Final project insurance

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Final project insurance

  1. 1. An Overview of the Life Insurance Industry in India UNIVERSITY PROJECT “An Overview of the Life Insurance Industry in India” Project Guide PROF. SANDEEP CHOPDE Project prepared by Amit Baburao Bidaye (Master in Financial Management) MFM- III Year (2010-13), Semister –V Roll No- 66 MET’S Institute of Management Bandra (W) – Mumbai Academic Year: 2012-2013MET Institute of Management 1
  2. 2. An Overview of the Life Insurance Industry in India IndexUNIVERSITY PROJECT......................................................................................................1“An Overview of the Life Insurance Industry in India”.........................................................1Project Guide..........................................................................................................................1PROF. SANDEEP CHOPDE.................................................................................................1Project prepared by.................................................................................................................1Amit Baburao Bidaye.............................................................................................................1(Master in Financial Management).........................................................................................1MFM- III Year (2010-13), Semister –V.................................................................................1Roll No- 66.............................................................................................................................1MET’S Institute of Management............................................................................................1Bandra (W) – Mumbai............................................................................................................1Academic Year: 2012-2013....................................................................................................1Executive Summary................................................................................................................3Overview.................................................................................................................................5History....................................................................................................................................5The First Step…......................................................................................................................6A Brief History of the Life Insurance Sector..........................................................................6Insurance History in India .....................................................................................................7Risk Management...................................................................................................................8Definition of Life Insurance...................................................................................................9Types of Insurance Companies ............................................................................................10The Transition Of Life Insurance.........................................................................................11The Insurance Regulatory and Development Authority (IRDA).........................................12Life Insurance Market...........................................................................................................14 .............................................................................................................................................16Industry Evolution................................................................................................................16Bancassurance.......................................................................................................................19Terminology Used................................................................................................................21Law of Large number...........................................................................................................23Three Principals in Insurance Industry.................................................................................24Human Life Value................................................................................................................30Life Insurance Products........................................................................................................31Annuity ................................................................................................................................42Riders ...................................................................................................................................44Premiums .............................................................................................................................48Underwriting.........................................................................................................................50Financial Underwriting.........................................................................................................54Life Insurance Accounting ..................................................................................................56The Role of Portfolio Management:.....................................................................................58Implications of Cost Management:.......................................................................................60Organisational Structure .....................................................................................................61Departments in a Life Office ............................................................................................65MET Institute of Management 2
  3. 3. An Overview of the Life Insurance Industry in IndiaThe Role of actuary in a Life Office.....................................................................................67Macro Economic Scenario & Insurance Industry Prospects................................................69Conclusion............................................................................................................................73Bibliography.........................................................................................................................75 Executive SummaryIn India, insurance has a deep-rooted history. It finds mention in the writings ofManu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ).The writings talk in terms of pooling of resources that could be re-distributed intimes of calamities such as fire, floods, epidemics and famine. This was probably apre-cursor to modern day insurance. Ancient Indian history has preserved theearliest traces of insurance in the form of marine trade loans and carriers’contracts. Insurance in India has evolved over time heavily drawing from othercountries, England in particular. 1818 saw the advent of life insurance business in India with the establishmentof the Oriental Life Insurance Company in Calcutta. This Company however failedin 1834. In 1829, the Madras Equitable had begun transacting life insurancebusiness in the Madras Presidency. 1870 saw the enactment of the BritishInsurance Act and in the last three decades of the nineteenth century, the BombayMutual (1871), Oriental (1874) and Empire of India (1897) were started in theBombay Residency. This era, however, was dominated by foreign insurance officeswhich did good business in India, namely Albert Life Assurance, Royal Insurance,Liverpool and London Globe Insurance and the Indian offices were up for hardcompetition from the foreign companies. In 1914, the Government of India started publishing returns of InsuranceCompanies in India. The Indian Life Assurance Companies Act, 1912 was the firststatutory measure to regulate life business. In 1928, the Indian InsuranceCompanies Act was enacted to enable the Government to collect statisticalinformation about both life and non-life business transacted in India by Indian andforeign insurers including provident insurance societies. In 1938, with a view toprotecting the interest of the Insurance public, the earlier legislation wasconsolidated and amended by the Insurance Act, 1938 with comprehensiveprovisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However,there were a large number of insurance companies and the level of competitionwas high. There were also allegations of unfair trade practices. The Government ofIndia, therefore, decided to nationalize insurance business.MET Institute of Management 3
  4. 4. An Overview of the Life Insurance Industry in India An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurancesector and Life Insurance Corporation came into existence in the same year. TheLIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s whenthe Insurance sector was reopened to the private sector.This millennium has seen insurance come a full circle in a journey extending tonearly 200 years. The process of re-opening of the sector had begun in the early1990s and the last decade and more has seen it been opened up substantially. In1993, the Government set up a committee under the chairmanship of RN Malhotra,former Governor of RBI, to propose recommendations for reforms in the insurancesector.The objective was to complement the reforms initiated in the financialsector. The committee submitted its report in 1994 wherein , among other things, itrecommended that the private sector be permitted to enter the insurance industry.They stated that foreign companies be allowed to enter by floating Indiancompanies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, theInsurance Regulatory and Development Authority (IRDA) was constituted as anautonomous body to regulate and develop the insurance industry. The IRDA wasincorporated as a statutory body in April, 2000. The key objectives of the IRDAinclude promotion of competition so as to enhance customer satisfaction throughincreased consumer choice and lower premiums, while ensuring the financialsecurity of the insurance market.The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.Together with banking services, insurance services add about 7% to the country’sGDP. A well-developed and evolved insurance sector is a boon for economicdevelopment as it provides long- term funds for infrastructure development at thesame time strengthening the risk taking ability of the country IRDA regulations and norms for the allocation of funds need to have acomprehensive look. In the phase of declining interest rates and rising inflation thefunds need to be applied in productive areas so as to generate high returns. Also interms of clients servicing areas such as premium payments, after sales service,policy dispatch, redressal of grievances has to be amended. In the current scenario,LIC has to provide flexible products suited to the customers requirements. Also aproper and systematic risk management strategy needs to be adopted. After theincrease in terrorism and destructive events around the global world such asSeptember 11 attack on World Trade Centre, US – Taliban war, US – Iraq war etc...An alternative to reinsurance such as asset backed securities is emerging out in thedeveloped economies. Catastrophe bonds are one of the alternatives forreinsurance.MET Institute of Management 4
  5. 5. An Overview of the Life Insurance Industry in IndiaFinally some policies such as pure term and pension schemes needs to beaddressed massively at both the urban and the rural segment so as to generatehigh premium income which will help in the development and growth of theeconomy.OverviewThe purpose of Insurance is to cover Risk and the means of its existence in turn isRisk Management. All pervasive concepts, Risk Management is the bedrock ofgrowth, survival and stability for organizations where increasing awareness andinvolvement of top management is evidenced in the process of establishing a "RiskManagement Framework".With the opening up of the insurance industry to the private sector in India, aplethora of opportunities with its attachment of Risk and Reward has come acrossfor all those associated with the insurance industry and more specifically, theinsurance companies themselves.Time and again, history has revealed that major events were bound to happen andshould and could have been avoided by means of an effective Risk ManagementFramework. However, there will always be surprises, for Risk Management is aContinuum where surprises add to the learning process and effectively reinforcethe framework. Certain events are beyond organizational control andorganizations can only take alternate mitigating steps, but cannot avoid the event.Risks can be either transferred or retained. Either way, the objective is to minimizethe losses expected to arise from the risks. Insurance Companies being the key risktransferees, who in turn retain based on risk appetite, have to exercise extreme duediligence in their risk management practices and establish a strong RiskManagement Framework to ensure adequate solvency and their survival.HistoryAlmost 4500 years ago, in the ancient land of Babylonia, traders used to bear riskof caravan trade by giving loans that had to be later repaid with interest when thegoods arrived safely. In 2100 BC, the code of Hammurabi granted legal status tothe practice. That, perhaps, was how insurance made its beginning.Life Insurance had its origins in ancient Rome, where citizenes formed burial clubsthat would meet the funeral expense of its members as well as help survivors bymaking some payments.MET Institute of Management 5
  6. 6. An Overview of the Life Insurance Industry in IndiaIn 1347, in Genoa, European maritime nations entered into the earliest knowninsurance contract and decided to accept marine insurance as a practice.The First Step…Insurance as we know it today owes its existance to 17th century England. In fact, itbegan taking shape in 1688 at a rather interesting place called Lloyd’s Coffe Housein London, where merchants, ship owners and underwriters met to discuss andtransact business. By the end of the 18th century, Lloyed’s had brewed enoughbusiness to become one of the first modern insurance companies.In IndiaMany may not be aware that the life insurance industry of India is as old as it isin any other part of the world. Insurance in India can be tracked back to Vedas. Forinstance, yogakshema, the name of Life Insurance Corporation of India’s corporateheadquarters, is derived from the Rig Veda. The term suggests that a form of“community insurance “was prevalent around 1000 BC and practiced by theAryans. The history of life insurance in India dates back to 1818 when it wasconceived as a means to provide for English Widows. Interestingly in those days ahigher premium was charged for Indian lives than the non-Indian lives, as Indianlives were considered more risky for coverage.A Brief History of the Life Insurance SectorThe business of life insurance in India in its existing form started in India in theyear 1818 with the establishment of the Oriental Life Insurance Company inCalcutta.Some of the important milestones in the Life Insurance business in India are:1912: The Indian Life Assurance Companies Act enacted as the first statue to regulate the life insurance business.1928: The Indian Insurance Companies Act enacted to enable the government to collect satisfied information about both life and non life insurance business.1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of parliament,MET Institute of Management 6
  7. 7. An Overview of the Life Insurance Industry in India viz. LIC Act, 1956 with a capital contribution of Rs. 5 corer from the Government of India.1968: The Insurance Act amended to regulate investment and set minimum solvency margins and the Tariff Advisory Committee set up.Insurance History in India Insurance History in India Registering the Private Insurance Amended Companies ,16 new Insurance Act entrants Bombay Mutual new Assurance entrants Society IRDA Act 1870 1912 1938 1956 2000 2002 2007 Insurance Act LIC of India 5 new entrantsMET Institute of Management 7
  8. 8. An Overview of the Life Insurance Industry in IndiaRisk Management  Risk Management is a scientific approach to the problem of dealing with the pure risks faced by the individuals and business.  Risk management deals with insurable and uninsurable risk & the choice of the appropriate techniques for dealing with them.  The emphasis in risk management is on reducing the cost of handling risk by whatever means that are considered most appropriate & insurance is one of several alternatives for minimising the pure risk faced by the firm.  The primary objective of risk management effort is to preserve the operating effectiveness of the organisations; to make sure that it is not prevented from attaining its goals by the losses arises from pure risk. The second objective is the humanitarian goal of protecting employees from an accident that might result in death or serious injury.  Risk identification is the first important step in risk management.  The next step is the analysis & measurement of risk to know the severity of risk and its frequency.  The next step is Risk Assessment in terms of frequency, its monetary cost & human cost.  Decision to deal with the risk could be any one of the following  To retain the risk  To deal with the risk through loss prevention  To transfer the risk through insurance  The last step in Risk management is evaluation & review based on experience & business situation.MET Institute of Management 8
  9. 9. An Overview of the Life Insurance Industry in IndiaDefinition of Life Insurance  “A contract that provides compensation for specific losses in exchange for a periodic payment.”  “An individual contract is known as an insurance policy, and the periodic payment is known as an insurance premium.”  “A system under which individuals, businesses, and other organizations or entities, in exchange for payment of a sum of money (called a premium), are guaranteed compensation for losses resulting from certain perils under specified conditions in a contract.”Hence Insurance is  A sharing device  Contribution of many used to share losses suffered by few  Loss should occur as a result of natural calamities  No gains to be made out of insurance.The Insurance Act 1938 does not contain a definition of life insurance contract. Butsection 2(11) of the Act defines life insurance business as follows.“Life Insurance Business” means the business of effecting contracts of insuranceupon human life, including any contract whereby the payment of money isassured on death (except death by accident only) or the happening of anycontingency dependent on human life, and any contract which is subject topayment of premiums for a term dependent on human life and shall be deemedto include— a) The granting of disability and double or triple indemnity accident benefits, if so provided in the contract of insurance. b) The granting of annuities upon human life, andMET Institute of Management 9
  10. 10. An Overview of the Life Insurance Industry in India c) The granting of Superannuation allowance and annuities payable out of any fund applicable solely to the relief and maintenance of persons engaged or who have been engaged in any particular profession, trade or employment or of the dependents of such person.Types of Insurance CompaniesInsurance companies may be classified as: • Life insurance companies -Sell life insurance, annuities and pensions products. • Non-life or general insurance companies -Sell other types of insurance.In most countries, life and non-life insurers are subject to different regulatoryregimes and different tax and accounting rules.The main reason for the distinction between the two types of company is that life,annuity, and pension business is very long-term in nature — coverage for lifeassurance or a pension can cover risks over many decades. By contrast, non-lifeinsurance covers usually a shorter period, such as one year.Reinsurance Companies: Reinsurance companies are companies that sell policiesto other companies, so that those companies can protect themselves from hugelosses. Companies with a lot of fund have conquered the reinsurance markettoday.Captive Insurance Companies- Captive Insurance Companies are the insurancecompanies that have been established for a particular reason for financing risk. Inshort these Companies are an in house self insurance vehicle. They providecoverage of risk that is neither available nor offered by usual insurance companiesin the market at reasonable price. They are also known as “insurance consultants”.Like the mortgage brokers the insurance consultant companies are paid a fee bythe customers to buy the best insurance policy from the best company.MET Institute of Management 10
  11. 11. An Overview of the Life Insurance Industry in IndiaThe Transition Of Life InsuranceEffect of introducing competition * Figures are of FY 07 – 08 Source: Life insurance CouncilMET Institute of Management 11
  12. 12. An Overview of the Life Insurance Industry in IndiaThe Insurance Regulatory and Development Authority (IRDA)Reforms in insurance sector were initiated with passage of IRDA Bill in parliamentin Dec 1999.The IRDA since its incorporation as a statutory body in April 2000 hasfastidiously stuck to its schedule of framing regulations and registration privatesector insurance companies. The other decision taken simultaneously to supportinsurance sector and in particular the life insurance companies was the launch ofIRDA’s online service for the issue and launch of renewal of licenses to the agents.The approval of institutions for imparting training to the agents has also ensuredthat insurance companies would have a trained workforce of insurance agents inplace to sell their products.Duties, Powers and Functions of IRDA:Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA.(1) Subject to the provisions of this Act and any other law for the time being inforce, the Authority shall have the duty to regulate, promote and ensure orderlygrowth of the insurance business and re-insurance business.(2) Without prejudice to the generality of the provisions contained in sub-section 1,the powers and functions of the Authority shall include, - (a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration. (b) Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance. (c) Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents. (d) Specifying the code of conduct for surveyors and loss assessors.MET Institute of Management 12
  13. 13. An Overview of the Life Insurance Industry in India (e) Promoting efficiency in the conduct of insurance business. (f) Promoting & regulating professional organizations connected with insurance & re-insurance business. (g) Levying fees and other charges for carrying out the purposes of this Act. (h)Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business. (i)Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938). (j) Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries. (k) Regulating investment of funds by insurance companies. (l) Regulating maintenance of margin of solvency. (m) Adjudication of disputes between insurers and intermediaries or insurance intermediaries. (n) Supervising the functioning of the Tariff Advisory Committee. (o) Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f). (p) Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector and (q) Exercising such other powers as may be prescribedMET Institute of Management 13

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