In their article, reviewed

some studies on different aspects of life insurance like customer services, services marketing,

problems and privatisation of life insurance sector. The study revealed that scope of life

insurance had increased in the post-liberalization period and further study was imperative on

other aspects like role of IT, banc assurance, and Customer Relationship Management (CRM)

in the life insurance sector.

R Goldfarb, (2006),”Risk Adjusted Performance Measurement Performance

Measurement for Property and Casualty Insurance‟, 2006: In his article introduced risk

adjusted performance measurement for P&C (Property and Casualty) insurance companies.

Risk Adjusted Return on Capital (RARC) is one of the methods used in the study to evaluate

47
the performance of insurance companies. The method begins with the development of an

aggregate firm wide risk profile and uses various risk measures to identify how much of the

firm‟s capital was at risk. Apart from highlighting the level and sources of risk in the firm,

the measure of risk capital was allocated to various business units or activities and then used

to compare relative performance or to guide pricing decisions.

B S Sekar, (2006), “Balance Scorecard of Insurance‟, Insurance Chronicle, June,

2006, pg. 66-72: In his article, used balanced scorecard system to evaluate the performance of

insurance companies. The balanced scorecard was used to measure performance on the basis

of financial values (cost efficiency, investment return, underwriting results, premium growth,

profits etc.), internal business processes (business process, underwriting process, innovation,

CRM process etc.), customer (market share, customer satisfaction, customer retention etc.),

learning and growth (claims management skills, financial skills, marketing skills and

underwriting skills etc.)

Paul Fenn and Dev Vencappa, (2006), “Market structure and the Efficiency of

European Insurance Companies”: The study highlighted and examined the impact of

competition on the cost and revenue efficiency of insurance companies operating locally in

the various European Insurance markets.

Heywood James, (2006), “Privatization of Insurance markets in New European

Union Countries”: The study highlighted the insurance markets in the eight new members of

the European Union which are in the process of being liberalized. This analysis determines

the extent to which government actions have promoted or hindered this liberalization.

P V Sethu, (2007),”Effect of Privatisation and Globalization on Insurance Segments

a Threat to PSU (Non-life) Insurance-Whether Non-life Insurance can do Justice to the

Common Masses?‟ The Insurance Times, Dec., 2007, pg 23-24 : In his paper, studied the

48
impact of privatisation and globalization on general insurance business. According to his

study, the private companies have defied the basic objectives of insurance i.e. to promote

social security keeping in view the principles of equity and natural justice. The private

companies have mainly concentrated on creamy layer of insurance portfolios and have been

involved in unethical practices to earn more business. The public sector companies who are

functioning according to insurance principles are unable to compete with the private

companies because of this and also due to huge operating expenses on account of massive

staff strength, weak technology etc.

R Jampala and V Rao, (2007), “Distribution Channels of LIC‟, Insurance

Chronicle, Jan., 2007, pg 71-75: It conducted a study on the various distribution channels

used for selling life insurance. They concluded that LIC could not benefit much from these

new distribution channels while private sector players reaped the advantage of this new

mechanism. Hence, it is imperative for LIC to use these new channels effectively to increase

its business coverage.

J S Banga, (2007), “Market Strategies of General Insurance Companies in India: A

Study of Public and Private Sector, Ph.D. Thesis, Submitted to Punjab School of

Management Studies, Punjabi University, Patiala, 2007: In his thesis, attempted to examine

the effectiveness of marketing strategies, customer satisfaction level, product management

and distribution strategies of insurance companies. He found that while planning a product

these factors were very important to be considered. He concluded that private companies

provide better services to their customers and stressed on the proper training of the employees

and agents working with the insurance companies. He also urged the insurance companies to

redraw their marketing practices.

49
 V Pal and N S Malik, (2007), “A Multivariate Analysis of the Financial

Characteristics of Commercial Banks in India‟, The ICFAI Journal of Bank Management,

Vol.VI, No.3, August, 2007, pg 29-42: It investigated the reasons for financial differences of

public sector, private sector and foreign banks in India on the basis of profitability, risk,

liquidity and efficiency. Multinomial regression analysis was used on the sample of 74 banks

for the period from the year 2000 to 2005. The results from the study indicated that foreign

banks had better performance than public and private sector banks operating in India.

Acharyya Madhusudan (2007), “An empirical study of the management of

operational risk in four Europen Insurance Companies”: The study has analyzed data of four

major insurance companies of explore the quantifiable and non-quantifiable operational risks

to which they are exposed.

Capgemine and EFMA, (2007), “Market Mechanics‟, Asia Insurance Post, Vol.

VII, Issue 7, 2007, pg 25-26: Its light upon the key features of insurance business viz.

customer centricity, enabled distribution networks, implementation of multi-channel

strategies, updating technology and improving operational efficiency. An insurance company

had to reposition itself in respect of the above areas to be able to profitably sustain in the

market.

R P Sinha, (2007),”Productivity and Efficiency of Indian General Insurance

Industry‟, The ICFAI Journal of Risk and Insurance, Vol. IV, No.2, April, 2007, pg 33-39:

He made an in-depth study about the penetration level of general insurance in India in respect

of technical and scale efficiency and total factor productivity in a three-output, three-input

framework for the years 2003-04 and 2004-05, by using Data Envelopment Analysis and

Malmquist Total Factor Productivity Index. According to his study, public sector dominate

the private sector insurance companies in terms of mean technical efficiency in terms of

50
constant returns to scale, while the private sector insurance have a slightly higher mean

technical efficiency in terms of variable returns to scale.

Kumar Dr. G.S. Gireesh and Eldhose K V (2008), “Customer perception on Life

Insurance Service”: Te study has highlighted the customer awareness on various aspects of

life insurance policies offered by the insurance companies and service quality of life

insurance companies.

M Ahmed, (2008), “Marketing Strategies of Public and Private Life Insurance

Companies in India- A Comparative Study‟, Ph.D. Thesis, Submitted to Kurukshetra

University, 2008: The Researcher has made a comparative study of various public and private

life insurance companies in India in respect of marketing strategies. He concluded that private

life insurance companies had better marketing strategies than the public companies.

M Devarakonda and V S Ramesh, (2008), “Redefining Distribution- the Changing

Paradigms in Insurance Intermediation‟, Insurance Chronicle , Special Issue, Jan., 2008, pg

23-32 : In his article focused on the new insurance intermediaries for marketing insurance

products. The study covers all the prospective vehicles for distribution of insurance products

viz. online social networks, mall assurance, banc assurance, online sales brokers etc.

J M Oetzel and B S Ghosh, (2008), “A Case of the Tortoise versus the Hare?

Deregulation Process, Timing and Firm Performance in Emerging Markets‟, International

Business Review, Vol. 17, Issue I, Feb, 2008, pg. 54-77: In their paper, tried to find out the

relationship between market liberalization and performance in sixteen emerging economies of

Latin America and Asia including India. The variable used for measuring the firm‟s

performance was adjusted profits (profits before taxes/total firm‟s assets). The findings of the

study were that liberalization was positively related with firm‟s profits and there were no

51
significant profitability differences between local and foreign companies, while US owned

subsidiary companies had significantly less profits than the subsidiaries of other countries.

C Gosalia, (2008), “A Study of Financial Performance of Indian Non-life Insurance

Industry, Aug. 4, 2008: In his study involves an analysis of financial performance of non-life

insurance sector in India using financial ratios such as claims ratio, combined ratio, return on

equity ratio, capacity ratio etc. and other measures such as net premium earned, operating

profits, profits after tax, equity share capital and reserves etc. The study also to a very limited

extent examines the compliance of IRDA norms by the insurance companies in respect of

solvency margins and rural and social sector obligations. The study concludes that private

insurers are growing aggressively at a very fast rate and posing a serious problem for the

public players who are still dominating because of their already existing large base.

A S Sinha, (2008), “Indian Insurance Industry; An Industry Competitive Analysis‟,

2008: It states that general insurance industry is the backbone of a country‟s risk management

system. According to his analysis, their participation in financial market evens out

fluctuations and provides liquidity in the market. He analyzed the insurance scenario in three

aspects i.e. pre-nationalization, nationalization and privatization. The role of insurance during

these three periods has been studied with reference to various angles like socio economic

development of the country, risk management, customer services and the like.

S Rachappa, (2008), “Trends and Progress of Life Insurance Industry in India‟, Ph.

D. Thesis submitted to Osmania University, 2008 : It examined the trends and progress

evaluation of life insurance sector in India. The study is an exhaustive one covering all the

aspects of life insurance.

K J Singh, (2008), “Customer Relationship Management in General Insurance

Services‟, Ph. D. Thesis submitted to Kurukshetra University, 2008: He has written a thesis
52
on the relationship of general insurance companies with their customers and how to improve

such relations.

T S R Rao, (2008), “Indian Insurance Industry- the New Thrust‟, Insurance

Chronicle, Special Issue, Jan., 2008, pg 19-23: In an article has written about the

detoxification of insurance industry which was introduced in 2007. According to him

introduction of health insurance policies with higher covers of insurance for rural and social

sector provides opportunities for utilizing the untapped market in India. After the process of

privatization, the insurance sector has undergone gradual metamorphosis which has changed

the whole scenario. This study pointed that desertification has decreased the role of the

erstwhile most powerful authority Tariff Advisory Committee more commonly known as

T.A.C. which was entrusted the duty of determining the premium tariff of the various public

as well as private insurance companies.

Dr. H. Sadhak, (2009), “Life Insurance in India, Opportunities, Challenges and

Strategic Prospective, Sage Books Publication: It was a pioneering work on the Indian Life

insurance Industry with a new perspective. The book is a culmination result of research and

practical experience for a number of years by an internationally acknowledged financial

economist and practicing manager with proactive and visionary thoughts. The book has been

written in the context of Globalization, economic Reforms and Liberalization of Indian

Insurance and capital market and overall financial sectors. The scope and dynamics of growth

of Indian Life Insurance Industry has been discussed in the light of changes in micro

economic environment, demographic transition, changing market structure, changing

product-market relationship, emerging convergence in financial market etc. Dr. Sadhak has

also focused on certain critical issues like Strategic Planning and Market Research, Change in

53
Management Systems dealing with distribution and customer expectation with futuristic

perspectives which would provide immense guidance to the practicing managers.

S Siddiqui, (2009), “Indian Life Insurance Sector-An Overview‟, 2009: In his paper

presents an overview of the present position of life insurance sector in India and studies

various economic indicators related to life insurance companies operating in India viz. market

share, insurance penetration, equity share capital, premium earned, profit and loss etc. The

paper summarizes that LIC is the only life insurer in India that is fairly settled. The paper

suggests that improvement in insurance penetration and insurance density is required by

creating new products, conducting consumer awareness campaigns and market research,

spreading insurance education through universities and colleges, efficient and effective

grievance redressal mechanisms, fair trading practices and transparent disclosure norms while

addressing the policyholders.

A K Ronay and B Oztaysi, (2009),”Performance Measurement of Insurance

Company by using Balanced Scorecard and ANP‟ : In their paper have used balanced

scorecard technique and Analytical Network Process (ANP) to measure the performance of

three insurance companies in Turkey. Firstly, a questionnaire was prepared on the basis of

financial issues, customer issues, internal business processes and learning and growth.

Finally, by using the selected criteria and sub-criteria an ANP model is designed. The results

indicated that financial perspective is not enough to explain an insurance company‟s

performance and internal business process perspective have a considerable effect on

performance.

R P Sinhala, (2009) ,“Technical Efficiency of Indian General Insurance Companies:

A Non-Radial Approach”, The ICFAI Journal of Risk and Insurance, January, 2009: In his

research paper compared ten general insurance companies in terms of technical efficiency for

54
the years 2003-04, 2004-05 and 2005-06 using the slacks and super-efficiency model in Data

Envelopment Analysis. The results indicated a decline in mean technical efficiency in 2004-

05 compared to 2003-04 but an upsurge again in 2005-06. According to the study, two

companies namely Reliance General Insurance Company Limited and New India Assurance

Company Limited occupied the top two slots for all the years under observation.

R Kumar, (2010), “Performance Evaluation of General Insurance Companies: A

Study of Post-reform Period‟, Ph. D. Thesis, submitted to Faculty of Business Studies,

Punjabi University, Patiala, 2010: In his thesis, conducted a performance evaluation of

general insurance companies in the post-reforms period up to the year 2007-2008 on the basis

of profitability, efficiency and service quality offered to the customers. The analysis has been

done using mean, median, standard deviation, multivariate profitability analysis,

SERVQUAL scale, data envelopment analysis, Cronbach‟s Alpha test (for testing the

reliability of customer perceptions regarding service quality) etc. The study states that

insurance industry has recorded profound growth owing to liberalization, privatisation and

globalization but the reforms have adversely affected the underwriting results. Although

liberalization has inculcated efficiency in case of public insurers but private insurers are

trying to reduce the gap fast by providing better service quality to their customers.

M Eling and M Luhnen, (2010) ,“Efficiency in the International Insurance Industry:

A Cross Country Comparison”, Journal of Banking and Finance, Vol. 34, Issue 7, July, 2010,

pg 1497-1509: In their paper have provided new empirical evidences on frontier efficiency

measurement in the international insurance industry. The study contains a broad efficiency

comparison of 6462 insurers of 36 countries. Different countries, organizational forms and

company sizes are compared considering life and non-life insurers. The study detects a steady

technical and cost-efficiency growth in international insurance market from 2002-03 with

55
large differences across countries. Denmark and Japan have highest average efficiency

whereas Phillipines is the least efficient. Regarding organizational form, the results claim that

mutual fund companies are more efficient than stocks due to higher agency cost of stock

markets.

J D Cummins, M A Weiss, X Xie and H Zi, (2010), “Economies of Scope in

Financial services: A Data Envelopment Analysis of the US Insurance Industry”, Journal of

Banking and Finance, Vol.34, Issue 7, July, 2010, pg 1525-1539 : In their paper investigate

the economies of scope in the US insurance industry over the period 1993-2006. In their

paper, they have tested the conglomeration hypothesis which holds that firms can optimise by

diversifying across businesses against the strategic focus hypothesis which holds that firms

can optimize by focusing on core business. They have analyzed whether it is advantageous

for insurers to offer both life-health and property-liability insurance or to specialise in one

industry segment. The study estimates cost, revenue and profit efficiency utilising Data

Envelopment Analysis and test for scope of economies by regressing efficiency scores as

control variable. The conclusion of the study is that strategic focus is superior to

conglomeration in the insurance industry.

M Singh and R Kumar, (2011), “Efficiency analysis of the Public Sector General

Insurance Companies: A Comparative Study of the Pre and Post-Reform Period”, The ICFAI

Journal of Risk and Insurance, October, 2011: In their research paper have compared the

efficiency and productivity of public sector general insurance companies in the pre and post

reform periods using Data Envelopment Analysis. The pre-reform period has been taken from

the year 1993-94 and the post-reform period has been taken from 2000-01 to 2007-08. The

results indicate that the efficiency of the public sector general insurance companies is higher

in the post-reform period compared to the pre-reform period.

56
 S Sharma, (2012), “Performance of General Insurance Pre & Post reforms periods”

The Ph. D thesis highlight that the performance of pre & post reforms of public & private

general insurance and also identify the factors for reforms of general insurance.

1.13 RESEARCH GAP:

In spite of vast literature available on insurance, there still exists a gap which offers

further scope for research. As for example, sufficient studies have been made on marketing of

insurance products, growth of premium, impact of insurance on socio-economic development

of the country, life insurance, customer satisfaction, productivity of insurance companies,

investment portfolios etc. The present study is undertaken with a view to fill up this gap in

literature as no such related study has been undertaken in regarding customer satisfaction

regarding comparative analysis of performance evaluation life insurance companies. Hence,

this study has been proposed and undertaken and the need for the study can be justified.

1.14 SIGNIFICANCE OF THE STUDY

The reforms in the Indian insurance sector have led to significant changes not only in

the industry but in the economy as a whole. The insurance market has been converted from a

seller‟s market to a buyer‟s market. With the entry of private and foreign players the market

has become dynamic and fiercely competitive. The insurance companies are witnessing a

paradigm shift in terms of various performance parameters, customer services, use of

information technology, advanced marketing strategies, deeper market penetration, customer-

specific products, and social welfare obligations and so on.

This study is proposed mainly as there has not been any comprehensive research on

the comparative performance of public and private insurance companies. This research was

being an attempt to conduct an in-depth study of performance of Life Insurance companies in

57
public and private sectors. The study was make a comparative analysis of public and private

sector life insurance companies with regard to market share, premium collection, customer

satisfaction and product awareness of public and private insurance companies. The study was

not only help in determining the comparative status of public sector companies but also help

in analyzing the relative status of public companies against the private companies. Also, this

is high time to judge the performance of private sector companies who are new in the field

and hence demand special attention and performance analysis. It makes sense to find out their

position in the industry and their market position vis-a-vis the public sector, who have been

the market leaders for long in the Indian insurance market. Hence, the research titled,

“Performance of Life Insurance Companies: A Comparative study of Public & Private

Sectors”, is important to evaluate the performance of Life insurance companies, public as

well as private, market share, customer satisfaction number of lives covered and their

contribution to social growth and development.

1.15 OBJECTIVES OF THE STUDY

The study has the following objectives:-

1. To compare the profitability of public and private life insurance companies;

2. To analyze the market share and premium collection by public and private life

insurance companies;

3. To test the awareness level of customers about various products of public and

private life insurance companies; and

4. To analyze the customer satisfaction level in public and private life insurance

companies

58
1.16 RESEARCH QUERIES

The research study is centered on the following research queries:

1. Whether the differences in the profitability ratios of public and private sector

companies are increased?

2. Whether the gap in market share of public sector insurance company and

market share of private sector insurance companies is enhanced?

3. Whether the customer awareness level in public sector is more than the

private sector?

4. Whether there is significant difference in customer satisfaction level in both

the private and public sector companies?

1.17 RESEARCH METHODOLOGY

The study is related to the performance of public and private sectors life insurance

companies of India. The researcher has evaluated the performance of public and private

sector insurance companies in terms of market share, profitability, premium collection and

status of claim settlement and number of lives covered by the policies. Besides that, the

awareness level of buyer on life insurance product and customer satisfaction level have been

under taken. The study is done into two parts‟ i.e. public sector insurance company and

private sector insurance companies. The public sector comprises of Life Insurance

Corporation of India. In case of private sector life insurance companies, the researcher has

selected 10 (Ten) companies out of existing 23(Twenty three) private sector companies which

are operating business in India and registered under the IRDA Act 1999. The researcher has

applied judgment sampling method in selecting sample of private companies. In this case the

59
researcher has chosen only those companies which were registered on or before 2001 under

this Act.

Sample units of study:

The researcher has selected following private and public sectors companies for the

study.

Private Sector Companies:

The various laws relating to the business of insurance were amended in 1999. The

Insurance Regulatory and Development Authority (IRDA) were established in December

1999, to regulate and ensure the orderly growth of the insurance industry. The IRDA was

authorized to allow companies incorporated in India to transact life insurance business,

provided the foreign shareholding was not more than 26%.

In private sector, up to 31st March‟2014, there were 23 private sectors life insurance

companies operating in India. The researcher has chosen only following ten private

companies for the present study:-

1). HDFC Standard Life Insurance Company Limited, w.e.f. 23rd October‟2000.

2). Max New York Life Insurance Company Limited, w.e.f. 15thrd November‟2000.

3). ICICI Prudential Life Insurance Company Limited, w.e.f. 24th November‟2000.

4). Kotak Mahindra Old Mutual Life Insurance Company Limited, w.e.f. 10th Jan‟2001.

5). Birla Sun Life Insurance Company Limited, w.e.f. 31st January‟2001.

6). Tata AIG Life Insurance Company Limited, w.e.f.12th February‟2001.

7). SBI Life Insurance Company Limited, w.e.f. 30th March‟2001.

60
8). ING Vysya Life Insurance Company Limited, w.e.f. 2rd August‟2001.

9). Bajaj Alliance Life Insurance Company Limited, w.e.f. 3rd August‟2001.

10). Met Life India Insurance Company Limited, w.e.f. 6th August‟2001.

Public Sector Companies:

As the public sector insurance company is only LICI, therefore the researcher has

collected information from LICI and compared the same with the average performance of all

select private insurance companies.

In case of interpreting information related to performance of the companies the

researcher has collected information on national basis regarding market share, profitability,

premium collection by the insurance company.

For interpreting the information related to customers awareness for various products

and satisfaction level the researcher has collected primary data from the policy holders of

public and private life insurance companies located in Guwahati .In this context, Guwahati

has been chosen, as majority of private insurance companies are operating in Guwahati and

their business in entire Assam are controlled from Guwahati regional offices.

Sources of Primary data: -

The researcher has collected primary data from policy holders of select private and

public life insurance companies with prepared schedule. The researcher has selected the

policy holders on basis of judgment sampling method. The criterion of judgment is

educational qualification, gender, occupation, premium paid, and income level of policy

holder. The researcher has selected 50 policy holder from each of 10 select private insurance

companies and 500 policy holders from the LICI residing in Guwahati.

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Sample size of Policy Holders:

The sample size of policy holder is 1000(i.e50×10+500).

Besides the policy holders, the researcher has also contacted regional heads of all

select private and public insurance companies for meeting few queries.

Sources of Secondary Data:

The researcher has collected secondary data from following documents and

web sites:

1) Annual Report of IRDA

2) Annual Report of LICI

3). Annual Report of selected Private Insurer.

4) Various Non Print Media

a) http://www.google.com

b) http://www.irdaindia.org

c) http://www.iii.com

d) http://www.licindia.com

e) http://www.hdfclife.com

f) http://www.maxnewyorklife.com

g) http://www.iciciprulife.com

h) http://www.kotakmahindralife.com

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 i) http://www.birlasunlife.com

j) http://www.tataaiglife.com

k) http://www.sbilife.com

l) http://www.ingvysyalife.com

m) http://www.bajajalliancelife.com

n) http://www.metlifeindia.com

Tools of analysis:-

Some statistical tools like percentage, average, ratio, diagram, pie charts, tables, trend

analysis etc and management accounting tools & technique have also been used for

interpretation of data and outcomes.

PERIODICITY OF THE STUDY

This study was cover the twelve year period from 2001-02 to 2013-14 for interpreting

secondary data.

1.18 LIMITATION OF THE RESEARCH STUDY

The performance evaluation of insurance companies includes only information on

market share, profitability premium collection, customers‟ satisfaction, product awareness

etc. Other things are excluded from this study.

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1.19 SUMMARY OF CHAPTERISATION OF THESIS

Chapter I – Introduction

Introduction, Principles of Insurance, Function of Insurance, Importance of Insurance,

Features of Insurance, Economic Theory of Insurance, Life Insurance Vs Other

Savings, Nationalisation of Life Insurance, Statement of problem, Rationale of the

study, Review of Literature, Research Gap, Significance of the study, Objectives of

study, Research Queries of the study, Research Methodology, Limitations of the

study, Chapterisation & Conclusion.

Chapter II – History & Profile of Life Insurance Companies

In this chapter the scholar explain the History of Life Insurance in India, Insurance

Industry in India at Present, Insurance Industry in India in Future, Importance

Milestone in Life Insurance Regulated in India, Malhotra Committee, Insurance

Regulatory Development India, Profile of selected samples of life insurer, Life

Insurance in India, Public Insurer: LICI, Private Insurer: HDFC, MAX NEW YORK,

ICICI, KOTAK, BIRLA, TATA AIG, SBI LIFE, ING, BAJAJ, METLIFE,

Chapter III– Profitability, Market Share Analysis

In this chapter scholar analysis the profitability, market share & premium collection

of LICI & Pvt. Life Insurer, used management accounting tools, tabulation the data,

diagram representation & interpretation of profitability, market share & premium

collection of Public & Pvt. Life Insurer.

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Chapter IV – Product Awareness and Customer Satisfaction

In this chapter scholar explains the life insurance awareness about various insurance

product of Public & Pvt. Life Insurer and also explain the meaning of life insurance

customer satisfaction of Public & Pvt. Life Insurer and also analyses product wise

satisfaction level of customers of the public & Pvt. Life insurers separately with the

help of tabulation of data, diagram representation, interpretation

Chapter V– Summary of Findings and Conclusion

In this chapter scholar explain the overall findings, summary, and conclusion of all

the research work and scope for future research, Bibliography, Questionnaire,

Annexure

1.20 CONCLUSION

The Insurance sector in the country has come in full circle, from being an open

competitive market to complete nationalization and then back to a liberalized market.

The entry of private players in Indian insurance market has changed the nature of

competition and the vigorous campaign of these players has increased customer

awareness. This has led to rapid increase in insurance business and a sizeable gain of

this has also been reaped by Life Insurance Corporation of India. The present thesis is

an attempt to study the performance of public & private sector life insurance

companies.

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