Insurance services

• Insurance services and products:-

• Insurer ( assurer, underwriter)
• Document—Insurance policy
• Insurable interest
• ---Life insurance, under which a specified amount
becomes payable on the death of the insured or
upon the expiry of specified period on time
whichever is earlier.
• ---General insurance, which covers losses caused
by fire, accident and marine advetures and so on
• Life insurance vs General insurance—
----LI certainty and obligation to pay. GI
uncertainty event may happen or not does not
have necessarily to compensate
---The contract of LI is not a contract of
indemnity ( no proof for measuring the actual
loss is necessary)GI is a contract of indemnity (
the assured can only recover the actual loss
subject to the maximum amount of policy)
• ---Insurable interest only at the time of contract in case
of LI. But in case of GI, insurable interest must be present
both at the time of contract as well as at the time of loss.
• ---A contract of GI is an annual contract , LI contract is a
continuing contract
• Insurance Act 1938—
• Eligibility:-
• Only by –i) Public co.,
ii) A cooperative society
iii) An insurance cooperative society, having paid up capital
of Rs 100 core in which no body corporate holds more
than 26% of its paid up capital
• Iv) a body corporate other than a private co.,
incorporated in any country or outside India.
• However only Indian insurance companies are
permitted to carry out any call of insurance after
enactment of Insurance regulatory and
development authority ( IRDA)
• Indian Insurance company is defined as a company
formed or registered under the Companies Act in
which the aggregate holding of equity shares by a
foreign company either by itself or through
subsidiaries does not exceed 26% of paid up
capital.
• Registration:- with IRDA
--a certified copy of Memorandum of association,
Articles of association
---name and address, occupation of directros
--Deposit with RBI
---Investment in approved securities
On being satisfied that
i) The financial condition
ii) Volume of Business, capital structure, earning
prospectus
iii) the interest of the general public
• Cancellation of Registration—
---failed to comply with the RBI ( deposit)
---failed to comply with required assets
----on court order
---claim unpaid
---carries any other business
Renewal of registration…
 Consumer credit
• Definition • The term consumer finance refers to the activities
involved in granting credit to consumers to enable them to
possess goods meant for everyday use. • Business procedure
through which the consumers purchase semi durable and
durable goods other than real estate in order to obtain a series
of payments extending over a period of 3 months to 5 yrs.
• . Types of Consumer Credit • Revolving credit: it is a ongoing
credit arrangement where by the financier on a revolving basis
grants credit. The consumer is entitled to avail credit to the
extent sanctioned as credit limit ex: Credit Card • Fixed credit:
it is like a term loan where by the financier provides loans for a
fixed period of time. The credit has to be repaid within a
stipulated period ex: monthly installment loan, hire purchase.
• Cash Loan: Under this type of credit banks and financial
institutions provide money with which the consumers buy
goods for personal consumption here the lender and seller
are different and lender does not have the responsibility of
seller.
• • Secured Finance: when the credit granted by financial
institutions is secured by collateral it takes the form of
secured finance. The collateral is taken by the creditor in
order to satisfy the debt in the even of default by the
borrower. The collateral may be in the form of personal
property, real property or liquid assets.
• • Unsecured Finance: When there is no security offered by
the consumer against which money is granted by financial
institutions, it is called unsecured finance.
• Sources of Consumer Finance • Traders : The
predominant agencies that are involved in consumer
finance are traders. They include sales finance
companies, hire purchase and other such financial
institutions. • Commercial Banks: Commercial Banks
provide finance for consumer durables. Banks lend large
sum of money at wholesale rate to commercial or sales
finance companies, hire purchase concerns and other
such finance companies. Banks also provide consumers
personal loans meant for purchasing consumer durable
goods.
• Credit Card Institutions: These institutions arrange for credit
purchase of consumer goods through respective banks which
issue the credit cards. The credit card system enables a person
to buy credit card services on credit. On presentation of credit
card by the buyer, the seller prepares 3 copies of the sales
voucher, one for seller, bank/credit card company and 3rd for
the buyer. The seller forwards a copy to the bank for collection.
The seller’s bank forwards all such bills to the card issuing bank
or company. The bank debits the amount to the customers
account. The buyer receives monthly statement from the card
issuing bank or company and the amount is to be paid within a
period of 20 to 45 days without any additional charges.
• (NBFC’s):Non banking Financial companies constitute an
important source of consumer finance. Consumer
finance companies also known as small loan companies
or personal finance companies are non saving
institutions whose prime assets constitute sale finance
receivables, personal cash loans, short and medium
term receivables. These companies charge substantially
higher rate of interest than the market rates. • Credit
Unions: A credit union is an association of people who
agree to save their money together and in turn provide
loans to each other at a relatively lower rate of interest.
These are caller co-operative credit societies. They are
non profit deposit taking and low cost credit institutions.
• Mode of Consumer Finance • Open Account: any number
of purchases per month up to a certain value • Credit card:
most popular mode of finance • Revolving account:
purchases during a month and payment on installment
basis • Option plan: option of paying in full or part •
Installment account: Equal periodic installments • Cash
loan : purchases are made through cash and payment is
made periodically.
• Demand for consumer finance(Factors) • Increase in
consumer disposable income • Enhancement in real
income of consumer • Convenient size of installment
payment • Growth in nuclear families leading to number
of house holds • Lower charges • Down payment and
credit contract
• Products covered • Consumers financing
covers a wide range of products such as cars,
Televisions, washing machines, refrigerators,
Air conditioners, computers etc. The products
covered possess some distinct feature such as
durability, sustainability, salability and
serviceability etc.
• Terms of Finance • Eligibility : The basic eligibility for consumer
finance is the income of the individual customer and the nature of
employment. The EMI’s are worked out on the basis of number of
installments and tenure of employment of the customer.
• • Guarantee: Financiers insist on guarantee for the credit availed by
the customer. Guarantee is obtained in order to ensure prompt
payment of the installment.
• • Tenure : Consumer finance is granted for short period ranging from
3 months to 5 yrs. The tenure also depends on the value of the asset
purchased. Assets of smaller value are given short term credit and
assets of higher value are given comparatively longer term credit.
• • Rate of interest : the effective rate of consumer finance is much
higher than the rates applicable to business finance. This is because
the loans are granted based on the personal integrity of the
customer. The effective interest varies between 20% and 30%.
Finance companies use different methods of disclosing interest rates.
• Other charges : in addition to rate of interest finance companies also
charge documentation fees, processing fees, management fees, service
charges, collection costs etc. A deposit is also taken as a precautionary
measure to guard against default in payment of installments.
• • Mode of payment: in case of individual loans payments are usually
collected in advance in the form of post dated checks.
• • In the case of institutional financing there is an arrangement for
deduction of installments from the salary of the employee which is
remitted to the finance company.
• • Credit evaluation: A verification of details furnished by the customer
is carried out in order to ascertain the validity of the statement and the
credit standing of customer. The evaluation may be carried out by the
financier or an independent agency details collected include age,
monthly income, status of employment, previous record, assets own,
borrower’s equity, type of collateral offered etc.
• Pricing of Consumer Finance • The pricing of consumer credit
depends on the extent of facility offered by the financier. The
components of price are risk free rate of interest assuming no
probability of default, default risk premium, administrative
expenses.
• Advantages of Consumer Credit(Finance) • Enjoying position : An
important benefit of consumer credit is that it allows people to
enjoy possession of goods without having to pay for them
immediately. • Saving : consumer credit allows for a mechanism of
compulsory saving this induces people to use their income wisely
and promotes thrift among people. • Convenient mode : Consumer
credit offers a convenient mode of acquiring consumer durables. •
Meeting emergency : Consumer credit is useful in meeting
emergencies such as illness, accident and death which involve
unexpected expenses.
• Maximization of revenues: Consumer credit
facilitates speedy disposal of goods which would
have remained unsold in the absence of credit
facility to consumers. This helps in increased
sales and profits through credit sales.
• • Accelerates industrial investment: Consumer
credit accelerates investment in consumer
durable industry giving rise to growing level of
income and employment.
• • Enhanced living standard : consumer credit
enables people of limited means to acquire
goods to enhance their general standard of living.
• Promoting Economic development : Consumer credit
promotes higher levels of investment, employment and
income thus raising the effective demand and promoting
higher standard of growth and development.
• Disadvantages of Consumer Finance • Thoughtless
buying : consumer credit being attractive tempts people to
buy goods indiscriminately even if they are not needed.
• Insolvency : Credit forces people to mortgage a
substantial portion of their fixed future income which may
lead to insolvency and bad debts. • Costly Credit :
Consumer credit with its benefit of convenient buying
brings with it severe consequence of costliness of credit
because the effective rate of interest is much higher than
on paper.
• Risk to traders : Consumer Credit posses considerable risk
to traders because if the buyer defaults on payment the
lender can acquire the good but cannot sell it at the
original price.
• • Artificial Boom: Consumer credit creates artificial boom
in consumer durable industry.
• • Bad Debt : Consumer credit generates a substantial
amount of revenue for traders but there is a high risk of
bad debt.
• • Economic instability: Indiscriminate consumer credit
leads to economic instability because of recurrence of
booms and slumps. In boom there is credit extension and
in recession there is credit tightening.