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  1. 1. MBA: FINANCIAL PRODUCTS AND SERVICES IntroductionBanks have played a critical role in the economic development of developed countries suchas Japan and Germany and most of the emerging economies including India. Banks today areimportant not just from the point of view of economic growth, but also financial stability. Inemerging economies, banks are special for three important reasons. First, they take a leadingrole in developing other financial intermediaries and markets. Second, due to the absence ofwell-developed equity and bond markets, the corporate sector depends heavily on banks tomeet its financing needs. Finally, in emerging markets such as India, banks cater to the needsof a vast number of savers from the household sector, who prefer assured income andliquidity and safety of funds, because of their inadequate capacity to manage financial risks.Forms of banking have changed over the years and evolved with the needs of the economy.The transformation of the banking system has been brought about by deregulation,technological innovation and globalization. While banks have been expanding into areas whichwere traditionally out of bounds for them, non-bank intermediaries have begun to performmany of the functions of banks. Banks thus compete not only among themselves, but also withnon-bank financial intermediaries, and over the years, this competition has only grown inintensity. Globally, this has forced the banks to introduce innovative products, seek newersources of income and diversify into non-traditional activities. Definition of bankAccording to Herber Hart “a banker is one who in the ordinary course of business honourscheques drawn upon him by persons from and for whom he receives money or currentaccount”.In India, the definition of the business of banking has been given in the Banking RegulationAct, (BR Act), 1949. According to Section 5 of the Banking Regulation Act, 1949, “a bankingcompany means any company which transacts the business of banking. Banking means theaccepting for the purpose of lending or investment, of deposits of money from the public,payable on demand or otherwise, and withdrawable by cheque, draft, order or otherwise”.The key activities which a bank performs can easily be derived from this definition which areas follows:- Accepting deposits from public- Advancing loans/investment of deposit money.- Deposits are repayable only on demand.- Allowing withdrawal of deposits through various modes. 1 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  2. 2. MBA: FINANCIAL PRODUCTS AND SERVICES Role of BankingBanks provide funds for business as well as personal needs of individuals. They play asignificant role in the economy of a nation. Let us know about the role of banking.• It encourages savings habit amongst people and thereby makes funds available forproductive use.• It acts as an intermediary between people having surplus money and those requiringmoney for various business activities.• It facilitates business transactions through receipts and payments by chequesinstead of currency.• It provides loans and advances to businessmen for short term and long-termpurposes.• It also facilitates import export transactions.• It helps in national development by providing credit to farmers, small-scaleindustries and self-employed people as well as to large business houses which lead tobalanced economic development in the country.• It helps in raising the standard of living of people in general by providing loans forpurchase of consumer durable goods, houses, automobiles, etc. Evolution of Commercial Banks in IndiaThe first bank in India, called The General Bank of India was established in the year1786. The East India Company established The Bank of Bengal/Calcutta (1809), Bankof Bombay (1840) and Bank of Madras (1843). These three individual units (Bank ofCalcutta, Bank of Bombay, and Bank of Madras) were called as Presidency Banks.Allahabad Bank which was established in 1865, was for the first time completely runby Indians. Punjab National Bank Ltd. was set up in 1894 with head quarters atLahore. Between 1906 and 1913, Bank of India, Central Bank of India, Bank of Baroda,Canara Bank, Indian Bank and Bank of Mysore were set up.In 1921, all the three Presidency banks were amalgamated to form the Imperial Bankof India, which took up the role of a commercial bank, a bankers bank and a bankerto the Government. The Imperial Bank of India was established with mainly Europeanshareholders. It was only with the establishment of Reserve Bank of India (RBI) as thecentral bank of the country in 1935, that the quasi-central banking role of theImperial Bank of India came to an end.At the time of first phase the growth of banking sector was very slow. Between 1913and 1948 there were approximately 1100 small banks in India. To streamline thefunctioning and activities of commercial banks, the Government of India came upwith the Banking Companies Act, 1949 which was later changed to Banking RegulationAct 1949 as per amending Act of 1965 (Act No.23 of 1965). Reserve Bank of India was 2 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  3. 3. MBA: FINANCIAL PRODUCTS AND SERVICESvested with extensive powers for the supervision of banking in India as a CentralBanking Authority.After independence, the Government of India started taking steps to encourage thespread of banking in India. In order to serve the economy in general and the ruralsector in particular, the All India Rural Credit Survey Committee recommended thecreation of a state-partnered and state-sponsored bank taking over the Imperial Bankof India and integrating with it, the former state-owned and state-associate banks.Accordingly, State Bank of India (SBI) was constituted in 1955. Subsequently in 1959,the State Bank of India (subsidiary bank) Act was passed, enabling the SBI to take overeight former state-associate banks as its subsidiaries.To better align the banking system to the needs of planning and economic policy, itwas considered necessary to have social control over banks. In 1969, 14 of the majorprivate sector banks were nationalized. This was an important milestone in the historyof Indian banking. This was followed by the nationalisation of another six privatebanks in 1980. With the nationalization of these banks, the major segment of thebanking sector came under the control of the Government. The nationalisation ofbanks imparted major impetus to branch expansion in un-banked rural and semi-urbanareas, which in turn resulted in huge deposit mobilization, thereby giving boost to theoverall savings rate of the economy. It also resulted in scaling up of lending toagriculture and its allied sectors. However, this arrangement also saw someweaknesses like reduced bank profitability, weak capital bases, and banks gettingburdened with large non-performing assets.To create a strong and competitive banking system, a number of reform measureswere initiated in early 1990s. The thrust of the reforms was on increasing operationalefficiency, strengthening supervision over banks, creating competitive conditions anddeveloping technological and institutional infrastructure. These measures led to theimprovement in the financial health, soundness and efficiency of the banking system.One important feature of the reforms of the 1990s was that the entry of new privatesector banks was permitted. Following this decision, new banks such as ICICI Bank,HDFC Bank, IDBI Bank and UTI Bank were set up.Commercial banks in India have traditionally focused on meeting the short-termfinancial needs of industry, trade and agriculture. However, given the increasingsophistication and diversification of the Indian economy, the range of servicesextended by commercial banks has increased significantly, leading to an overlap withthe functions performed by other financial institutions. Further, the share of long- 3 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  4. 4. MBA: FINANCIAL PRODUCTS AND SERVICESterm financing (in total bank financing) to meet capital goods and project-financingneeds of industry has also increased over the years. Functions of Commercial BanksA. Primary FunctionsPrimary banking functions of the commercial banks include:1. Acceptance of deposits2. Advancing loans3. Creation of credit4. Clearing of cheques5. Financing foreign trade6. Remittance of funds1. Acceptance of Deposits: The most important function of commercial banks is to acceptdeposits from the public. Various sections of society, according to their needs and economiccondition, deposit their savings with the banks.For example, fixed and low income group people deposit their savings in small amounts fromthe points of view of security, income and saving promotion. On the other hand, traders andbusinessmen deposit their savings in the banks for the convenience of payment.Therefore, keeping the needs and interests of various sections of society, banks formulatevarious deposit schemes. Generally, there are three types of deposits which are as follows(a) Current Deposits:The depositors of such deposits can withdraw and deposit money whevever they desire. Sincebanks have to keep the deposited amount of such accounts in cash always, they carry eitherno interest or very low rate of interest. These deposits are called as Demand Depositsbecause these can be demanded or withdrawn by the depositors at any time they want.Such deposit accounts are highly useful for traders and big business firms because they haveto make large payments and accept payments many times in a day. The bank levies certainincidental charges on the customer for the services rendered by it.(b) Savings Deposits: 4 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  5. 5. MBA: FINANCIAL PRODUCTS AND SERVICESAs is evident from the name of such deposits their main objective is to mobilize small savingsin the form of deposits. These deposits are generally done by salaried people and the middleclass people who have fixed and less income.Money can be deposited at any time but the maximum cannot go beyond a certain limit.There is a restriction on the amount that can be withdrawn at a particular time or during aweek. If the customer wishes to withdraw more than the specified amount at any one time,he has to give prior notice. Interest is allowed on the credit balance of this account, but therate of interest is very less. The rate of interest is greater than the rate of interest on the current deposits andless than that on fixed deposit. This system greatly encourages the habit of thrift or savings.(c) Fixed Deposits: These deposits are also known as long term deposits or Time deposits.These deposits cannot be withdrawn before the expiry of the period for which they aredeposited or without giving a prior notice for withdrawal. If the depositor is in need ofmoney, he has to borrow on the security of this account and pay a slightly higher rate ofinterest to the bank. These deposits generally carry a higher rate of interest because bankscan use these deposits for a definite time without having the fear of being withdrawn.Fixed deposits are liked by depositors both for their safety and as well as for their interest. InIndia, they are accepted between three months and ten years.2. Advancing Loans: The second primary function of a commercial bank is to make loans andadvances to all types of persons, particularly to businessmen and entrepreneurs. Loans aremade against personal security, gold and silver, stocks of goods and other assets. The mostcommon way of lending is by:(a) Overdraft: In this case, the depositor in a current account is allowed to draw over andabove his account up to a previously agreed limit. Suppose a businessman has only Rs.30,000/- in his current account in a bank but requires Rs. 60,000/- to meet his expenses. Hemay approach his bank and borrow the additional amount of Rs. 30,000/-. The bank allowsthe customer to overdraw his account through cheques. The bank, however, charges interestonly on the amount overdrawn from the account. This type of loan is very popular with theIndian businessmen.(b) Cash Credit: Under this account, the bank gives loans to the borrowers against certainsecurity – shares, stock, bonds etc. Such loans are not based on personal security. But theentire loan is not given at one particular time, instead the amount is credited into his accountin the bank; but under emergency cash will be given. The borrower is required to pay interestonly on the amount of credit availed to him. He will be allowed to withdraw small sums ofmoney according to his requirements through cheques, but he cannot exceed the credit limitallowed to him. Besides, the bank can also give specified loan to a person, for a firm againstsome collateral security. The bank can recall such loans at its option. 5 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  6. 6. MBA: FINANCIAL PRODUCTS AND SERVICES(c) Discounting Bills of Exchange: This is another type of lending which is very popular withthe modern banks. The holder of a bill can get it discounted by the bank, when he is in needof money. After deducting its commission, the bank pays the present price of the bill to theholder. Such bills form good investment for a bank. They provide a very liquid asset which canbe quickly turned into cash. The commercial banks can rediscount, the discounted bills withthe central banks when they are in need of money. These bills are safe and secured bills.When the bill matures the bank can secure its payment from the party which had acceptedthe bill.(d) Money at Call: Bank also grant loans for a very short period, generally not exceeding 7days to the borrowers, usually dealers or brokers in stock exchange markets against collateralsecurities like stock or equity shares, debentures, etc., offered by them. Such advances arerepayable immediately at short notice hence, they are described as money at call or callmoney.(e) Term Loans: Banks give term loans to traders, industrialists and now to agriculturists alsoagainst some collateral securities. Term loans are so-called because their maturity periodvaries between 1 to 10 years. Term loans, as such provide intermediate or working capitalfunds to the borrowers. Sometimes, two or more banks may jointly provide large term loansto the borrower against a common security. Such loans are called participation loans orconsortium finance.(f) Consumer Credit: Banks also grant credit to households in a limited amount to buy somedurable consumer goods such as television sets, refrigerators, etc., or to meet some personalneeds like payment of hospital bills etc. Such consumer credit is made in a lump sum and isrepayable in instalments in a short time. Under the 20-point programme, the scope ofconsumer credit has been extended to cover expenses on marriage, funeral etc., as well.(g) Miscellaneous Advances: Among other forms of bank advances there are packing creditsgiven to exporters for a short duration, export bills purchased/discounted, import finance-advances against import bills, finance to the self employed, credit to the public sector, creditto the cooperative sector and above all, credit to the weaker sections of the community atconcessional rates.3. Creation of Credit: A unique function of the bank is to create credit. Banks supply moneyto traders and manufacturers. They also create or manufacture money. Bank deposits areregarded as money. They are as good as cash. The reason is they can be used for the purchaseof goods and services and also in payment of debts. When a bank grants a loan to itscustomer, it does not pay cash. It simply credits the account of the borrower. He canwithdraw the amount whenever he wants by a cheque. In this case, bank has created adeposit without receiving cash. That is, banks are said to have created credit. Sayers says“banks are not merely purveyors of money, but also in an important sense, manufacturers ofmoney.” 6 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  7. 7. MBA: FINANCIAL PRODUCTS AND SERVICES4. Promote the Use of Cheques: The commercial banks render an important service byproviding to their customers a cheap medium of exchange like cheques. It is found much moreconvenient to settle debts through cheques rather than through the use of cash. The chequeis the most developed type of credit instrument in the money market.5. Financing Internal and Foreign Trade: The bank finances internal and foreign trade throughdiscounting of exchange bills. Sometimes, the bank gives short-term loans to traders on thesecurity of commercial papers. This discounting business greatly facilitates the movement ofinternal and external trade.6. Remittance of Funds: Commercial banks, on account of their network of branchesthroughout the country, also provide facilities to remit funds from one place to another fortheir customers by issuing bank drafts, mail transfers or telegraphic transfers on nominalcommission charges. As compared to the postal money orders or other instruments, bankdrafts have proved to be a much cheaper mode of transferring money and has helped thebusiness community considerably.B. Secondary FunctionsSecondary banking functions of the commercial banks include:1. Agency Services2. General Utility ServicesThese are discussed below.1. Agency Functions: Banks also perform certain agency functions for and on behalf of theircustomers. The agency services are of immense value to the people at large. The variousagency services rendered by banks are as follows:(a) Remittance of Funds: Banks help their customers in transferring funds from one place toanother through cheques, drafts, etc.(b) Collection and Payment of Credit Instruments: Banks collect and pay various creditinstruments like cheques, bills of exchange, promissory notes etc., on behalf of theircustomers. (c) Execution of Standing Orders: Banks execute the standing instructions of their customersfor making various periodic payments. They pay subscriptions, rents, insurance premium, etc.on behalf of their customers.(d) Purchase and Sale of Securities: Banks purchase and sell various securities like shares,stocks, bonds, debentures on behalf of their customers. Banks neither give any advice to theircustomers regarding these investments nor levy any charge on them for their service, butsimply perform the function of a broker. 7 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  8. 8. MBA: FINANCIAL PRODUCTS AND SERVICES(e) Collection of Dividends on Shares: Banks collect dividends and interest on shares anddebentures of their customers and credit them to their accounts.(f) Acts as representative and Correspondent: Sometimes banks act as representative andcorrespondents of their customers. They get passports, travelers tickets, book vehicles, plotsfor their customers and receive letters on their behalf.(g) Income-tax Consultancy: Banks may also employ income tax experts to prepare income taxreturns for their customers and to help them to get refund of income tax. (h) Acts as Trustee and Executor: Banks preserve the „Wills‟ of their customers and executethem after their death.2. General Utility functions: In addition to agency services, the modern banks provide manygeneral utility services for the community as given.(a) Locker Facility: Bank provide locker facility to their customers. The customers can keeptheir valuables, such as gold and silver ornaments, important documents; shares anddebentures in these lockers for safe custody.(b) Traveller‟s Cheques and Credit Cards: Banks issue traveller‟s cheques to help theircustomers to travel without the fear of theft or loss of money. With this facility, thecustomers need not take the risk of carrying cash with them during their travels.(c) Letter of Credit: Letters of credit are issued by the banks to their customers certifyingtheir credit worthiness. Letters of credit are very useful in foreign trade.(d) Collection of Statistics: Banks collect statistics giving important information relating totrade, commerce, industries, money and banking. They also publish valuable journals andbulletins containing articles on economic and financial matters.(e) Acting Referee: Banks may act as referees with respect to the financial standing, businessreputation and respectability of customers.(f) Underwriting Securities: Banks underwrite the shares and debentures issued by theGovernment, public or private companies.(g) Gift Cheques: Some banks issue cheques of various denominations to be used on auspiciousoccasions.(h) Accepting Bills of Exchange on Behalf of Customers: Sometimes, banks accept bills ofexchange, internal as well as foreign, on behalf of their customers. It enables customers toimport goods.(i) Merchant Banking: Some commercial banks have opened merchant banking divisions toprovide merchant banking services. 8 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  9. 9. MBA: FINANCIAL PRODUCTS AND SERVICESC. Fulfillment of Socio-Economic ObjectivesIn recent years, commercial banks, particularly in developing countries, have been calledupon to help achieve certain socio-economic objectives laid down by the state. For example,the nationalized banks in India have framed special innovative schemes of credit to help smallagriculturists, village and cottage industries, retailers, artisans, the self employed personsthrough loans and advances at concessional rates of interest. Under the Differential InterestScheme (D.I.S.) the nationalized banks in India advance loans to persons belonging toscheduled tribes, tailors, rickshaw-walas, shoe-makers at the concessional rate of 4 per centper annum. This does not cover even the cost of the funds made available to these prioritysectors. Banking is, thus, being used to subserve the national policy objectives of reducinginequalities of income and wealth, removal of poverty and elimination of unemployment inthe country.It is clear from the above that banks help development of trade and industry in the country.They encourage habits of thrift and saving. They help capital formation in the country. Theylend money to traders and manufacturers. In the modern world, banks are to be considerednot merely as dealers in money but also the leaders in economic development. RESERVE BANK OF INDIA: ITS FUNCTIONS AS A CENTRAL BANKReserve Bank of India, besides being the Central Bank of the country, is the principalregulatory authority in the Indian money market. It derives its powers from two principalenactments, namely the Reserve Bank of India Act, 1934 and the Banking Regulations act,1949. The Reserve Bank of India Act, 1934, apart from providing for the Constitutionmanagement and functions of the RBI, also empowers it to exercise control and regulations,over the Commercial Banks, the non-banking finance companies and the financial institutions.The Banking Regulation Act 1949 contains various provisions governing the Commercial Banksin India.The Reserve Bank of India was established on April 1, 1935 ,under the Reserve Bank of IndiaAct, 1934. As the countrys Central Bank, the Reserve Bank of India performs the followingfunction:a) Issuer of Currency Notes: Reserve Bank of India is the sole authority to issue currencynotes, except one-rupee note and coins of smaller denominations. Within the RBI, allfunctions relating to the issuance of notes are undertaken by the Issue Department, which isresponsible for issue of notes and the maintenance of eligible assets of equivalent value toback the notes issued.b) Banker to the Government: RBI acts as banker to the Central Government under theReserve Bank of India Act, and to the State Governments, under agreements with them. Asthe banker to the Government, RBI provides services, such as acceptance of deposits, 9 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  10. 10. MBA: FINANCIAL PRODUCTS AND SERVICESwithdrawal of funds, receipts and payments on behalf of the Government, transfer of fundsand the management of public debt.c) Bankers Bank: The Reserve Bank of India controls the volume of resources at the disposalof the Commercial Banks through the various measures of credit control. This checks theability of banks to create/squeeze credit to the industry, trade and commerce.d) Supervisory Authority: RBI has the powers to supervise and control Commercial Banks. Itissues licenses for starting new banks and for opening new branches. It has the power to varythe reserve ratios, to inspect the working of banks, and to approve the appointment ofChairman and Chief Executive Officers of the banks.e) Exchange Control Authority: The Reserve Bank of India regulates the demands for foreignexchange in terms of the Foreign Exchange Management Act, besides maintaining the externalvalue of Indian rupee.f) Regulation of Credit: One of the most important functions of the Reserve Bank of India is toregulate the flow of credit to industry. This is achieved by measures such as the Bank rate,Reserve Requirements, Open Market Operations, selective credit controls and moral suasion. 10 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  11. 11. MBA: FINANCIAL PRODUCTS AND SERVICES INTRODUCTION TO INSURANCEINTRODUCTIONToday, only one business, which affects all walks of life, is insurance business. That‟s whyinsurance industry occupies a very important place among financial services operative in theworld. Owing to growing complexity of life, trade and commerce, individuals as well asbusiness firms are turning to insurance to manage various risks. Therefore a proper knowledgeof what insurance is and what purpose does it serve to individual or an organisation istherefore necessary. Insurance is a mechanism that ensures an individual to thrive on adverseconsequences by compensating the individual his/her loss financially. Every individual in thisworld is subject to unforeseen and uncalled for hazards or dangers, which may make him andhis family vulnerable. At this place, only insurance helps him not only to survive but alsorecover his loss and continue his life in a normal manner, which would otherwise beunthinkable.MEANING AND NATUREThe term insurance can be defined in financial as well as in legal terms. The financialdefinition deals with the funding or financial arrangement of the losses whereas the legaldefinition deals with provisions relating to legally enforceable contract.DEFINITION IN FINANCIAL SENSEInsurance is a financial arrangement, which redistributes the costs of unexpected lossesamong the members of the pool. The pool is a collection of people facing common risks. Allmembers contribute a fixed amount towards a pool called premium. In exchange for thepremium payment, the person gets an assurance that a certain sum of money is to be paid tohim on the happening of the event insured against. The assurance is that his loss will be madegood. Thus, insurance involves the transfer of loss exposures to an insurance pool and theredistribution of losses among the members of the pool.DEFINITION IN LEGAL SENSEInsurance can be defined as a contract between two parties by which one party undertakes tomake good or indemnify any financial loss suffered by other party, in consideration of a sumof money, on the happening of a specified event e.g. fire, accident or death. We call theparty agreeing to pay for the losses the insurer. We call the party whose loss makes the„insurer‟ pay the claim the insured. We call the payment insured pays to the insurer thepremium. We call the insurance contract a policy. 11 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  12. 12. MBA: FINANCIAL PRODUCTS AND SERVICESNATURE OF INSURANCEThe insurance has the following characteristics, which are observed in case of life, marine,fire and general insurance.Sharing of risk - Insurance is a device to share the financial losses which might befall on anindividual or his family on the happening of a specified event. The event may be death in caseof life insurance, fire in fire insurance etc. If insured the loss arising from these events will beshared by all insured in the form of premium.Co-operative device - The most important feature of every insurance plan is the cooperationof large number of persons who, in effect, agree to share the financial loss arising due to aparticular risk which is insured. An insurer would be unable to compensate all losses from hiscapital. So, by insuring a large number of persons, he is able to pay the amount of loss.Value of risk - The risk is evaluated before insuring to charge the amount of share of aninsured, premium. There are several methods of evaluation of risks. If there is expectation ofmore risk, higher premium may be charged. So, the probability of loss is calculated at thetime of insurance.Payment at contingency - The payment is made at a certain contingency insured. If thecontingency occurs, payment is made. Since the life insurance contract is a contract ofcertainty, because the contingency, the death or the expiry of term, will certainly occur, thepayment is certain. In other insurance contracts, the contingency is the fire or the marineperils etc., may or may not occur. So, if the contingency occurs, payment is made, otherwiseno amount is given to the policy-holder.Amount of payment - The amount of payment depends upon the value of loss occurred due tothe particular insured risk provided insurance is there up to that amount. In life insurance,the purpose is not to make good the financial loss suffered. The insurer promises to pay afixed sum on the happening of an event. If the event or the contingency takes place, thepayment falls due if the policy is valid and in force at the time of the event.Large number of insured persons - To spread the loss immediately, smoothly and cheaply,large number of persons should be insured. Large number of persons or property is insured tolower the cost of insurance and the amount of premium.Insurance is not a gambling - The insurance serves indirectly to increase the productivity ofthe community by eliminating worry and increasing initiative. The uncertainty is changed intocertainty by insuring property and life because the insurer promises to pay a definite sum atdamage or death. From the company‟s point of view, the life insurance is essentially non-speculative; in fact, no other business operates with greater certainties. From the insuredpoint of view, too, insurance is also the antithesis of gambling. Nothing is more uncertainthan life and life insurance offers the only sure method of changing that uncertainty intocertainty. 12 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  13. 13. MBA: FINANCIAL PRODUCTS AND SERVICESInsurance is not charity - Charity is given without consideration but insurance is not possiblewithout premium. It provides security and safety to an individual and to the security althoughit is a kind of business because in consideration of premium it guarantees the payment of loss.It is a profession because it provides adequate sources at the time of disasters only bycharging a nominal premium for the service.PURPOSE AND NEEDBeside things mentioned by you, let‟s discuss in detail the purpose and need of insurance. Aswe all know life is full of uncertainties and insurance is based on uncertainties and if thereare no uncertainties about the occurrence of a disaster, the concept of insurance will ceaseto exist. If we all are able to predict the future dangers correctly then we can take asafeguard action to move out of the danger but problem is that we cannot predict death,disaster and danger. All individuals as well as their tangible and intangible assets are exposedto all types of unforeseen risks. Thus insurance is done against such possible contingencies tosave the owner and his family from all sorts of sufferings by making good the losses of theunfortunate few, through the help of the fortunate many, who were exposed to the samerisk, but saved from the misfortune.As insurance is a system of sharing risk that seems to be too great to be borne by oneindividual we can list out the benefits derived by individual and society from the insurance.Indemnifies loss - Insurance restores people to their former financial position as if no loss hadoccurred. It helps them to remain financially secure without running into debt after a loss. Italso helps business firms to carry on their normal business operations without interruptioneven after the loss occurs.Reduces worry and fear - Insurance helps in reducing anxiety and fear before and after theloss occurs, as it is known that the insurance company will compensate the loss.Makes available funds for investment - Investments are the base of an economic developmentand mostly these investments are the result of savings. An insurance company is a majorinstrument for the mobilisation of the savings of people, which are thereafter canalised intoinvestment for economic growth. Insurance provides the continuity in trade and commerce,by covering the risks that could retard the economy and thereby indirectly helps the economyto grow.Provides employment to a large number of people – Insurance industry offers regular full timeemployment to a large number of people in the country. Besides them a number of agents,professionals etc. are also engaged by the industry to render professional services.Educates people about loss prevention - Insurance companies also engage themselves ineducating people about loss prevention. In our country the GIC has created the lossprevention association of India to promote and propagate loss prevention. 13 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  14. 14. MBA: FINANCIAL PRODUCTS AND SERVICESInsurance enhances credit worthiness - Insurance policies are often offered as collateralsecurity for credit as well.Social benefits - Above all we derive social benefits when people with peaceful minds carryon their operations properly and in a better way. Thus insurance‟s contribution to theeconomy as a whole is valuable as it avoids economic hardships to people. PRINCIPLES OF INSURANCEIndemnityA contract of insurance is a contract of indemnity. Indemnity means that the insured in caseof loss against which the policy has been insured, shall be paid the actual amount of loss notexceeding the amount of the policy i.e. he shall be fully indemnified. The purpose of contractof insurance is to place the insured in the same financial position, as he was before the loss.Suppose, a person insured his factory for Rs.20 lakhs against fire, the factory is partially burntand it is estimated that a sum of Rs.10 lakhs will be required to restore it to the originalcondition. The insurer is liable to pay Rs.10 lakhs only. The exceptions to the rule are foundin Personal Accident policies, Agreed Value policies in marine insurance and Valuables andreinstatement policies in Engineering insurance. These are also contracts of indemnity but bya special application of the principle, the amount of indemnity is decided at the time ofentering into the contract itself.In certain forms of insurance, the principle of indemnity is modified to apply. For example, inmarine or fire insurance, sometimes, certain profit margin that would have earned in theabsence of the event, is also included in the loss. Under life insurance, the insurer is requiredto pay the fixed amount in the event of death or on the expiry of the period of the policy.Thus the contract of life insurance is not insurance as such but it is an assurance. This is dueto the reason that life cannot be indemnified i.e. the life of a person cannot be valued interms of money and therefore the question of compensation of actual loss does not arise.Thus a contract of life insurance is a contract of guarantee.Utmost good faithThe doctrine of utmost good faith applies to all forms of insurance. Both parties of theinsurance contract must be of the same mind at the time of contract. There should not be anyfraud, non-disclosure or misrepresentation concerning the material facts. An insurancecontract is a contract of absolute good faith where both parties of the contract must discloseall the material facts truly and fully as insurance shifts risk from one party to another. As ininsurance insured knows more about the risks than the insurer, so there must be utmost goodfaith and mutual confidence between insured and insurer. For instance, if a person suffersfrom a serious invisible disease but does not disclose this fact while getting his life insured,the insurance company can avoid the contract. Similarly the insurer must exercise the same 14 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  15. 15. MBA: FINANCIAL PRODUCTS AND SERVICESgood faith in disclosing the scope of the insurance, which he is prepared to grant. Breach ofgood faith renders the contract voidable ab-initio at the discretion of the aggrieved party. Amaterial fact is a fact which would influence the mind of an insurer in deciding whether heshould accept the risk, on what terms and what premium he should charge. The utmost goodfaith says that all material facts should be disclosed in true and full form. It means that thefacts should be disclosed in that form in which they really exist. There should no falsestatement and no half-truth nor any silence on the material facts. What is a material factdepends upon the circumstances of the particular case.Insurable interestFor an insurance contract to be valid, the insured must have an insurable interest in thesubject matter of insurance. It means that the insured must have an actual pecuniaryinterest. The insured must be so situated with regard to the thing insured that he would havebenefit by its existence and loss from its destruction. For instance, a person has insurableinterest in his life or in the life of the spouse but he has no insurable interest in the life of astranger. The owner of a building has absolute insurance interest. If this building is financedby banks then financiers too have their interest in the property but is limited to the extent oftheir financial commitment only. The insurable interest must exist both at the time of theproposal and at the time of claims but in case of life insurance, insurable interest must existonly when the policy is taken.The essentials of a valid insurable interest are the following:(a) There must be a subject matter to be insured.(b) The insured should have monetary relationship with the subject matter.(c) The relationship between the insured and the subject matter should be recognised by lawi.e. there should not be any illegal relationship between the insured and the subject matter.(d) The financial relationship between the insured and the subject matter should be such thatthe insured is financially benefited by its existence or survival and will suffer economic loss atthe destruction or death of the subject matter.The subject matter is life in life insurance, property and goods in property insurance, liabilityand adventure in general insurance. Insurable interest is essentially a pecuniary interest, noemotional or sentimental loss, like an expectation or an anxiety, could be the ground of theinsurable interest.Proximate causeThe rule of proximate cause says that the cause of the loss must be proximate or immediateand not remote. If the proximate cause of the loss is a risk insured against, the insured canrecover. If the risk insured is the outcome of a remote cause, which is not insured against,then the insurer is not bound to pay compensation. Proximate cause means the active 15 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  16. 16. MBA: FINANCIAL PRODUCTS AND SERVICESefficient cause that sets in motion a chain of events, which brings about a result, withoutintervention of any force started and working actively from a new and independent source.That means proximate cause is the cause which in a natural and unbroken series of events isresponsible for a loss or damage.If there is a single cause of the loss, the cause will be proximate cause and if the cause of losswas insured, insurer will have to indemnify the loss. When a loss has been brought about bytwo or more causes, the question arises as to which is the proximate cause. If the causesoccurred in form of chain, they have to be observed seriously. For the policy to cover the lossmust have an insured peril must occur in the chain of causation that links the proximate causewith the loss.The proximate cause is not necessarily, the cause that was nearest to the damage either intime or in place, but is rather the cause that was actually responsible for loss.SubrogationThe doctrine of subrogation is a corollary to the principle of indemnity and applies only to fireand marine insurance. According to it, when an insured has received full indemnity in respectof his loss, all rights and remedies which he has against third person will pass on to theinsurer. The insurer‟s right of subrogation arises only when he has paid for the loss and thisright extend only to the rights and remedies available to the insured in respect of the thing towhich the contract of insurance relates.If the insured is in a position to recover the loss in full or in part from a third party due towhose negligence the loss may have been occurred, his right of recovery is subrogated(substituted) to the insurer on settlement of the claim. The insurers, thereafter, can recoverthe claim from the third party or in case the lost property is recovered or the damagedproperty fetches any value, the insurer will be its owner. Suppose, a house is insured for Rs.2lakhs against fire, the house is damaged by fire and the insurer pays the full value of Rs.2lakhs to the insured. Later on the damaged house is sold for Rs.20, 000. The insurer is entitledto receive the sum of Rs.20, 000.ContributionWhen an insured obtains more than one policy on one risk, the principle of contributioncomes into play. The aim of contribution is to distribute the actual amount of loss among thedifferent insurers who are liable for the same risk under different policies in respect of thesame subject matter. That means the insured may affect more than policy to cover the samerisk, he/she cannot recover in total more than a full indemnity (sum insured). In other words,the right of contribution arises when (a) there are different policies which relate to the samesubject matter; (b) the policies cover the same peril which caused the loss; (c) all the policiesare in force at the time of the loss; and (d) one of the insurers has paid to the insured morethan his share of the loss. However, the principle of contribution does not apply to lifeinsurance. 16 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  17. 17. MBA: FINANCIAL PRODUCTS AND SERVICESMitigation of lossIn the event of a mishap, the insured must take all possible steps to mitigate or minimise theloss to the subject matter of insurance. He should act in the same manner in which he wouldhave acted in the absence of the insurance cover. This means that it is the duty of the insuredto make a reasonable effort and take all available precautions to save the insured property.WarrantiesThere are certain conditions and promises in the insurance contract which are calledwarranties. Warranties which are mentioned in the policy are called express warranties.There are certain warranties which are not mentioned in the policy. These warranties arecalled implied warranties. Warranties, which are answers to the question, are calledaffirmative warranties. The warranties fulfilling certain conditions or promises are calledpromissory warranties.Warranty is the very important condition in the insurance contract which is to be fulfilled bythe insured. On breach of warranty the insurer becomes free from his liability. Thereforeinsured must have to fulfil the condition and promises during the insurance contract whetherit is important or not in connection with the risk. If warranties are not followed, the otherparty may cancel the contract whether risk has occurred or not. However, when the warrantyis declared illegal and there is no reverse effect on the contract, the warranty can be waived. Types of InsuranceThe insurance can be divided from two angles: from business point of view and from the riskpoint of view.Business Point of View.The insurance from business point of view can be categorised into: (1) Life Insurance, (2)General Insurance, and (3) Social Insurance.(1) Life InsuranceLife Insurance is different from other insurance in the sense that the subject matter ofinsurance is life of human being. The insurer will pay the fixed amount of insurance at thedeath or at the expiry of certain period. At present, life insurance enjoys maximum scopebecause each and every person requires the insurance.This insurance provides protection to the family at the premature death or gives adequateamount at the old age when earning capacities are reduced. Types of insurance plans offeredin our country:- Term assurance plans- Whole life plans 17 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  18. 18. MBA: FINANCIAL PRODUCTS AND SERVICES- Endowment assurance plans- Assurances for children- Family income policy- Life annuity Joint life assurance- Pension plans- Unit linked plan- Policy for maintenance of handicapped dependent- Endowment policies with health insurance benefits(2) General InsuranceThe general insurance includes property insurance, liability insurance and other forms ofinsurance. Fire and marine insurance comes under property insurance. Liability insuranceincludes motor, theft, fidelity and machine insurances to a certain extent. The strictest formof liability insurance is fidelity insurance whereby the insurer compensates the loss to theinsured when he is under the liability of payment to the third party. Types of insurancepolicies available are:- Health insurance- Medi-claim policy- Personal accident policy- Group insurance policy- Automobile insurance- Worker‟s compensation- Liability insurance- Aviation insurance- Business insurance- Fire insurance policy- Travel insurance policy(3) Social Insurance 18 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  19. 19. MBA: FINANCIAL PRODUCTS AND SERVICESThe social insurance is to provide protection to the weaker sections of the society who areunable to pay the premium for adequate insurance. Pension plan, disability benefits,unemployment benefits, sickness insurance and industrial insurance are the various forms ofsocial insurance.Risk point of viewInsurance can be divided into property, liability and other forms of insurance.(1) Property InsuranceUnder the property insurance property of a person is insured against a certain specified risks.The risk may be fire or marine perils, theft of property or goods, damage to property ataccident. Examples of this are:- Home insurance- Business insurance- Commercial insuranceMarine InsuranceMarine insurance provides protection against loss of marine perils. The marine perils arecollision with rock, or ship attacks by enemies, fire and capture by pirates etc. These perilscause damage, destruction or disappearance of the ship and cargo and non-payment offreight. So, marine insurance insures ship (Hull), cargo and freight. Types of policies are:- Voyage policies- Time policies- Valued policies- Hull insurance- Cargo insurance- Freight insuranceFire InsuranceFire insurance covers risks of fire. In the absence of fire insurance, the fire waste willincrease not only to the individual but to the society as well. With the help of fire insurance,the losses, arising due to fire are compensated and the society is not losing much. Theindividual is protected from such losses and his property or business or industry will remain inthe same position in which it was before the loss. The fire insurance does not protect only 19 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  20. 20. MBA: FINANCIAL PRODUCTS AND SERVICESlosses but it provides certain consequential losses also. Policies available in this insuranceare:- Consequential loss policy- Comprehensive policy- Valued policy- Valuable policy- Floating policy- Average policyMiscellaneous InsuranceThe property, goods, machine, furniture, automobile, valuable goods etc., can be insuredagainst the damage or destruction due to accident or disappearance due to theft. There aredifferent forms of insurances for each type of the said property whereby not only propertyinsurance exists but liability insurance and personal injuries are also insured. Miscellaneousinsurance covers:- Motor- Disability- Engineering and aviation risks- Credit insurance- Construction risks- Money insurance- Burglary and theft insurance- All risks insurance(2) Liability InsuranceThe general insurance also includes liability insurance whereby the insurer is liable to pay thedamage of property or to compensate the loss of personal injury or death. The examples ofthis type of insurance are fidelity insurance, automobile insurance and machine insurance.Examples are:- Third party insurance- Employees insurance 20 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  21. 21. MBA: FINANCIAL PRODUCTS AND SERVICES- Reinsurance(3) Other FormsBesides the property and liability insurances, there are certain other insurances, which areincluded under general insurance. The examples of such insures are export credit insurances,state employees insurance, etc. whereby the insurer guarantees to pay certain amount at thehappening of certain events. Examples are:- Fiduciary insurance- Credit insurance- Privilege insuranceNEW INSURANCE PRODUCTSSome of the new policies are:(1) Policies under LIC Mutual Fund – LIC launched its Mutual Fund with promise to theinvestors to provide high returns along with safety and security of investments. LIC MutualFund came up with 5 schemes which provide distinct benefits to various cross sections ofinvestors. The names of scheme are:- Dhanashree 1989- Dhan 80 cc(1)- Dhanavarsha- Dhanaraksha 1989- Dhanavridhi 1989(2) Jeevan Akshay – In return for purchase price paid by the purchaser a monthly pension willbe paid during the lifetime of the purchaser of the pension. On the death of the pensioner,the original amount invested by the employee along with an additional bonus will be returnedto the nominee or his legal heirs.(3) Jeevan Dhara – The payment of annuities in respect of policies under Jeevan Dhara has tostart one month after the completion of the deferment period.(4) Jeevan Kishor – Children between the ages of 1(last birthday) and 12(last birthday) areeligible to be proposed for insurance under this plan.(5) Jeevan Chhaya – Couples having a child of age less than one year can avail of this plan, inorder to ensure that an adequate financial provision is made for the higher education of the 21 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  22. 22. MBA: FINANCIAL PRODUCTS AND SERVICESchild. The child should not have completed one year of age on the date of the registration.Either father or mother or each one of them individually can take policies under this plan.(6) Jeevan Suraksha – This policy enables individuals to provide for retirement income from achosen date. The policy is with life cover but can be taken without life cover under certainconditions.(7) Rural insurance – The policies offered under this scheme are: Personal Insurance (a) Janta Personal Accident (Individual) (b) Janta Personal Accident (Group) (c)Gramin Personal Accident Property Insurance (a) Agricultural Pumpset (b) Animal Driven Carts Insurance (c) Hut Insurance (d) Gober Gas Insurance (e) New Well Insurance Cattle and Livestock Insurance (a) Cattle Insurance (b) Sheep and Goat Insurance (c) Camel Insurance (d) Horse Insurance Poultry Insurance (a) Duck Insurance (b) Poultry Insurance Master Policy(8) Insurance of Species(9) Package Insurance(10) Crop Insurance 22 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  23. 23. MBA: FINANCIAL PRODUCTS AND SERVICES(11) Medi-claim Hospitalisation and Domiciliary Hospitalisation Insurance(12) Overseas Medi-claim Policy(13) Student‟s Safety Insurance(14) Unborn Child Welfare Insurance(15) Cancer Medical Expenses Policy(16) Boiler and Pressure Plant Insurance(17) Machinery Insurance(18) Cold Storage Insurance(19) Baggage Insurance(20) Shopkeeper‟s Insurance(21) All Risks Cover Insurance(22) Social Security Scheme(23) Wedding Insurance(24) Kidnap and ransom Insurance(25) Travel InsurancePRESENT STATE OF INSURANCE INDUSTRY IN INDIAThe insurance industry in India can be discussed in two ways – its historical background and itspresent state. Insurance in India is nothing new. It had its origins in the early 19thcenturywith the arrival of British enterprise in India.Insurance, particularly non-life remained an urban oriented activity of the Insurancecompanies operating through their agencies.HISTORICAL BACKGROUNDLife Insurance Corporation of India -The insurance sector in India dates back to 1818 when first insurance company, The OrientalLife Insurance Company, was established, at Calcutta. Thereafter, Bombay Life AssuranceCompany in 1823 and Madras Equitable Life Assurance Society in 1829 were established. In1912, the Indian Life Assurance Companies Act was enacted as the first statute to regulatethe life insurance business. In 1928, the Indian Insurance Companies Act was enacted toenable the Government to collect statistical information about both life and non-life 23 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  24. 24. MBA: FINANCIAL PRODUCTS AND SERVICESinsurance businesses. The Insurance Act was subsequently reviewed and a comprehensivelegislation was enacted called the Insurance Act, 1938.The nationalisation of life insurance business took place in 1956 when 245 Indian and foreigninsurance and provident societies were first amalgamated and then nationalised. The LifeInsurance Corporation of India (LIC) came into existence by an Act of Parliament, viz. LIC act,1956, with a capital contribution of Rs.5 Crores from the Government of India.General Insurance Corporation Of India - The General insurance business in India started withthe establishment of Triton Insurance Company Limited in 1850 at Calcutta .In 1907, the firstcompany, The Mercantile Insurance Ltd. Was set up to transact all classes of generalinsurance business. General Insurance Council, a wing of the Insurance Association of India in1957, framed a code of conduct for ensuring fair conduct and sound business practices. In1968 the Insurance Act was amended to regulate investments and to set minimum solvencymargins. In the same year the Tariff Advisory Committee was also set up. In 1972, TheGeneral Insurance Business (Nationalisation) Act was passed to nationalise the generalinsurance business in India with effect from 1st January 1973. For these 107 insurers wasamalgamated and grouped into four company‟s viz., the National Insurance Company Ltd.,the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. And the UnitedIndia Insurance Company Ltd. General Insurance Corporation of India was incorporated as acompany.CURRENT SCENARIO:In new economic policies formulated since 1991, globalisation, privatisation and liberalisationhave become new buzzwords. Under new economic policies, many economic and financialreforms took place. Like liberalising licensing policy, attracting FDI, allowing foreign equity inpublic sector undertakings. The financial reforms restructured banking sector by allowingentry of new private and foreign banks. They also allowed private sector and commercialbanks in mutual funds investment business, rationalising the EXIM policy and so on.INSURANCE SECTOR REFORMSAfter the nationalisation of the life insurance industry in 1956 and the general insuranceindustry in 1972, the insurance industry confined only to the operations of LIC, GIC and itsfour subsidiaries viz. The National Insurance Company Limited, New India Assurance CompanyLimited, Oriental Fire and General Insurance Company Limited and United India Fire andGeneral Insurance Company Limited. Over the years this state monopoly resulted incomplacency, use of outdated technologies, inefficient and insufficient customer services andnon-coverage of the potential market. Recognising this, the Government set-up a high-powered committee headed by Mr. R. N. Malhotra.Malhotra CommitteePurpose 24 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  25. 25. MBA: FINANCIAL PRODUCTS AND SERVICESIn 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor, wasformed to evaluate the Indian Insurance Industry and recommend its future direction. Thecommittee was set up with an objective of complementing the reforms in the Indian Financialsector. The reforms were aimed at “creating a more efficient and competitive financialsystem suitable for the requirements of the economy keeping in mind the structural changescurrently underway and recognising that insurance is an important part of the overallfinancial system where it was necessary to address the need for similar reforms.” Besidesthis, the Malhotra committee was asked to make recommendations for changing the structureof insurance industry, to make specific suggestions about how to improve the functioning ofLIC and GIC and to recommend on regulation and supervision of the insurance sector in India.Besides this, the committee was asked to assess the strengths and weaknesses of the existinginsurance industry and to make recommendations for changes in its functioning and thegeneral policy framework keeping in mind the reforms under way in other parts of thefinancial sector.RecommendationsIn 1994, the committee submitted the report and gave the following recommendations:Structure• Government stake in the insurance companies to be brought down to 50%• Government should take over the holdings of GIC and its subsidiaries so that thesesubsidiaries can act as independent corporations• All the insurance companies should be given greater freedom to operate.Competition• Entry of private sector companies within well defined parameters of nature of business.• Private Companies with a minimum paid up capital of Rs.1 billion should be allowed toenter the industry• No Company should deal in both Life and General Insurance through a single entity• Selective entry of foreign insurance companies preferably through joint ventures.• Postal Life Insurance should be allowed to operate in the rural market• Only one State Level Life Insurance Company should be allowed to operate in each state• The insurance Act should be changed• Controller of Insurance should be made independent 25 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  26. 26. MBA: FINANCIAL PRODUCTS AND SERVICES• Establishment of a strong and effective Insurance Regulatory Authority (IRA) as a statutoryautonomous board.Investments• Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to50%• GIC and its subsidiaries are not to hold more than 5% in any companyCustomer Service• LIC should pay interest on delays in payments beyond 30 days• Insurance companies must be encouraged to set up unit linked pension plans• Computerisation of operations and updating of technology to be carried out in the insuranceindustry.Overall, the committee strongly felt that in order to improve the customer services andincrease the coverage of the insurance industry should be opened up to competition. But atthe same time, the committee felt the need to exercise caution as any failure on the part ofnew players could ruin the public confidence in the industry. The recommendations of thecommittee were discussed at different forums. The recommendations to set up anautonomous IRA found wide support. Since enacting legislation for creating the statutory IRAwas to take time, the then government constituted an interim IRA, pending the enactment ofcomprehensive legislation.It was on the basis of this report that the then Finance Minister P. Chidambaram proposed theopening up of insurance to the private sector, including multinational companies.IRDA BillThe IRDA Bill was drafted keeping the Malhotra Committee recommendations in view andhence the government has ruled out privatisation of public sector insurance companies, LICand GIC. The bill did not provide for any dilution of 100 percent government equity in the twopremier companies.The IRDA bill sought to give a statutory status to the interim Insurance Regulatory Authorityand amend the 1938 Insurance Act, the 1956 Life Insurance Corporation Act and the 1972General Insurance Business (Nationalisation) Act to open up the sector. It provides for a ninemember regulatory body with statutory powers. The bill also fixed minimum capitalrequirement for life and general insurance at Rs.100 Crores and for reinsurance firms atRs.200 Crores. The Malhotra Committee Report justified the entry of foreign insurancecompanies by arguing that if it is permitted, it should be done on selective basis preferablythrough joint venture with Indian partner. In 1999, the bill was finally passed and IRDA wasformed to regulate and promote insurance business in India. The IRDA Act bestows the 26 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  27. 27. MBA: FINANCIAL PRODUCTS AND SERVICESauthority with powers to frame varies regulations, issue licenses, set capital requirementsand solvency margins, prepare investment norms and inspect the books of private insurersindependent of the government.LIBERALISATION OF INSURANCE MARKETSLiberalisation of Insurance involves transformation of the industry from a Governmentmonopoly to a competitive environment. Free markets allow for better resource allocationand creation of wealth and prosperity of people and the country. It enables development ofhealth care, education and infrastructure of the country. In a liberalized insurance market,consumers are able to choose from different insurance providers having a wide range ofproducts.A liberal insurance market is one in which the market determines who should be allowed tosell insurance, what, how and the prices at which these insurance products should be sold.The issues like market access and equality of competitive opportunity and national treatmentwill decide who will be allowed to sell insurance. Second and fourth items commonly dealwith issues such as product, price and market conduct regulation.There are certain pre-conditions to make liberalisation of insurance effective:• Sound competition law• Efficient and reliable regulation• Phased liberalisation• Consistency and impartiality between competitors• Optimum quantum of regulation• Efficient disclose and dissemination of information to the society.Insurance markets in India possess certain imperfections justifying the need for competitionas well as regulation.INSURANCE PLAYERS IN INDIANon –Life InsurersBajaj Allianz General Insurance Company LimitedIt is a joint venture between Bajaj Auto Limited and Allianz AG of Germany. The companyregistered on May 2, 2001 to conduct General Insurance business (including Health Insurancebusiness) in India. The company has an authorised and paid up capital of Rs.110 Crores andhas a network of 31 offices across the country.ICICI Lombard General Insurance Company Limited 27 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  28. 28. MBA: FINANCIAL PRODUCTS AND SERVICESIt is a joint venture between ICICI Bank Limited India‟s second largest bank and LombardCanada Limited, one of the oldest property and casualty insurance companies in Canada. ICICILombard offers a wide range of retail and corporate general insurance customised products.The company has over 100 branches across the country.IFFCO-TOKIO General Insurance Company LimitedIt is a joint venture between IFFCO and The Tokio Marine and Fire Insurance CompanyLimited, Japan Krishak Bharati Cooperative Limited (KRIBHCO), and Indian Potash contributing49 percent, 26 percent and 5 percent respectively to its Rs.100 Crores capital. After gettingthe licence the company started operations and is a leading private General InsuranceCompany in India in launching innovative insurance cover for farmers called the “SankatHaran Policy” It is operating from 20 cities in India.National Insurance Company LimitedIt was incorporated in 1906 to carry out general insurance business and nationalised in 1972.Inthe same year, 22 foreign and 11 Indian Insurance Companies were amalgamated withNational Insurance Company Limited, as a subsidiary company of General InsuranceCorporation of India. In 2002, with the passage of Insurance amendment Bill (2002), NationalInsurance Company has been delinked from GIC and has been functioning as an independentcompany. Apart from domestic insurance business the company also undertakes reinsuranceand foreign operationsNew India Assurance Company LimitedThe New India Assurance Company was incorporated on July 23, 1919 and commencedbusiness from October 14, 1919. In 1972 the Government of India took over the managementof the company along with all other non-life insurers in the country. New India Assurance wassubsequently reconstituted taking over 23 companies. In2002, with the passage of Insuranceamendment Bill, New India Assurance Company Limited has been delinked from GIC and hasbeen functioning as an independent company.Oriental Insurance Company LimitedThe Oriental Insurance Company Limited is a public sector company and is one of the foursubsidiary companies of the General Insurance Corporation of India. In 1956, Oriental becamea subsidiary of the Life Insurance Corporation of India. On May 13, 1971 Government of Indiatook over the management of all general insurance companies in India and nationalised theOriental Fire and General Insurance Company under the General Insurance Corporation ofIndia as one of the four subsidiaries. In 2002, with the passage of Insurance amendment Bill,the Oriental Insurance Company Limited has been delinked from GIC and has been functioningas an independent company.United India Insurance Company Limited 28 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  29. 29. MBA: FINANCIAL PRODUCTS AND SERVICESUnited India Insurance is one of the four subsidiaries of the General Insurance Companycarrying on general insurance business in India. In 2002, with the passage of Insuranceamendment Bill (2002), United India Insurance has been delinked from GIC and has beenfunctioning as an independent company.Tata AIG General Insurance Company LimitedTata AIG General Insurance Company Ltd. And Tata AIG Life Insurance Company Ltd.(collectively “Tata AIG”) are joint venture companies between the Tata group and AmericanInternational Group Inc. (AIG), the leading U.S. based international insurance and financialservices organisation. It has a capital of Rs.125 Crores out of which 74 percent has beenbrought in by Tata Sons and the remaining 26 percent by American partner. Tata AIG GeneralInsurance Company Limited claims to be the first Indian insurance company to offer acomprehensive policy to cover various risks in the IT sector.Royal Sundaram General Insurance Company LimitedThe joint venture between Royal and Sun Alliance Insurance and Sundaram Finance Limitedstarted its operation from March 2001. Royal and Sun Alliance is one of the world‟s leadinginternational insurance companies. The Sun was established in 1710 and is the oldestinsurance company in existence still trading under its original name. The Alliance wasfounded in 1824 and the Royal in 1845.Cholamandalam General Insurance Company LimitedIt is promoted by Chennai based Murugappa Group. The company is founded with Rs.105Crores out of which 75 percent is being held by Tube Investment, a Murugappa groupcompany. While Cholamandalam Investment and Finance Company Limited holds 15 percentstake and the rest is by other privately held Murugappa companies with 5 percent stake each.Reliance General Insurance Company LimitedReliance group has announced its plans to enter the Indian insurance sector – both in the lifeand general insurance businesses. Reliance Industries plans to bring in around Rs.300 Croresinto its insurance venture through its financial arm Reliance Capital Limited. The twocompanies will have an initial authorised capital of Rs.200 Crores each. This is the first Indiancompany without a foreign tie-up.Export Credit Guarantee Corporation of India LimitedIt was established in the year 1957 by the Government of India to strengthen the exportpromotion drive by covering the risk of exporting on credit. Being an export promotionorganisation, it functions under the administrative control of the Ministry of Commerce,Government of India. It is the fifth largest credit insurer of the world in terms of coverage ofnational exports. The paid –up capital of the company is Rs.390 Crores. 29 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  30. 30. MBA: FINANCIAL PRODUCTS AND SERVICESHDFC Chubb General Insurance LimitedHDFC, India‟s premier financial services company and Chubb Corporation, leading global non-life insurer, entered into a joint venture agreement for non-life insurance in 2002. HDFC holds74 percent and Chubb 26 percent in the joint venture company, HDFC Chubb GeneralInsurance Limited with initial capital of Rs.100 Crores.Life InsurersAlliance Bajaj Life Insurance Company LimitedAlliance Bajaj Life Insurance Company Limited is a joint venture between Alliance AG andBajaj Auto Limited. The company was incorporated on March 12, 2001. The company receivedthe IRDA certificate of registration on August 3, 2001 to conduct Life Insurance business inIndia.Birla Sun Life Insurance Company LimitedIt is a joint venture between Birla Group and Sun Life Corporation of U.S. The products ofBirla Sun Life Insurance Company (BSLI) are distributed through a fully owned subsidiary –BSDL Insurance Advisory Services Limited (BSDL IAS) BSDL. The company claims to have uniqueproducts, presenting a powerful combination of returns, liquidity, safety, tax benefits,transparency and convenience.HDFC Standard Life Insurance Company LimitedHDFC and Standard Life was the first joint venture to enter the life insurance market, inJanuary 1995. In October 1998, the joint venture agreement was renewed and Standard Lifepurchased 2 percent of Infrastructure Development Finance Company Limited (IDFC). Thecompany as such, was incorporated on August 14, 2000 under the name of HDFC Standard LifeInsurance Company Limited. HDFC are the main shareholders in HDFC Standard Life, with 81.4percent, while Standard Life owns 18.6 percent. HDFC and Standard Life have a long andclose relationship built upon shared values and trust.ICICI Prudential Life Insurance Company LimitedThe company was incorporated on July 20, 2000, with an authorised capital of Rs.230 Crores(paid up Rs.190 Crores). It is a joint venture of ICICI (74%) and Prudential plc U.K (26%). Thecompany is on the top of the list of competitors to LIC. The company was granted certificateof incorporation on 26-11-2000 and it started its operations on 19-12-2000.Life Insurance Corporation of India LimitedLIC was established in 1956 and is the dominant leader in life insurance in India. It has 7 zonaloffices, over 100 divisional offices and 204 branches in India with over 6.50 lakhs agents.Tata AIG Life Insurance Company Limited 30 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  31. 31. MBA: FINANCIAL PRODUCTS AND SERVICESIt is capitalised at Rs.185 Crores of which 74 percent has been brought in by Tata Sons andthe American partner brings in the remaining 26 percent. American Insurance Group (AIG) isthe leading U.S. based international insurance and financial services organisation and thelargest underwriter of commercial and industrial insurance in the United States. AIG‟s globalbusinesses also include financial services and asset management. Including aircraft leasing,financial products, trading and market making, consumer finance, institutional, retail anddirect investment fund asset management etc.SBI Life Insurance Company LimitedIndia‟s largest bank SBI and Cardiff S.A. a leading insurer in France have firmed SBI Life. It isa 74: 24 venture; with Cardiff the foreign partner contributing 24 percent paid capital ofRs.250 Crores. SBI plans to market the insurance products through select branches of SBI andits seven associate banks.OM Kotak Mahindra Insurance Company LimitedThe joint venture OM Kotak Mahindra Life Insurance started off with an initial net worth ofRs.150 Crores, with 74: 26 stake between KMFL and OM. Kotak Mahindra is one of India‟spremier financial services groups, with a range of over two dozen highly specialised productsand services. Starting as a one-product company in the mid 80‟s, they have evolved into a fullservice financial conglomerate. Old Mutual pic. Is a leading financial services provider in theworld, providing a broad range of financial services in the area of insurance, assetmanagement and banking. It is a leading life insurer in South Africa, with more than 30percent market share. The partnership with Old Mutual plc. provides the Kotak Mahindragroup with an international perspective and expertise in the life insurance business.Max New York Life Insurance Company LimitedIt is a partnership between Max India Limited, one of India‟s leading multi businesscorporations and New York Life, a Fortune 100 company. The paid up capital of the jointventure is Rs.250 Crores. Max India Ltd. is building businesses in the emerging knowledgebased areas of Healthcare, Financial Services and Information Technology.ING Vyasya Life Insurance Company Ltd.It is a joint venture between ING, Vyasya Bank, one of India‟s leading private sector banksand GMR group. As per the joint venture agreement, Vyasya Bank holds 49 percent stake, ING26 percent, and the GMR Group would hold 25 percent. The paid up capital of the jointventure is Rs.110 Crores. Vyasya Bank has a very high degree of retail focus with goodcustomer service. ING Group, with an asset base of over Rs.28, 42,000 Crores is a globalfinancial institution of Dutch origin, which is active in the field of banking, insurance andasset management in more than 60 countries.Aviva Life Insurance Company Ltd. 31 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  32. 32. MBA: FINANCIAL PRODUCTS AND SERVICESIt is a joint venture between Dabur India and CGU, a wholly owned subsidiary of Aviva Pic, iscapitalised at Rs.110 Crores. Aviva Pic is the largest life and general insurance group of UKand the world‟s largest insurer with worldwide premium income and retail investment sales of£28 billion. Aviva Life has tied up with ABN Amro, Canara Bank, Laxmi Vilas Bank andAmerican Express for distribution of its products.AMP Sanmar Assurance Company Ltd.It is a joint venture between AMP having a stake of 26 percent and the Sanmar Group holding74 percent. The Sanmar group is one of the largest industrial groups in South India. AMPLimited is one of the world‟s leading financial services businesses. Types of RisksWith regards insurability, the below are categories of risks; Speculative or dynamic risk; and Pure or static risk Speculative or Dynamic RiskSpeculative (dynamic) risk is a situation in which either profit OR loss is possible. Examples ofspeculative risks are betting on a horse race, investing in stocks/bonds and real estate. In thebusiness level, in the daily conduct of its affairs, every business establishment faces decisionsthat entail an element of risk. The decision to venture into a new market, purchase newequipments, diversify on the existing product line, expand or contract areas of operations,commit more to advertising, borrow additional capital, etc., carry risks inherent to thebusiness. The outcome of such speculative risk is either beneficial (profitable) or loss.Speculative risk is uninsurable. Pure or Static RiskThe second category of risk is known as pure or static risk. Pure (static) risk is a situation inwhich there are only the possibilities of loss or no loss, as oppose to loss or profit withspeculative risk. The only outcome of pure risks are adverse (in a loss) or neutral (with noloss), never beneficial. Examples of pure risks include premature death, occupationaldisability, catastrophic medical expenses, and damage to property due to fire, lightning, orflood.It is important to distinguish between pure and speculative risks for three reasons. First,through the use of commercial, personal, and liability insurance policies, insurance companiesin the private sector generally insure only pure risks. Speculative risks are not consideredinsurable with some exceptions. 32 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  33. 33. MBA: FINANCIAL PRODUCTS AND SERVICESSecond, the law of large numbers can be applied more easily to pure risks than to speculativerisks. The law of large numbers is important in insurance because it enables insurers topredict loss figures in advance. It is generally more difficult to apply the law of largenumbers to speculative risks in order to predict future losses. One of the exceptions is thespeculative risk of gambling, where casinos can apply the law of large numbers in a veryefficient manner.Finally, society as a whole may benefit from a speculative risk even though a loss occurs, butit is harmed if a pure risk is present and a loss occurs. For instance, a computermanufacturers competitor develops a new technology to produce faster computer processorsmore cheaply. As a result, it forces the computer manufacturer into bankruptcy. Despitethe bankruptcy, society as a whole benefits since the competitors computers work faster andare sold at a lower price. On the other hand, society would not benefit when most pure risks,such as an earthquake, occur.Types of Pure (Static) RiskThe major types of pure risk that are associated with great economic and financial insecurityinclude; Personal risks; Property risks; and Liability risks.  Personal risks are risks that directly affect an individual. They involve the possibility of loss or reduction of income, of extra expenses, and the elimination of financial assets.There are four major personal risks; Premature death Old age Poor health UnemploymentPremature death risk is defined as the risk of the death of the head of a household withunfulfilled financial obligations. These can include dependents to support, a mortgage to bepaid off, or children to educate.Old age is a risk of insufficient income during retirement. When older workers retire, theylose their normal amount of earnings. Unless they have accumulated sufficient assets fromwhich to draw on, they would be facing a serious problem of economic insecurity.Risk of poor health includes both catastrophic medical bills and the loss of earned income.The cost of health care has increased substantially in recent years. The loss of income isanother major cause of financial instability. In cases of severe long term disability, there is asubstantial loss of earned income, medical bills are incurred, employee benefits may be lost,and savings depleted.The risk of unemployment is another major threat to most families. Unemployment can bethe result of a industry cycle downswing, economic changes, seasonal factors and frictions in 33 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  34. 34. MBA: FINANCIAL PRODUCTS AND SERVICESthe labor market. Regardless of the cause, unemployment can create financial havoc in theaverage families by way of loss of income and employment benefits.  Property risk is the risk of having property damaged or loss from numerous perils. Property loss can occur as a result of fire, lightning, windstorms, hail, and a number of other causes.  Liability risks are another important type of pure risk that many people face. More than ever, we are living in a litigious society. One can be sued for any frivolous reason. One has to defend himself when sued, even when the suit is without merit.Fundamental Risks and Particular RisksFundamental risks affect the entire economy or large numbers of people or groups within theeconomy. Examples of fundamental risks are high inflation, unemployment, war, and naturaldisasters such as earthquakes, hurricanes, tornadoes, and floods.Particular risks are risks that affect only individuals and not the entire community. Examplesof particular risks are burglary, theft, auto accident, dwelling fires. With particular risks,only individuals experience losses, and the rest of the community are left unaffected.The distinction between a fundamental and a particular risk is important, since governmentassistance may be necessary in order to insure fundamental risk. Social insurance,government insurance programs, and government guarantees and subsidies are used to meetcertain fundamental risks in our country. For example, the risk of unemployment is generallynot insurable by private insurance companies but can be insured publicly by federal or stateagencies. In addition, flood insurance is only available through and/or subsidized by thefederal government.Financial and non-financial risks( insurance is concerned with only financial risks)Life Insurance products:  Life insurance products are referred to as‟ Plans‟ of insurance. These plans have two basic elements – one is the „death cover‟ providing for the benefit being paid on the death of the insured person within a specified period. The other is the „survival benefit‟ providing for the benefit being paid on survival of a specified period.  Plans of insurance that provide only death cover are called „Term Assurance‟. Those that provide only survival benefits are called „pure endowment‟ plans.  Both these are like fire insurance policies. If the specified contingency does not happen, the policy holder does not get anything from the insurer.  All traditional life insurance policies are combinations of these two basic plans.  A term assurance plan with an unspecified period is called a „ Whole Life policy‟ under which the sum assured is paid on death, whenever it may occur. o A term assurance plan along with a pure endowment plan, when offered as a single product is called an endowment assurance plan, under which the SA is paid on survival for the specified period or on earlier death. 34 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  35. 35. MBA: FINANCIAL PRODUCTS AND SERVICES o A term assurance plan with a pure endowment plan of double the value is called a Double Endowment assurance Plan under which the amount payable on survival is double the amount payable on death. o Money back or anticipated endowment policy, under which a certain percentage of SA is paid at regular intervals and full SA on death at any time within the assured period is a combination of term assurance plan and pure endowment plans o By making changes in the features or adding and combining some of them, any number of plans can be developed o All insurers do not offer all the plans. The same plans may be called by different names by different insurers o Term assurance policies are not very popular as there is no saving content. o They are useful only when death cover is required. o Both whole life and endowment policies can be made participating in profits at the option of the policy holder. The benefits of bonuses declared after every valuation will be available under the policy o The amount payable on death and on survival need not be the same in endowment policies. A number of variations are possible. The changes versions can come in the form of Anticipated Endowment Plans.( Also called Money back or Money Saver Plans) With Profit and without Profit Policies: Without Profit or Non-Participating Policies are not entitles to bonuses. „With profit‟ policies attract a slightly higher premium for the right to participate in the progress of the insurer. Joint Life Policies: Married couples or partners go for this. The SA paid on the death of any of the insured persons during the term or at the end of the term. On the death of one life, the policy is continued to cover the second life till maturity, without payment of further premium. Children’s policy: Insurance in the name of children, who are minors, can be taken by parents or guardians. The time gap between the date of commencement of risk is called the „Deferment period‟. There is no insurance cover during the deferment period. The title will automatically pass on to the insured child, on his attaining the age of majority. After vesting, the policy becomes a contract between the insurer and the insured person. Variable insurance plans: The general complaint against insurance is the inadequacy of the returns. To reduce the grievance of policy holders, Insurance companies have introduced variable insurance plans. Examples are a) ULIP b) Money back type of policies Industrial assurance plans: Industrial assurance plans are designed for workers with low income. These types of policies did not become popular.35 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte
  36. 36. MBA: FINANCIAL PRODUCTS AND SERVICES SSS Policies: It is also called „payroll insurance‟. SSS has become very popular. Premium is deducted by the employer at source and remitted to the Insurance company. Group insurance: Group insurance is a plan of insurance, which provides cover to a large number of individuals under a single policy called the „Master policy‟ The contract will be between the insurer and a body that represents the group of individuals covered. Group insurance schemes are used by the Government as instruments of social welfare. Non Life Insurance: 1. Fire Insurance 2. Policies for stocks 3. Marine insurance 4. Rural insurance a) Aqua culture insurance b) Cattle insurance c) Failed well subsidy d) Poultry insurance e) Project Insurance36 Jnaneshwar Maroor Pai, Faculty, Justice K S Hegde Institute of Management, Nitte