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Practice of Life Insurance

Presentation By:

Manoj Verma

Life Insurance

Life Insurance is a contract for payment of a sum of money to the person assured (or failing him or her, to the person entitled to receive the same) on the happening of the event insured by the contract.
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Advantages of Life Insurance

Complete peace of mind. Security for future uncertainties. Superior to any other savings plan. Encourages and forces Thrift. Easy protection against Creditors.
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History of Life Insurance

In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrith ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
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Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta.
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In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. Manoj Verma (MAIMS) 6

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In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
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An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Manoj Verma (MAIMS)

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In 1999, the Insurance Regulatory and Development Authority popularly known as IRDA was created by an act of the Parliament to regulate all insurance companies and businesses in India. IRDA has evolved into an effective regulator and it has facilitated the entry and growth of private players in the insurance sector. Since then the growth of the insurance industry in India has never been the same again.
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Life Insurance is a sun rise industry in India. Many major international players are operating in collaboration with Indian partners. The Joint Ventures are backed by strong capital base and latest technology. The sector was opened up for private players in the year 2000. Currently there are 19 companies operating in India in addition to LIC of India.
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After opening up of the sector the life insurance industry has grown leaps and bounds. The industry has earned $ 45 billion total premium income during the F.Y 2007-08.
The life insurance companies are the largest institutional investors in India.

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The life insurance companies have brought in huge capital for investment and expansion. They have generated good employment opportunities, both direct and in-direct. The latest technology is being introduced by all the companies thereby improving the servicing standards.
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Innovative and market driven products are being offered by all the companies. All companies are building the distribution channels with strong tied agency network. Alternate distribution channels are also being developed in order to strengthen the overall process of procuration of business and deliver of service. India has a total of 2.5 million agents of which 50% are with LIC alone. There is a sharp increase in the remuneration of life insurance professionals
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Challenges : Many
Professionals and experts are in short supply. Man power requirement has increased manifold. Increase in salaries to employees leading to high levels of attrition. Retention of employees is a major challenge.

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Challenges : Many

India being a vast country and with huge population, is a challenge for the life companies. Designing products for the people of various economic strata is a daunting task indeed.

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Prosperity of all companies depends upon their capability to innovate and include all sections of the society into their business portfolio. Micro Insurance and financial inclusion will be major challenges for all the companies. There is a shift from traditional endowment policies to unit linked policies.

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There is a shift from long term policies to short term.

Customers are expecting higher returns and thereby a strong emphasis on unit linked plans.

When stock markets are volatile can the life insurance companies overcome the turbulence? Are they equipped to tide over the storm?
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One of the key drivers of the Indian economy has been the dramatic increase of the urban population. Urban India today is already more populous than the entire United States. By 2025, it will exceed the current population of the European Union. Apart from this, the real potential lies in the rural India where prosperity is on the rise

Go Rural is the slogan for most of the companies in India today.

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Key Issues

Building institutions for development of self regulation for better market conduct Development professionalism and organising research for industry to develop on scientific lines Ensuring profitability and return to stakeholders by cost competitive policies.
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Insurance a Hedge against personal Risk

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A cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk. Its a method of risk transfer.
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Hedging is a technique for transferring the risk of unfavorable price fluctuations to a speculator by purchasing and selling future contracts on an organized exchange. Hedging is another method of risk transfer
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Insurance Vs. Hedging

Although both the techniques are similar in that risk is transferred by a contract; but there are some important differences between them

Risk Insurability Reduction of risk by law of large number.

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Insurance - a hedge against personal risk

To an individual Insurance provides Security and Safety Insurance affords Peace of Mind Insurance eliminates Dependency Insurance encourages Savings Insurance provides Profitable Investment Insurance fulfills the needs of a person
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To Business Uncertainty of business loss is reduced Business efficiency is increased with insurance Key Man Indemnification Enhancement of Credit Business Continuation Welfare of Employees

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To Society Wealth of the society is protected Economic growth of the Country is encouraged Reduction in Inflation

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Insurance an alternative to Investment Products


Investment means engagement of funds for the sake of future return. In normal circumstances the purpose of investment is either to have sufficient return or to have significant arrangement of funds so as to meet the future obligations. In India, Insurance is mostly perceived as an investment of funds; but the mechanism is entirely different.
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Investment: Basic mechanism

Expected rate of Return Involvement of Risk More Risk More Profit Conditional engagement of funds Time element plays its role Very much speculative

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Insurance: Basic mechanism

Social device Pure Risk coverage Pooling of Funds Law of Large numbers Risk Coverage Assurance of indemnification against a specific peril
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Insurance an alternative to Investment Products

Purpose Risk Coverage/ Protection Certainty/ Better assurance No speculation No more Risk more profit Comparatively better return Sharing of Losses Third party assurance Solution for all family needs Lesser knowledge of investment process may work
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Insurance Products collateral security in rising hire purchase market

Concept of Hire Purchase

Hire purchase (abbreviated HP) is the legal term for a contract, in this persons usually agree to pay for goods in parts or a percentage at a time. In cases where a buyer cannot afford to pay the asked price for an item of property as a lump sum but can afford to pay a percentage as a deposit, a hirepurchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal installments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner.
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Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract. If the buyer defaults in paying the installments, the owner may repossess the goods, a vendor protection not available with unsecured-consumer-credit systems. HP is frequently advantageous to consumers because it spreads the cost of expensive items over an extended time period.
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In lending agreements, collateral is a borrowers pledge of specific property to a lender, to secure repayment of a loan. The collateral serves as protection for a lender against a borrower's default - that is, any borrower failing to pay the principal and interest under the terms of a loan obligation. If a borrower does default on a loan (due to insolvency or other event), that borrower forfeits (gives up) the property pledged as collateral - and the lender then becomes the owner of the collateral. In a typical mortgage loan transaction.
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Collateral, especially within banking, may traditionally refer to secured lending (also known as asset-based lending). More recently, complex collateralisation arrangements are used to secure trade transactions (also known as capital market collateralization).

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Insurance Products - collateral security in rising hire purchase market

Easy availability of loan Greater assurance to lender Interest can be better negotiated Risk coverage + credit enhancement Reduction of Uncertainty Elimination of Dependency Encourages savings Better Decision Making
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