Economy: 6 pillars + theory + current + BES17 (Budget & Eco.

Survey 2017)
1) Banking 2) Finance 3)
Insurance, 4) Financial Inclusion

1.Banking, Fin,
2.Budget 3.BoP
Insur.
• V1:c2,3, 6,9,11(GST),13 • V1c:5
• V1:c3,4

4.Sectors 5.Infra 6.HRD

• V1c:7(Textile),11(trade) • v1c:12, 14; Budget^Rail • V1c:10
 Insurance This icon means the
given slide is more imp
for insurance jobs than
BEFORE "L2" After for UPSC IAS/IPS. But
Series "BES171" doesn’t mean completely
ignore, since ‘horizontal’
• 155 • ~50 [theory + awareness necessary.
contemporary
]
• Govt
schemes-
separately
under the
Fin.inclusion
 • Debt instrument.
• Social device / legal contract
• Against eventualities of death /
damage

1.Life
um
Pr e m i
2.Non-Life
(General)
Insurer Insured
Assurer Assured
Underwriter Client
Household: Stability in household Insurance
against death / disability /damage– else
child labour & prostitution Why is
“state”: ▼ burden on Government to insurance
run social security schemes: ▼ fiscal important for
deficit economy?
Entrepreneur: fire, theft= can’t take
bold decisions without insurance of
property, transport etc.
Economy: Insurance as an “FI”: turns
savings into investment – circular flow
of money. Has to invest part of
premium in social / economy
infrastructure (PSL).
 What’re the principals of insurance?
[Ethics]
Already HIV/cancer and buying health insurance with fake
Uberrima medical Certi.
fides Good faith, hide nothing
5 lakh rs. House burnt, couldn’t give CAT exam= give rs.50 cr
Indemnity Only to extend of “REAL” rupees loss, not
imaginary
Subrogatio Insurerfaulty boiler caused
can Recover explosion?
from negligent 3rd
n party
Causa Direct loss link (explosion w/o fire= no
proxima $$)
If “x” not happen,
Fan buying client
accident remains
insurance for Tigerin
Shroff
Insurable same position, “x” happens client in
interest bad position

Intro Body Conclusion

 Insurance: History & mathematical Models

4500 • Babylonia Caravans

BC

• European Maritime Insurance

1347

• Llyod’s Coffee House, UK as

meeting place of insurance Edmund Haley
1688
agents (1693)
• Mortality table
• 1 life insurance co. “Old
st • Premium vs. lifespan
• Joseph Dodson
1756 Equitable”, UK updated

• Dr. Nicolas Barbon

Jakob Bernoulls
1967 • 1st Fire insurance (1700)
• Laws of Large
numbers
• To predict average
total loss /liability of
1. 1000 BC: Aryans practiced Insurance History
“community insurance”, Joint
family system itself insurance
2. Rigveda: “Yogakshema” (well In India
being) – name of LIC HQ,
Mumbai & corporate magazine
3. Gita: “योगक्षेमं वहाम्यहम”्
(Yogakshemam Vahamyaham)- I
ensure safety and well being (of
my devotees) – LIC motto
 Insurance companies in British India
• 1st Life insurance co. in India:
1818: Oriental Life insurance.

• 1st General insurance: Trinton,

1850: Calcutta
• Bombay Mutual life assurance
company- first INDIAN
1870: company.

• Indian mercantile insurance

1907: ltd. Bombay

• New India Assurance- 1st fully

1919: Indian owned (general)
 Both started by foreigners
Presidency Insurance
Banks • 1818: Oriental life (1st)
• 1806-45->1921->55
Targets
Target • foreign widows, Indians
• Merchants, charged extra premium
foreigners “more likely to die”
Swadeshi Swadeshi
• Allahabad (?, 1865), • 1870: Bombay Mutual life
PNB (1894) assurance. [no extra
premium]
Both faced problems in aftermath of Great depression

1912:
1913 • Life insurance
companies act
• Companies Act

1934 1938:
• RBI Act • Insurance Act
1949 Aftermath of great
• Banking regulation Act depression and
collapse of companies
both had to be Nationalized due to scams, fin-exclusion

1948
• RBI nationalized

1955 1956 (Corporation)

• LIC Act took over ~245
• Imperial Bank->SBI desi, foreign, provident
society & insurance co.
Private Banks
1972 (Corporation)
• 1969 (14 banks)
• GIC & its four subsidiaries
• 1980 (6 banks) took over ~107 GI
 1972: General insurance Nationalization Act
Subsidiar
y
Owner Holding
Compani
es
Natl.insuranc
e

New India
assurance
Government GIC
United India 4 General NABARD
Insurance 30%
Cos.
Oriental 35%

GIC
2002: Govt takes direct control 35%
Allowed to issue more shares,
provided Government 5th Agri. insurance Company ltd.
(2002)
shareholding alteast 51%
 • DESHI BANK?
1. PNB: 1894 Distribution of Banking Industry
2. Punjab-Sind (’08) BMB Near Ports, Trading Centres
3. SBPatiyala (‚17) ‘13
4. OBC (‘43)
5. SB Bik&Jai (40s-63)
1. UCO-United Commercial
1. Bank of India (‘06) ‘43
2. Central Bank of India 2. United Bank of India ’50
(‘11) 3. Bandhan Microfin’14
3. Union Bank (‘19)
4. RBI (’34-35)
5. Bank of Maharashtra
(‘35) 1. Corporation (06)
6. Dena Bank (‘38) 2. Canara Bank (’10)
7. IDFC NBFC’14 3. SBMysore(13)
4. Syndicate bank (‘28)
5. Vijaya (‘31)
1. Andhra bank: 1923;
’41 SBHyd
2. TN: Indian Bank (‘23);
Indian Overseas
SBTravenkore’4 bank(‘37)
5
 General insurance companies In the presidency
cities, from North to
South
Oriental insurance
1947 – Govt. owned
company, HQ Delhi
56: under LIC , 73: under
GIC, 2003: independent
Insured Reliance-Jamnagar
Power, steel, chemical
plants
National insurance
1906, HQ: Kolkata,
During Swadeshi
New India Assurance
Movement era
1919, Mumbai, Sir Dorabji
Strong presence in North
Tata
& Eastern region
1st Fully Indian owned. Now United India 1938, HQ: Chennai
100% Govt.owned 2nd Largest General insurance Co.
Major player overseas (2013)
market Insured ONGC’s offshore assets
Satellite insurance (INSAT (2015, May); Tirupati, Airport-
2E) Hyderabad, Mumbai
 Types of insurance?

Non-
Life Life /
(~80%) General
insurance

Re-
insurance
Life insurance types

@Maturit @Deat
Type y h

Whole
No Yes
Life
Low premium, Short
term • Life Ensured for 1 year @2
Term No Yes lakh
• Rs. 330 per year. No
Endowm moneyback if you don’t die.
Yes Yes • Premium $$ invested in a
ent
fund
• Return =~ Fund’s
ULIP Yes Yes Performance
• Debt | balanced |equity fund
• Lost shine after Sub-prime
 What are the challenges to life
insurance biz.?
1) ULIPs lost shine after subprime crisis hurt Indian share
market
2) Inflation – negative REAL interest
3) Consumers Shifting from insurance to “pension” for
better returns while being “ALIVE”
4) Cost of ops. High, need more working capital : hence
FDI 49% permitted.
5) Agents focus on “selling” from tax-benefit / “rate of
return”, rather than generating awareness abt need for
insurance
6) => other pension / investment products with better
returns & tax benefits
7) => rural penetration low, because they’re not income tax
payers, & see +ve real return in gold
8) Reforms taken in insurance amendment: Life insurance
policy can be used as collateral for loan- unless
Intro
insurance Body
company disagrees. Conclusion
Will help the farmers /
 General Insurance, Major Types

Accident cum Health insurance Fire

Death • Cashless/ • Houses, industrial
reimbursement assets

Marine Rural
Motor (largest biz) • Cargo, vessel • Crops, livestock
3rd party: insures party other than owner – Compulsory
under law
Comprehensive: both owner & others
 What are the challenges to general
insurance biz.?
• Fear of discovery of ‘value’
House fire / theft • IT raids & ransom demands

• Only 3rd party because

Motor vehicle compulsory.
• Not doing “comprehensive”
• Insured vehicle- careless to lock
Moral hazard it
MSME • “Value” for money , tailormade
industries: transit products….x
/ operation
Adverse • Risky persons buying- e.g. high
selection BP, Obese, diabetic person

Intro Body Conclusion

 What are the challenges to health
insurance?
1) Insurance: Highly regulated, but
Healthcare: highly unregulated.
2) Supply demand mismatch: between
(doctors-hospitals) vs. patients
3) standardized treatment costs difficult to
ascertain, unlike car damage.
4) Delays in claim settlement: less repeat
customers
5) Third party administrators (link client,
hospital) - their substandard service
6) Higher premium for elderly

Intro Body Conclusion

What are the Business Risks in insurance
industry?
• If too much focus on health but
then SARS / Ebola?
Portfolio • Non-life: heath, motor, marine
product
• Financial market ups and downs,
Market
but Clients want optimal return
• Changing demography and alt.
Marketing
distribution channels
• Database hacking, Poaching of
Operation staff / agents
al • death, disease, disasters ▲

Intro Body Conclusion

 What’re common challenges to life & general
insurance?
1) Capital intensive industry: high commission,
marketing, training, salary-database, solvency
margin…hence FDI necessary (49% permitted)
2) Private players not generating enough profits.
3) Bleeding in commission rates and marketing
4) Insurance is ‘sold’, but never bought, brokers
need more skill, network than banker.
5) Banking- asset driven industry, while insurance is
liability driven industry.
6) Rural people: either disinterested / un-served
despite schemes & IRDA norms.
7) End result: insurance penetration and density low.

Intro Body Conclusion

 Definitions

• total • Total
insurance Premium /
premium/total Total
GDP population
Insuranc
•% • Or Per capita
e Insuranc
premium
Penetrati e density
on
 Types of insurance?

Non-
Life Life /
(~80%) General
insurance

Re-
insurance
Re-insurance: to stabilize peak profit and peak loss…

Great
Profit
Loss
Life
Insuran
London ce
(1966)
Re-
If no
pandemic Chicago fire
(1871)
Insuran
If no plane- ce
crash… New York General
fire (1835) Insuran
ce
 Re-insurance: to stabilize peak profit and peak loss…
1972: General • GIC Invests money in G-sec,
Insurance biz
nationalization Act UTI, securities of private and
• Private General Insurance cos public cos.
nationalized • GIC insures Air India, HAL,
• Restructured: GIC + 4 AAI directly and Manages
subsidiaries • third
2015:party motor pool
Insurance Act
2000 Amendment Amendment
• More than one RE allowed.
• Gen. Insurance Corporation of • 2015, Dec: IRDA
India (GIC) to be sold notification, private players
reinsurer can apply min. 100 cr.
2002 Amendment Capital.

• 4 subsidiaries transferred
directly under Govt. ; GIC
“wholly owned Company” of
Govt.
Act 1961: 100% owned by RBI, HQ-Mumbai

em
• Max. 1 lakh insured
t h
e of an • If banks is shut
n
O hai rm
is C down
• If bank is
merged..not
possible Premium
Banks- All types from their
own pocket

Client- all type of

deposits
 DICGC: Credit Guarantee? (no longer after 2003)
• Banks pay fee ~0.3% of
SIDBI + Credit Guarantee loan
• If NPA->money from
Govt Fund Trust for Micro
and Small fund.
Enterprises • Govt to SIDBI
(CGTMSE)- 2000 • 4:1 contribution.
Dept. of National Credit MUDRA Loans

Financial Guarantee Trustee Skill development loans

Stand up India
services Company (NCGTC)
Credit Guarantee Fund Scheme for
Educational Loans (CGSEL)

Commer ECGC ltd. Export Credit Guarantee Corporation

of India fund
ce
Ministry
 Both had to setup new statutory bodies
• RBI already since • 1996: IRDA setup,
1934 • 1999: Act
• DRT->SARFAESI Act • 2014: ordinance
2002 name changed:
• Payment regulation & Insurance regulatory
settlement system and Development
act-> PRB (Budget authority of India.
Narsimhan
2017)
I Malhotra
(IRDAI)
(1991) & II Committee
(1998) [RBI 1993 [IAS,
Gov]
First and only
RBI Gov.]
person to become
Gov from RBI
Officer cadre.
GSM2: Write structure and function of
IRDAI • Previously- IAS,
IRS used to get
IRDA chief
position. But..
Chairma • 1977: TS
5 yr / 65 age
n Vijayan: LIC
TS Vijayan career officer
• 2006: LIC
5 4 Part Chairman
5Fulltime
yr / 62 age time • 2013: IRDAI
Total 10, re-appointment chief
yes.
Intro Body Conclusion
GSM2: Statutory, Regulatory Bodies-
IRDAI
1) RBI gave blanket permission to all NBFCs to
run insurance business, But they have to get
IRDAI registration.
2) IRDAI doesn't have 'quota', but gives separate
licenses for life and general. Min. capital 100 cr.
3) Registration, renewal and regulation, Withhold,
suspend, cancel registration
4) Accounting, solvency, audit, commission to
agents …Appeal-> SAT
5) Member of International association of
Insurance Supervisors (IAIS), Basel,
Switzerland.

Intro Body Conclusion

 Which of the following bodies have HQ in
Mumbai?
1. RBI • RBI, SEBI:
2. SEBI
Mumbai
3. IRDAI
• IDRAI:
4. PFRDA
Answer Choices Hyderabad,
A. Only 1 and 2 Telengana
Mock Question

B. Only 1, 2 and 3 • PFRDA:

C. Only 1, 2 and 4 Delhi
D. All of them
1. Skip 2. Attempt 3. Mark n Review
 Both had interest / tarrif control

• Administered • Insurance Act->

interest rate “Tariff advisory
• BPLR committee”
• Base Rate • Decide the
• MCLR (2016) premium, slabs.
• 2007: GI- De-
Narsimhan I Malhotra
tarrified, except 3rd
(1991) & II Committee
party motor.
(1998) 1993
Premium: statistics,
Lending Rates: probability theory,
Cost of Raw material ($$) demographic trend, return
+Spread in financial market.
 Both had to dilute Government shareholding
• Dilute • Allow
Government insurance
shareholding companies to
• SBI -> ~60% issue new
Narsimhan I
shares
Malhotra
(1991) & II [ownership
Committee
(1998) 51%]
1993
 How many Public sector Players? players?

• PSB: 27-5 • 1 LIC,

associate – • 5 General
1BMB= 21 [4+1],
left • 1 re-insurer
Narsimhan I (GIC)
Malhotra
(1991) & II Committee
(1998) 1993
 Both had to be allow private players entry
• Allow Private • 2000: Private cos.
banks & Foreign Allowed.
Banks • 2015- FDI: 49%
• 1993, 2001, 2013 (earlier 26%)
• Private Banks • 2016: automatic
FDI: 74% route
Narsimhan I Malhotra
(1991) & II Committee
(1998) 1993
 How to setup new entity ? Min. Paid up capital

• UsCB: 500 cr. • Life, health,

[BASEL-III 9% gen. insurance:
CRAR] 100 cr
• PB, SFB: 100 • Re-insurer:
cr. [15% 100 cr. [
Bank
CRAR] Insuranc
2015 rule]
(on-tap) e
 What about foreign companies’ entry in India?
• Allow Foreign • Foreign
Banks companies not
• Even Full fledge allowed.
foreign banks • Max. they can do
allowed (as only JV (49%)
subsidiaries with with Indian
Narsimhan I
100% foreign Malhotra
company.
(1991) & II
ownership) Committee
(1998) 1993
Insurance FDI: 49%-> should we raise to 74%?
Disagree
1) Trade Union: Profit/target minded MNCs will
not entertain employee unions' demands.
“target driven private companies” /
Whistleblower / claim-settlement=> Job Loss.
2) May use clients' money for speculative
trading, investment in junk bonds to offer
higher return => overleveraged companies
=>Collapse of asset bubble/NPA
3) Foreign participants have their own norms in
parent country -subsequently may lobby in
India to relax its norms, loopholes in taxation /
capital gains / royalties.

Intro Body Conclusion

Insurance FDI: 49%-> should we raise to
74%? Agree
1) Will provide more capital-> economies of
scale, cheaper ops., products, for
increasing density and penetration
2) “Investment pattern”; IRDA-investigate,
SAT appellate so mischief unlikely.
3) Publicly listed companies: independent
directors, auditing norms, whistleblower
protection, CSR.
4) Merger, consolidation of private and
public insurance biz=> we can sell
policies to 3rd world.

Intro Body Conclusion

 Backup / emergency / safety?
• 4% CRR • Investment
• 20.5% SLR pattern
• 9-15% CRAR, • Solvency Margin
• 0-2.5% CCCB
under BASEL-III
Insuranc
Bank
e
They’ve to buy
They’ve to buy re-
deposit insurance
insurance from GIC
from DICGC
 Premium->Life insurance->investment pattern

Type Min Max

25%
G-Sec
50%
• RBI Reverse Housing-
repo Infra 15%
bonds
• Commercial
“Approve
Papers d” 20%
• AA rated securities
Shares /
Others fill 100%
debentures
 Premium->General insurance->investment pattern

Type Min Max

G-Sec
Union:20
%
Loans to
• RBI Reverse States for
repo Housing & 5%
Fire
• Commercial Equipment

Papers Social infra. 10%

• AA rated
Shares / Approved
Securities 70%
debentures
 Financial inclusion?

• 40% PSL norms on • Rural & social

SCB obligation
• 75% PSL on RRB,
SFB
• 25% Rural
branching mandate
on all commercial Insuranc
Bank
banks
e
 Rural and social obligation on insurance companies….

Rural Area Social Rules

• Census • unorganized • 5k lives in 1st
workers, backward, Fin.Year
PH, Poor •…
• 25k lives in 10th
Financial years
New amendment 2015:
+ insurance policies can
be pledged for bank
loans, as “financial
assets”.
for poor / villagers / farmers insurance

Life / General Insurance policy

Small sum insured (50k or less),
Premium Return: low | with / Micro-insurance

without.
Cover: individual / group
Policy/ Contracts must be given
in local language
Intermediaries: NGO, SHG, MFI
E.g. LIC’s Jeevan Madhur
(2006) and Jeevan Mangal (2009)
 Intermediary: AGENTs and Brokers
Agent Corporate Agent Broker

• Only 1 LI, 1HI, 1GI • Banks, NBFCs • Multiple products

• 10 pass (R), 12 pass (U) • Earlier Only 1 LI, 1HI, • Need Min. 50L To 250L
• Exam: insurance institute 1GI capital depending on
of India + Training • 1/4/16: 3 LI, 3 HI, 3 GI product category
• Registration: controller
of insurance, under 1938 Bancassurance
ACT “French” concept
• Company must keep
database even 5 years
Fraud / mis-selling : penalty from 1-25 crores.
after he leaves
 Insurance intermediaries: 5 Types

Agents Banks Brokers: multiple

(Bancassurance) products
Corporate agents
1. Confirm cause
and quantum of Intermediar
loss. y between
2. Grade: A< B< C
depending on Patient
experience and
skill.
Hospital
3. Financial limits, Surveyor/ Loss Third Party Insurance
else only rubber Assessor Administrators
stamp.
co.
 What are the distribution channels for
insurance?
Intermediarie • Agent, corporate agent, Bancassurance
s
Direct • ICICI prudential (Life) direct flyers in
marketing lunchboxes, Mumbai
• Internet, policybazzar.com, Malls /
Outlets
stores
Automobile
showrooms/ • Direct tie up for vehicle insurance
Cos.
Forex • Thomas cook, Western Union – for intl.
dealers travel insurance
Cargo • Marine - Airline: / shipping companies

Intro Body Conclusion

 Ombudsman: Protect Client from company!
• RBI has powers under
“BANKING REGULATION
ACT”
• Matters upto 10 lakh
• 1995: Banking
ombudsman, RBI GM, 3
years, no reappointment.
• Area wise: Total 20 , incl.
J&K (sits @Jammu)
•Bank’95- ‘06,
All banks and loan giving
inspired
NBFCs from
UK
• Hear matters upto 20 lakh
• 1938: act itself provides
• 1999: IRDAI setup
• 17 ombudsman, 3 years,
no reappointment.
• Conciliation and award
making – binding on
company
Insurance’99
 How to Protect Company from its Client?!
• Attach Asset from • IF Client
client without suppressed facts,
court order. (DRT, can be
DRAT) questioned but
• Insolvency and within first 3 years
bankruptcy code of buying policy.
2016 Insurance
SARFAESI
Act
2002
Amend’15
Economy: 6 pillars + theory + current + BES17 (pre cum Mains)

1.Banking 2.Budget 3.BoP

• V1:c3,4 • V1:c2,3,5,6,9,11(GST),12, • V1c:5
13
Banking over.. Finance|insurance|Fin.inclusion

4.Sectors 5.Infra 6.HRD

• V1c:7,11(Agri) • v1c:12, 14; Budget^Rail • V1c:10