This is about life insurance corporation of India

1. ROLE OF LIC IN SOCIO-ECONOMIC
DEVELOPMENT OF INDIA
THESIS
SUBMITTED TO KUMAUN UNIVERSITY,
NAINITAL (UTTARAKHAND)
DOCTOR OF PHILOSOPHY
IN
COMMERCE
Supervisor: Research Scholar:
Prof. P.C. Kavidayal Mrs. Vijay Laxmi Sharma
Faculty of Commerce & Management Studies,
Kumaun University S.S.J. Campus
Almora- 263 601 (Uttarakhand)
June 2008

2. i
Prof. P.C. Kavidayal Mailing Address :
Faculty of Commerce Dugal Khola, Almora- 263601
Kumaon University Campus Phone : (O) 05962-230183
Almora- 263601 (Uttarakhand) (R) 05962-254555
(M) 94129-85896
SUPERVISOR'S CERTIFICATE
This is to certify that –
(i) The Thesis entitled "ROLE OF LIC IN SOCIO-
ECONOMIC DEVELOPMENT OF INDIA" which is
being submitted by Mrs. Vijay Laxmi Sharma for the
award of the degree of DOCTOR OF PHILOSOPHY in
COMMERCE of KUMAUN UNIVERSITY, NAINITAL
embodies her original work done under my supervision and
guidance;
(ii) The researcher has worked under the supervision of the
undersigned for the period required under Ordinance 6 of
the Kumaun University Ordinances for the degree of Ph.D.
(iii) The researcher has put in the required attendance of 200
days in the Faculty of Commerce of the Campus during that
period; and
(iv) The researcher has cleared all the dues of the Campus and
the University as well.
Date : (Prof. P.C. Kavidayal)
Place :

3. ii
ACKNOWLEDGEMENT
I am in a delightful mood rather than in a conventional mood in
expressing a few sentences, which comes spontaneously from the
inner core of my heart. I consider myself lucky to have worked under
the guidance of my esteemed teacher Prof. P.C. Kavidayal, Faculty
of Commerce, Kumaun University, S.S.J. Campus, Almora. At the
very outset, I owe my deep sense of gratitude to him for giving me
his valuable time inspite of his busy schedule. It was his excellent
guidance, constant encouragement, genuine advises, line-by-line
comments that acted as the key, without which this work would not
have seen the light of the day.
I am indebted to Prof. B.D. Awasthi, Dean Faculty of
Commerce, Kumaun University, S.S.J. Campus, Almora and
Prof. N.S.Bisht, University Head, Faculty of Commerce, Kumaun
University D.S.B. Campus, Nainital, for their constant
encouragement and blessings. I would like to thank all the faculty
members and staff of the faculty of commerce who made this work
possible by assisting me in so many ways.
The libraries attended by me deserve my sincere thanks for
their invaluable cooperation. Important among these are i) Ratan
Tata Library (Delhi School of Economics), New Delhi, ii) LIC,
Northern Zone office, New Delhi, iii) D.S.B. Central Library,
Kumaun University, Nainital, iv) Central Library, S.S.J. Campus,
Almora, v) Department Library, faculty of commerce, S.S.J.
Campus, Almora.

4. iii
I have to offer my sincere thanks to the following organizations
for supplying me valuable research material and reports i) Jeevan
Bharati, 124, Connaught Circus, New Delhi, ii) LIC Divisional
Office, Haldwani, iii) LIC Branch Office, Almora.
I express my deep sense of gratitude to Dr. R.C. Lohumi (LIC,
Branch Office, Almora) and Mr. Sunder Nayal for his valuable
cooperation. I owe my sincere thanks to Mrs. Maya Kavidayal for
her appreciation and encouragement during the course of study.
My special thanks are due to my grandmother Smt. Nandi
Devi, Father-in-law Shri Leela Dhar Sharma, Mother-in-Law
Smt. Nandi Sharma, Sister-in-law Miss Neha Sharma for being
supportive at every moment and help in many ways during the
course of study. I also acknowledge the encouragement and help
received from my mother Smt. Ganga Joshi, elder brother
Mr. Chandra Prakash, Sister-in-law Mrs. Santosi Joshi and younger
brother Mr. Suraj Prakash for their moral support and best wishes.
Thanks are especially due to my two years old loving daughter,
Nitya Priya, who did not press her claim to my time and attention.
I have no words to express my feelings to my husband
Mr. Anil Sharma for his co-operation and patience without which
this work could not have been completed.
Last but not the least my thanks are due to Mr. Pankaj Tewari
and Mr. Mahendra Negi for typing my thesis in time.
Date: (Vijay Laxmi Sharma)
Place:

5. iv
PREFACE
LIC of India has come to become one of the giant corporate
entity of the Indian economy. It has nearly nineteen crore policies
and services people through 2048 branches. LIC, life fund which was
a modest amount of Rs. 410 crore in 1956 has increased to
Rs. 468005 crore as on 31st
March, 2007. It has prospered under
competition and has become stronger as a life insurer under a
competitive environment. And even today, despite stiff competition
LIC has been in the service of the vast mass people of the country for
the last five decades. During the period, the economic activities of
the corporation has multiplied several fold and diversified into many
dimensions.
India has a rapidly growing middle class of roughly 300-350
millions who, in the opinion of some experts, can afford to buy life
insurance, health insurance, disability insurance, and pension plan
products. This explains the attraction that the Indian market holds for
foreign insurers who have been putting pressures on India, to open
up its market in terms of WTO.
There are several challenges that LIC has to face in changed
environment. In particular, it needs to ensure the protection of the
interest of all the stakeholders. However, running an insurance
business economically and ensuring financial viability and stability
are not very simple. Thus establishment costs, new business
pressures, claims settlement patterns, systems development and
catastrophies can together put a strain on company's balance sheet.

6. v
Meeting these problems require tremendous skill on the part of the
LIC. LIC has brought out from time to varied insurance products
keeping in view the social and economical needs of people of this
country. Providing social security to the economically weaker
section of society has been entrusted as a major social responsibility
upon LIC. It invests around 82 percent of its investment in public
sector and the rest in both co-operative and private sector. So, LIC is
a major driver of the state govt. expenditure for the welfare of the
people and it is also a major investor that drives the growth of the
corporative sector.
However, a lot has yet to be done in the insurance sector. As a
percentage of GDP the insurance premium of the country for life is
only 2.53 against world average of nearly 8 percent. One of the
reasons why insurance sector is opened for private players is that in
order to cover this huge gap, India needs many more players. It is
also a fact that the face of development has fallen far short of the
aspirations and objective potential of our people. Even after 61 years
of independence we have not been able to create adequate social and
economic infrastructure for the people, particularly for rural people.
The excepted impacts of deregulation and liberalizing have made it
imperative for LIC to take account of renewed focus of the next
decade. It's focuses mainly pertain to the quality of business in the
light of socio-economic development of the nation and not only to
the mere size and volume of the business.

7. vi
Therefore, keeping in view the importance of LIC in the socio
economic development of the country, the present work is a modest
attempt to observe the development of the past and recent years of
LIC in terms of potential and possible growth of insurance industry,
in the country. It is also an attempt to have a comprehensive look on
the activities of LIC in the light of its contribution towards socio-
economic development of the nation. The present study is divided
into seven chapters. The first chapter is introductory in nature. The
nature and functions of life insurance business together with various
plans provided by LIC have been discussed in second chapter. The
third chapter throws light on the impact of LIC in socio-economic
development of India. Various schemes offered by LIC for weaker
section of the society have also been discussed in this chapter. A
brief financial analysis of LIC and its investment policy have been
analyzed in the next two chapters. The principal sales force of LIC
i.e. its agents, their role, future prospects have been observed in the
sixth chapter. The last chapter contains summary of findings and
suggestions for improvement.

8. vii
CONTENTS
CERTIFICATE i
ACKNOWLEDGEMENT ii-iii
PREFACE iv-vi
LIST OF TABLES vii-viii
Page NO.
CHAPTER I: INTRODUCTION 1-25
♦ Meaning of Insurance 2
♦ Evolution of Life insurance 4
♦ Brief History of Life Insurance in India 6
♦ Review of Literature 12
♦ Hypotheses 13
♦ Research Methodology 14
♦ Statement of Problem 18
♦ Objectives 23
♦ Scope of the study 24
♦ Limitations 24
CHAPTER II: NATURE AND FUNCTIONS OF LIFE 26-64
INSURANCE BUSINESS
♦ Legal Framework of LIC 26
♦ Objectives of LIC 28
♦ Functions of LIC 30
♦ Products Diversification of LIC 31
♦ Growth of Life Insurance Business 46
♦ Impact of Economic Reforms 53
on Life Insurance

9. viii
♦ IRDA Regime 55
♦ Privatizing Insurance Sector 60
CHAPTER III : IMPACT OF LIC IN SOCIO-ECONOMIC 65-101
DEVELOPMENT OF INDIA.
♦ Housing Development 68
♦ Life Insurance for the Under Privileged 71
♦ Various Social Security Schemes 72
Launched by LIC
♦ Role of Insurance in Economic 84
Development
♦ Capital Formation and Insurance 93
CHAPTER IV: FINANCIAL PROFILE OF LIC 102-149
♦ Nature of Finance 102
♦ Financial Statements 104
♦ Financial Analysis 118
♦ Objectives of Financial Analysis 119
♦ Significance of Financial Analysis 120
♦ Types of Financial Analysis 123
♦ Tool of Analysis of Financial statements 125
♦ Classification of Ratios 129
CHAPTER V : INVESTMENT OF LIC 150-188
♦ Nature of Investment 152
♦ Need of Investment 155
♦ Objectives of the Investment Policy 157
♦ The Investment Policy in India 166

10. ix
♦ Investment Decisions Mandated by the 169
Government
♦ Investment Policy Prescribed 171
by IRDA
♦ Government’s Reluctance 177
♦ Investment Pattern of LIC 179
♦ Composition of Total Investment of 181
the LIC
CHAPTER VII : INSURANCE AGENT – A PRINCIPAL 189-224
INTERMEDIARY OF LIC
♦ Appointment of Agents 193
♦ Duties/Responsibilities of Agents 194
♦ Source of Recruitment of Agents 196
♦ Selection of Agents 196
♦ Training of Agents 198
♦ Code of Conduct 211
♦ Role of Insurance Intermediaries 216
♦ Suggestions for Strengthening the 220
Intermediaries
CHAPTER VII : CONCLUSION AND SUGGESTIONS 225 -251
♦ Management of Uncertainties 231
♦ Quality People : Need of the Hour 232
♦ Socio-Economic Responsibilities 235
♦ Challenges 236
♦ Suggestions 241
BIBLIOGRAPHY 252-259

11. x
LIST OF TABLES
Table No. Title Page
No.
2.1 New Business Individual Insurance
(Excluding Annuities)
47
2.2 Average Sum Assured Per Policy (New
Business)
48
2.3 Rural New Business 49
2.4 Percentage of Net Lapses to Mean Life
Insurance Business in Force
50
2.5 Number of LIC's Offices 51
2.6 Productivity of Agents 52
2.7 Pvt. Life Insurance Companies with Foreign
Partners
60
3.1 LIC’s Investment in Infrastructural
Development
67
3.2 Outstanding Loans Granted by the
Corporation in Different Zones
70
3.3 Statement of lives Covered Under Social
security Group Scheme
75
3.4 Lives covered under KSSSY 76
3.5 Claims Settled Under LALGI 78
3.6 Claims Settled Under IRDP 79
3.7 Lives Covered Under JBY 81
3.8 Number of Scholarships Under SSY 82
3.9 The Coverage Under UHIS 83
3.10 Composition of Gross Domestic Saving 89
vii

12. xi
3.11 Life Premium as % of GDS Country Life
Fund as % of GDS
91
3.12 Composition of savings in India (as % of
GDP at Current Prices)
92
3.13 Insurance Penetration in selected countries 97
3.14 Life insurance density in selected countries 98
4.1 Net Premium Income 146
4.2 Growth Rate of Shareholders Fund 147
4.3 Statement of Expenses 148
5.1 Sector wise Distribution of Investment of LIC 180
5.2 Various Component Assets of LIC 181
5.3 LIC’s Investment in Govt. Securities 182
5.4 LIC’s Investment in Central Govt. Securities 183
5.5 Analysis of State Govt. Securities 184
5.6 Investment on Approved Securities by LIC 185
5.7 LIC’s Investment in Corporate Securities 186
5.8 Minor Investment of LIC 187
6.1 Commission to Agents 217
6.2 Number of Active Agents and their Average
Business
218
6.3 Claims Settlement 219
viii

13. 1
CHAPTER-I
INTRODUCTION
Insurance is an important field of study because it is a business
that affects everyone directly or indirectly. Fortunately, every literate
person knows something about it but at the same time many who buy
it have only a superficial knowledge of insurance matter. Insurance
may be defined as economic system for reducing the uncertainly
through pooling of losses; a legal method of transferring risk in a
contract of indemnity; a business conducted for profit and providing
jobs in an economy; a social device in which the losses of few are
paid by many; or an actuarial system of applied mathematics. Along
with these aspects it mainly depends upon how one view the major
purposes methods and results of insurance.1
It is said that changes creates instability and that instability
creates uncertainty. Uncertainty creates risk, the necessary urge for
the emergence of insurance. The business of insurance is principally
risk taking. It is a far older business than is sometimes realized. In
fact, it is impossible to fix the date when insurance began.2
The story
of insurance is probably as old as the story of mankind. Though the
concept of insurance is largely a development of the recent past
particularly after the industrial era, yet its beginning dates back
almost 6000 years.3
It is said that the Sanskrit term, “Yogakshema”
in the ‘Rig-Veda’ meant some kind of insurance which was practiced
by the Aryans in India nearly 3000 years ago.4

14. 2
Meaning of Insurance
Insurance is as old as the civilization. It was present in the
form of mutual help. Joint stock companies and corporation are the
recent form of the insurance. The “Yogakshema” has been the oldest
term of insurance used in the Rigveda for some kind of insurance.
Manu has emphasized that a special charge be made on goods carried
from one then to another to ensure their safe carriage.
Manusmriti Says –
Ø;kfoØ;ede/okua HkDra p lifjO;e~A
;ksx{ksea p laizs{; of.ktks <ki;sRdjku~AA 5
Insurance is one of the most interesting transactions engaged in
by people. Insurance may be defined with emphasis on its financial
nature or with emphasis on its legal nature. If the subject of
insurance is to be learned key terms must be defined carefully. These
terms include “loss”, “Perils”, “hazard” and “risk”.
1. Loss- When you no longer have something or have less of
something.
2. Perils- An event that can cause a financial loss, e.g. a fire or
storm.
3. Hazard- Hazard is any factor that adds to the risk. Hazard causes
the loss to take place. Thus, hazard is the cause, loss is the effect.
4. Risk- It may be defined as the possibility of adverse result
flowing from any occurrence. It is a condition where there is a
possibility of an adverse deviation from a desired outcome that is
expected or hoped for.6
Insurance is a financial arrangement that redistributes the cost
of unexpected losses. The insurance arrangement pool, which

15. 3
combine the numerous exposures. Throughout human history
unexpected economic losses have occurred. Such losses would
continue to occur whether or not a system of insurance had ever been
devised, but through the operation of an insurance system, losses can
be predicted before they occur. The predictability of losses in
advance of their occurrence is a basic necessity of an insurance
system’s operation. Because an insurance system allow the cost of
losses to be financed and redistributed in advance of their occurring.
An insurance system accomplishes the redistribution of the cost of
losses by collecting a premium payment from every participant in the
system. In exchange for the payment of the premium, the insured
receives a promise from the insurance system to be compensated in
the event of a loss. In most insurance system only a small percentage
of those insured suffer losses. Thus an insurance system redistributes
the cost of losses from the unfortunate few members who
experienced them to all the members of the insurance pool who have
paid premiums.
Insurance transaction may be categorized as life or non life
transaction and there classifications are useful for both theoretical
and regulatory reasons. Life insurance means every insurance upon
the line of human being and every insurance appertaining there to.
The business of life insurance shall be deemed to include the
granting of endowment benefits; additional benefits in the event of
death by accident or accidental means; additional benefits operating
to safeguard the contract from lapse, or to provide a special surrender
value, in the event of total and permanent disability of the insured;
and optional modes of settlement of proceeds.7
Non life insurance

16. 4
covers property losses associated with such perils as fire, theft and
windstorm. Legal liability including workers compensation, claims is
another distinct area of non life insurance. Life insurance transaction
covers human life contingencies, death, accident and illness and non
life. The clarity of distinction between life and non life insurance is
blurred in the area of accident coverage which includes industrial
accident and non industrial accident.
Evolution of Life Insurance
The first insurers of life were the marine insurance
underwriters who started issuing life insurance policies on the life of
master and crew of the ship, and the merchants. The early insurance
contracts took the nature of policies for a short period only. The
underwriters issued annuities and pension for a fixed period or for
life to provide relief to widows on the death of their husbands. The
first life insurance policy was issued on 18th
June 1583, on the life of
William Gibbons for a period of 12 month.
It was in the eighteenth century, societies began to be formed
for issuing life insurance policies. Among such societies the
Amicable Society (1705), the Equitable Life Assurance Society
(1762), the West Minister Society (1792) was the important
societies. The premium rates were varied in view of reputation and
the health condition of the insured. During the early years of
nineteenth century, a large number of life insurance companies were
formed in India. Some of these companies preferred to amalgamate
their business with other companies and a good number failed to
function effectively. In order to stabilize and strengthen the insurance

17. 5
business, Life Insurance Companies Act, 1923 was passed and later
amended it in 1946, 1958 and 1967.
Life Insurance in India
Life insurance in its current form came in India from United
Kingdom (UK) with the establishment of a British firm, Oriental Life
Insurance Company in 1818 followed by Bombay Life Assurance
Company in 1823, the Madras Equitable Life Insurance Society in
1829 and Oriental Life Assurance Company in 1874. Prior to 1871,
Indian lives were treated as substandard and charged an extra
premium of 15 percent to 20 percent. Bombay Mutual Life
Assurance Society, an Indian insurer that came into existence in
1871, was the first to cover Indian lives at normal rate. The Indian
Life Assurance Companies Act, 1923 was the first statutory measure
to regulate life insurance business. Later, in 1928 the Indian
Insurance Companies Act was enacted, inter alia, to enable the
government to collect statistical information about life and non-life
insurance business transacted in India by Indian and foreign insurers,
including the provident insurance societies.
In order to protect the interest of insuring public, earlier
legislation was consolidated and amended by Insurance Act, 1938
with comprehensive provisions for detailed and effective control
over the activities of insurers. In turn to administer the aforesaid
legislation, an insurance wing was established and attached first with
the Ministry of Commerce and then Ministry of Finance. This
ministry was administratively responsible for policy matters
pertaining to insurance. The actuarial and operational matters
relating to the insurance industry were looked after by an attached

18. 6
office in Shimla, headed first by Actuary to the Government of
India, then by superintendent of Insurance and finally by the
Controller of Insurance. The act was amended in 1950, making far-
reaching changes such as requirement of equity capital for
companies, carrying on life insurance business, ceilings on
shareholdings, stricter control on investment of life insurance
companies, submission of periodical returns relating to investments
and such other information to the Controller as he may call for,
appointments of administrators for mismanaged companies, ceilings
on expenses of management and agency commission, incorporation
of the Insurance Association of India and formation of councils and
committees thereof.
Brief History of Life Insurance in India
• Early Phase
The early history of life insurance is enveloped in some kind of
collective co-operation among persons exposed to a particular risk.
The Aryans have evolved a system of village and community life,
which was proof against the ravages of time that gave sustenance to
everyone. Other civilized people of the world also had independently
conceived the idea of collective co-operation.
The Indian society guided by its basic philosophy of
benevolence, evolved into the joint family system. Apart from the
institution of joint family, the caste system, village panchayat, temple
and charitable institutions combined to provide protection from
calamities to a person and his dependants. In tracing out the origin of
life insurance in its modern form, one comes across a provision of

19. 7
1818, which provided protection to the English widows. The first
foreign insurance company that started in Indian soil was the
Oriental Insurance Company that started in Indian soil was the
“Oriental Insurance Company in Calcutta mainly by the Europeans
to help the widows and orphans of their community. The Universal
Life Assurance Company, which started operation in 1840 in India
was taken by North British in 1901 and become a part of Life
Insurance Corporation (LIC) in 1956.8
• Second Phase (1870-1900)
This was the period of steady development of life insurance in
India. The year 1870 heralded the birth of the first Indian insurance
company of the Bombay Mutual Assurance Society, which was
registered under the Indian Company’s Act, 1806. Pandit Ishwar
Chandra Vidyasagar, a noted social reformer and educationist,
founded the “Hindu Family Annuity Fund” in 1872 in Calcutta. The
company started to provide financial help to Hindu widows and
orphans through annuities. The fund was created by voluntary
donations and subscriptions.
The next most important development was the establishment of
the Oriental Government Security Life Assurance Company, on May
5, 1874 by the distinguished actuary Mr. D.M. Slater and Sir
Phirozshah Mehta.
During this period the external trade of India flourished, new
communications were opened, industrial towns sprang and a new
middle class was born. All these provided a fertile field for
expansion of life insurance. At this point of time the government
exercised practically no control. No law governed on foreign

20. 8
companies, which had an upper hand in matter of insurance business
and were insured with 10 per cent extra premium. This is the infant
stage of life insurance.9
• Third Phase (1900–1918)
The dawn of the 20th
century witnessed a vigorous
development of life insurance business in India. This period
witnessed two important events namely the birth of Indian National
Congress and the “Swadeshi” Movement. These developments
prepared the ground for accepting Indian insurance in preference to
foreign ones. This gave rise to birth of more insurance companies.
The United Indian in Madras, National Indian and National
Insurance in Calcutta and the Co-operative Assurance in Lahore
were established in 1906, Hindustan Insurance Company at Calcutta,
the Mercantile at Bombay came in 1908. Two features of insurance
during this period were the operation of business on risk spreading
principle and the enactment of two statutes, namely the Life
Insurance Companies Act of 1912 and the Provident Fund Act of
1912. The end of the First World War (1914-1918) witnessed an
influx of many more insurance companies.
• Fourth Phase (1919-1938)
During the period of First and Second World Wars Indian
economy was in a bad shape and business was depressed. To meet
the shortage of credit, industrialists started their own insurance
companies like the New Indian, the Jupiter, General Insurance
Company etc. In 1923 an Act was passed to collect insurance
statistics. Companies that started during the period were the Laxmi

21. 9
(Andhra), The British India, the Zenith and the Prudential of
England.
Insurance business was marked with high rebates, excessive
commission, increased operating expenses. Business became
diversified but foreign insurance companies attracted more business
than the Indian counterparts. The government for the first time
passed one comprehensive legislation on insurance in 1928.
The promotion of new life insurance companies continued to
be almost a craze. Several insurance companies were formed, but
many of them failed. This unhealthy growth was harmful to the
interest of policyholders and insurance business in India. Feeling
concerned about it, the All India Life Assurance Office Association
urged the government in 1932 to undertake a legislation to register
all life insurance companies, secure a deposit of Rs. 2 Lakh from all
life insurance companies, and compel foreign companies doing
business in India to meet their liability under all policies issued in the
country.
In responses to this, in 1934 the government appointed the
well-known solicitor, Mr. S.C Sen, as an officer on special duty in
the department of commerce to study and report on the subject of
amendments of insurance laws. All India Life Assurance Officer’s
Association (AILOA) formed a committee for this purpose in 1936.
The committee made several changes and government introduced the
bill in 1937 and after much debate and several changes, it emerged as
the Insurance Act, 1938. It came into force on 1st
July 1939.10

22. 10
• Fifth Phase (1939-1952)
The World War-II, the insurance legislation, the low mortality
rate, and keen competition were the characteristics of insurance
during this period. Inflation and increased business was helpful to
insurance. During 1941 to 1945, 25 new companies were started.
Bad features like speculation, inflation and financial irregularities
restricted industrialist to invest funds. Banks and insurance
companies interlocked the investment. So in 1945 Sir Cowasji
Jahansir Committee was appointed to examine the insurance
structure. It was that found interlocking of investment was harmful.
Hence, government passed an Act in 1950. As a result of this few
companies were started during the period and some existing offices
were consolidating their position. Independence of India followed a
partition of subcontinent. The riot risks were not covered practically
by any insurer. There were 218 head offices in India and 12 in
Pakistan.11
• Sixth Phase (1952 - onwards)
This is the period immediately succeeding nationalization and
the beginning of the plan era. After independence, the business of
Indian insurance grew at a faster pace as competition among Indian
companies intensified and as Indian life insurance companies
dislodged the non-Indian insurers. Despite the strides by the Indian
companies, insurance business remained an urban phenomenon,
there was an immense scope to accelerate life insurance business in
the country, moreover, this limited development was marked by
many malpractices involving misuse of insurance funds, excessive
cost, deficiencies and frequent liquidation of insurance companies.

23. 11
This shook public confidence. Thus LIC came into being in a
scenario marked by insolvencies, increasing public distrust and
mainly confined to public area.
With a view to spread insurance to rural areas, to operate it
systematically, and to achieve the objectives of socialistic pattern of
society, the government of India decided to nationalize the life
insurance business. Resultantly, after considerable controversy with
people both for and against nationalization, the President of India
declared an ordinance on 19.01.1956 taking over management and
control business of Life Assurance in India including foreign
business of Indian insurers and Indian business of foreign insurers
and then nationalized on 01.09.1956 when the Life Insurance
Corporation came into existence. It was formed by bringing together
over 243 odd private life insurers and provident societies under one
nationalized monopoly corporation.12
By passing an act in the
parliament, the LIC was formed with a capital contribution of Rs. 5
crore by the government of India with following objectives:
1. To spread insurance to rural areas.
2. To encourage public savings to finance the five year.
3. To provide complete Security to policyholders.
4. To prevent malpractices, misuse of powers and positions etc.
5. To avoid wasteful efforts in competition and conduct the
business with utmost economy.
6. To regulate insurance on scientific basis.
7. To achieve the goal of the socialististic pattern of society.

24. 12
Review of Literature
Mishra and Das (1977) highlighted that insurance is an
essential service, which a welfare State must provide to its people
and the State must assure the responsibility of rendering this service
to one and all. Anurag (2000) suggested that life insurance products
could become source of long-term contractual savings. Sonig (2001)
has observed that many developing countries also fear that
subsidiaries of foreign companies may transfer much of the premium
income back to their head-quarters, a fear which was an important
motive for the establishment of domestic companies. Anuroop Singh
(2000) pointed out that “Experience in Life Insurance business in
other markets has shown that actual investment in a three to five year
span is normally at least twice the initial equity”. Usha (2004)
observed that under the Section 64 UMH of Insurance Act 1938,
IRDA has been conferred the power to direct payment of claims.
But, the IRDA’s, power to adjudicate has very limited scope. She
felt, there is a need to establish a full-fledged grievance redressal at
the Centre as well as the States to look into the problem. Meder
(2001) observed that deregulation will make the insurance market
too competitive, resulting in rates that may not be sustainable.
According to an observation made by UNCTAD in (1993) the
opening of markets to foreign companies would hardly bring about
better services and/or prices for domestic consumers, as in smaller
insurance markets there is a high probability that strong foreign
insurers may enjoy a dominant market position. The initial low
premium rates offered to penetrate the market may soon give way to
oligopolistic or monopolistic pricing, and consumers may not be

25. 13
better than before. With regards to regulation of insurance sector
Ansari (2000) observed that the regulatory approach being charted
out is forward looking consultative, consistent and inline with
international best practices. Bodla and Garg (2003) in their work on
insurance procedures identified the problems of insurance companies
in settling the death claim. Palande and Shah (2003) gave the
overall problems relating to early claim settlement by LIC of India.
Sandhya Rani Mahapatra and Sovan Kumar Patnaik (2007)
observed that through the investment the LIC has been providing
solid support to social sector activities like housing, electification,
drinking water etc.
Hypotheses
The study proposes to verify the following hypothetical
prepositions:
1. In a country like India insurance sector develops as saving
channels that can produce very large amount for the
developmental programs of the country.
2. Since life insurance sector has life long contacts with people, it
acts as a tool to mobilize savings; functions as financial
intermediary and at time also indulge in direct investment.
3. In developing economies life insurance sector plays an important
role in supplying the funds for relatively larger projects.
4. In our country the opening up of private sector for insurance
companies may result into cut-throat competition but the balance
will remain undisturbed. The quality of insurance will not get
affected and the existing Indian companies will not loose revenue
in absolute numbers.

26. 14
5. Despite the threat posed by private players, the trend towards
liberalizing the insurance industry is now irreversible.
Research Methodology
The following pages have been devoted to research
methodology and tools of research adopted for the development of
the thesis. It discusses all about methodologies, techniques, research
design processing and analysis of data.
• Problem Formulation
Before conducting any research whether it is social, economic,
political, commercial or scientific the research has to decide the
problem to be investigated. This is termed as problem formulation.
The present walk is exploratory in nature. In the present research
“the role of LIC in socio-economic development of India” has been
analyzed. LIC being one of the largest financial institutions of India
has been contributing significantly towards the socio-economic
development of India.
Any social or economic research may have two objectives-
i. Academic objectives.
ii. Utilitarian objectives.
And urge for knowledge is the basic ingredients, of academic
research, while research for the sake of research too has found
favours with some academicians. There was a time when academic
research was very well regarded. But the trend has achieved a
tremendous change, and a research is not accepted to be more utility
oriented then merely academic oriented. This trend is evident in
many recent reports of researcher which are directly linked with

27. 15
policy formulation. Of course, in many cases it has become a fashion
to engage in research even when it does not serve any practical
purpose. The scope of any such research is very limited, for it has
limited potential for the achievement of organizational objectives.
Research and commerce and management are basically meant for a
specific purpose, and that is why these researches are by and large
result oriented.
Research provides and analytical framework for the subject
matter of investigation. It established the relationship between the
different variables, especially the relationship of the dependent
variables with the independent variables. The cause effect
relationship between different variables can also be identified,
leading the valuable observation, generalization and conclusions.
Induction and deductions are also possible in a systematic research.
Induction is a process of inferring and general law from particular
instances, i.e. a generalization is arrived at on the basis of the
observation or result of particular instances. Deduction, on the other
hand, is a way of making a particular inference from a
generalization. In a deductive method specific conclusion are derived
from generalizations, while a generalization is made from particular
situations on the inductive method.
Empirical studies have great potential, for they lead to
inductions and deductions. Thus, research enables one to develop
theories & principle, on the one hand and to arrive at generalizations
the others. Both are aids to problem solving. As research is based on
observations and empirical evidences, it improves knowledge and
understanding, as well as decision-making, skill and ability gathering

28. 16
primary data for analytical purposes or using secondary data for first
hand investigation should be involved in research. It stimulates the
process of understanding on the one hand and deepens the insight on
the other. Thus, managerial efficiency increases. Moreover, a
systemic research involves formalities and procedures and hence the
decision maker gets sufficient time for postponing decisions if he
desires to do so in certain circumstances. On such occasions research
can be blessings and disguise.13
To generalize research in humanities can fulfill the following
general objectives:
i. Decision-making objectives.
ii. Project objectives.
iii. Project objectives.
iv. Market objectives.
v. Controlling objectives.
vi. Economic & business environmental.
vii. Profit objectives.
viii. Product development objectives.
ix. Innovation objectives.
x. Promotional objectives.
xi. Customer satisfaction objectives.
Obviously, research has unlimited scope in business
organization. It has already being pointed out that decision making is
considerably influenced by research in the relevant area, while the
project objectives stands for the role played by research in project
identification, feasibility and project implementation. There is
corporate policy for any organization, which is linked with the

29. 17
corporate objectives and organizational philosophy, culture and
climate.
After a considerable period of hibernation, the insurance
industry has entered into a new era of rapid expansion, and the
reform pound. A profound change there in the passes of the IRDA
has initiated this process that leads to positive signals to the word.
The journey from private sector to nationalization and back, to the
entry of private insurers has being quite and eventful one and makes
an interesting story. The present research is an attempt to analyze the
developments & issues that are responsible for the emerging trends
in the life insurance corporation of India. The researcher would also
appraise the impact or IRDA in LIC of India in the present study.
As research findings influence corporate policy, it has
conspicuous role in shaping organizational philosophy, culture and
climate. Research is bound to through some light on risk and
uncertainties, which in turn under score the role of research in policy
formulation and decision making. The element of personal judgment
plays a less critical role until the manager is able to rely almost
completely on standard formula or set of rules when arriving at
routine decisions.
Research facilitates the formulation of a standard formula
enabling the executives to rely moderately on personal judgment,
especially at the middle and lower levels. Decision making cause for
alternative courses of action, and in identifying alternatives
managerial researcher play an important role.

30. 18
Statement of Problem
It can be seen that insurance in India has had a long and
chequered history. It had its roots in the British regime and continued
with the practices developed then; keeping pace with the changing
times is a major challenge for the industry. On the one hand, the
industry grew enormously, but on the other, its spread was limited to
certain areas and to certain sections. With the result that a large mass
of people remains bereft of insurance cover. In the absence of
effective control, certain malpractices crept into the business which
was, therefore, nationalized. But even in the nationalized set-up,
certain shortcomings cropped up which persuaded the govt. to favour
liberalization and introduction of competition.
Since the early fifties or thereafter the developing countries
started central planning as a tool to speed up the growth processes in
the economy. In the initial stages the govt. intervened through strict
controls to foster developments in all sectors including insurance but
after its initial success the flaws and drawbacks of centralized
planning and interventionist strategy surfaced, and over period of
time, there was a swing in policy toward liberalization. This ushered
in era of reforms in all sectors in most countries of the worlds. India
included, with the main objective of accelerating the pace of
developments.
In India, where the state sector had become the mainstay of the
economy, this process was unfortunately confined mostly to the
manufacturing sector. Some changes no doubt were introduced in
two sub-segments of the services sector, viz, the banking and stock
markets, but precious little in insurance. Naturally, there was a

31. 19
general expectation that in the insurance industry too, competition
would be promoted, if full privatization was not possible.
The report of the Committee on Reforms in the Insurance
sector initiated the debate in 1994 with regard to the reforms in that
sector. After its recommendations were accepted by the Govt. in
principle, change became imperative and implied structural reforms,
change in procedures and practices and most importantly, attitudinal
change, disturbance in established inter-relationships among
different players, and change in the structure of power centers. For
the public sector, these became sensitive issue and involved
questions of delegation of authority, dismantling of artificial control,
barriers etc. However, even if change meant offending some vested
interests, whichever instruments were likely to produce the desired
result, were the ones which India also had to adopt. Deregulation,
globalization and privatization are the routes that were found to have
been successful in many parts of the world. Accordingly, India too,
has opted for these routes.
Of course, it is difficult to visualize an economy which is a
purely market economy or a controlled economy. Unlike in the pre-
liberalization era when all decisions were made by the Govt., they
are now to be left to the market. However, markets are never so
clearly demarcated where either it is a controlled economy or it is a
market-determined economy. All economies have elements of both
market and command. In the exercise of restructuring too, the
emerging economy will be marked by elements and characteristics of
a market as well as a command economy.

32. 20
Apart from ideological considerations, on a more mundane and
practical level, there are other drivers of change such as the
following-better spread of education and greater financial
knowledge, rapid development of information and communication
technologies; changing realities of globalization, liberalization,
deregulation, mergers and acquisitions; a large number of
participants in the market; shrinking profit margins in the public
sector mould; the availability of new products; consumer pressure of
efficiency and performance; demand for larger cover for the common
man and the weaker section; need for training and research in
insurance; cross-border financial services; and at the same time, need
for regulation of a different kind.
As far as India is concerned, some of the important factors
leading to opening up of this sector domestically and externally can
be listed as follows:
♦ The global context.
♦ India’s initiatives in other sectors.
♦ Strengths and weaknesses.
♦ Dismantling restrictive barriers.
♦ Positive effects of competition.
♦ Benefits of globalization.
♦ Need for larger resources for infrastructure development.
♦ Need to spread insurance cover wider.
♦ Limited choice available to the customers.
♦ Competition favored by the customers.
Insurance is a business of large numbers and generates huge
amounts of funds overtime, making its financial muscle very strong.

33. 21
These funds arise out of policyholder’s funds in the case of life
insurance, and technical and free reserves in the non-life segment.
The time lag between the procurement of premium and the payment
of claim provides an interval during which the funds can be deployed
to generate income. The power of the sector is evident from the fact
that insurance companies are among the largest institutional investors
in the world. Assets managed by insurance companies are estimated
to account for over 40 percent of the world’s top 100 asset managers.
In view of this fact, the investment function has a crucial role to play.
In life insurance although there was no element of compulsion
to buy insurance, whoever needed it had only one supplier to fall
back upon. Therefore, the market network of Indian insurers though
extensive, remained weak in terms of efforts.
With the insurance industry in India shedding its monopolistic
character, its market dynamics are changing fast. The expected active
presence of even more players, besides those who have already
entered the scene, will have a tremendous impact on the marketing
policies of all players. Marketing is now emerging as a crucial
function and will, henceforth, have to be founded on sound and
substantial market research.
By its very character, the attention of the service industry has
primarily to be centered on marketing and customer service. Such a
strategy cannot be formulated in isolation and all the major elements
of the organisation, viz, structure, systems, processes, staff, skills,
and managerial styles, have to be taken into account while finalizing
it. Other consideration that are influencing the strategy include the
following- identification of the customer, his need, the features of a

34. 22
product or a service that he values; and the extent to which he is
willing to pay for those features. In the initial years of operation, the
strategy would be to emphasize brand building, customer education,
customer segmentation, and product design/packaging.
Unless the nationalized insurance entities reform their
marketing set-up and strategies, flight of business, especially in the
non-life sector cannot be totally ruled out. The areas of their
weakness are providing opportunities for the new players, and hence
it is important for the industry in the public sector to pay special
attention to these aspects. Corporate clients, for obvious reasons,
already extract the best service and discounts, but medium and small
industries and individuals, who feel neglected, will surely look for
better service and new products. Unfortunately, despite these clear
signals, no significant improvement has been noticed in the
nationalized sector.
In this sector, market considerations will dictate even structural
changes. Most of the present policies, procedures, practices
pertaining to marketing were borrowed from the West. Many of the
covers are also modeled on the pattern of products available in the
U.K. However, in the changing market conditions, the Indian
industry will be compelled to develop its own models, incorporating
sufficient flexibility.
The marketing of insurance has some unique features. It has to
identify uncertainties in the lives of individuals and groups and in the
operations of an economic system and offer suitable insurance covers
for them. The requirements of different groups of insurance seekers
will be different. Thus, a couple with a dual income because both

35. 23
husband and wife are working, and have grown up children has
significantly different insurance needs from those of a young couple
just starting out in life. Individuals and families need covers to
sustain their standard of living upon death or disablement of the
breadwinner. They may also require insurance linked saving with
reasonable return to take care of their consumer needs, old age and
some periods of uncertainly in their lives. Social regulations require
employers to secure the lives of their employees by obtaining group
life insurance covers for them.
Objectives
The present study is an attempt to analyze contributions of LIC
for socio economic development in India in the era of economic
reform. The dimensions of these broad objectives are:
i. To discuss the interface between insurance and human welfare.
ii. To examine the growth and diversity of LIC during the period
of study.
iii. To assess the overall working and performance of LIC.
iv. To analyze the contribution of LIC to social sector
development in India.
v. To make an appraisal of different insurance plans undertaken
by LIC in order to benefit the people living below poverty line.
vi. To examine the role of agents in mobilizing funds for LIC
particularly in the rural sector.
vii. To study the important provisions of IRDA Act in view of the
socio- economic development of the people.

36. 24
This work presents and account of the development of the past
and recent years, the prevailing situation and the likely scenario in
terms of potential and possible growth of LIC.
Scope of the Study
The scope of the study covers the role of LIC to develop the
components of social sectors like education, health, electricity, water
supply development etc, in India. The role of LIC in the economic
development like, capital formation, contribution to GDP, investment
pattern etc has also been covered. In addition the analysis of the
growth, development, investment pattern and various activities of
LIC also come within the scope of the work. The territorial coverage
has been taken as the country as a whole, because specific data
relating to particular zone, Divisions and Branches are not available.
The period of study spreads over last one decade from 1997 to 2007.
Limitations
The main problem faced by the researcher was the scantiness
of reliable information, even in regard to conditions in India. Since
the field is changing so rapidly, it is difficult to keep the information
up to date. However, an effort has been made to compile and present
the latest official information to the extent it was available. Due to
the time lag in publishing official data and at times because of the
questionable reliability of other sources of information, some
inaccuracies or ambiguities may have crept in.
The research problem could have been well addressed at the
level of a branch. A micro study of the genuine beneficiaries and the
range of actual activities could have been more useful. Since branch
level information are not properly recorded and published, such an
approach has not been attempted.

37. 25
References
1. Robert I Mehr, Modern Life Insurance p.1.
2. W.A. Dinsdale, Elements of Insurance p. 16.
3. S.R. Bhave, Saga of Security p.1.
4. S.R. Bhave, Saga of Security p.15.
5. Mayorson A.L. (1975), “Introduction to Insurance”.
6. Majmudar P.I. and M.G. Diwan (1999), “Principles of
Insurance”, First Edition, Insurance Institute of India, Mumbai,
pp. 227-232.
7. New York Insurance code.
8. Kumar Dharmendra (1991) “Tryst with Trust, LIC Central
Office, Yogakshema, Mumbai.
9. LIC (2000), Silver Jublee, “Sovenier”, Life Insurance
Association, Mumbai.
10. Palam, G.M. and S. Balachandran,(1999), “Principle and
Practice of Insurance”, First Edition, General Insurance
Institute of India, Mumbai.
11. Panda, G.S. (1985), “Principle and practice of Insurance”,
Kalyani Publisher, Ludhiana.
12. Rao D. Tripati (2000), “Privatization and Foreign Participation
in Life Insurance Sector”, Economic and Political Weekly, A
Sameeksha Trust Publication, Vol. XXXV. No. 10, 4 March,
p.1112.
13. Ackoff and Russell, L., The Design of Social Research,
Chicago University Press, 2002

38. 26
CHAPTER-II
NATURE AND FUNCTIONS OF LIFE INSURANCE
BUSINESS
Life Insurance Corporation is of special importance in India
because of its unique position. In September 1956, 243 insurance
companies were amalgamated and unified into single organization.
This was the birth of “LIC of India.” The nationalization of life
insurance was another milestone on the road the country had chosen
in order to reach its goal of socialistic pattern of society. Into the
lives of millions in the rural areas, it introduces a new sense of
awareness of building for the future in the spirit of calm confidence
which insurance alone can give. It is a measure conceived in a
genuine spirit of service to the people. It is for the people to respond,
confound the doubter and make it a resounding success. Life
insurance, one of the largest and most important industries in
America, is a business with far reaching social and economic
implications. Its first concern is with economic security. It provides
individual with a private institution through which they can obtain
financial security for their families and businesses. It also serves the
economy as an important channel through which capital is made
available to business for economic growth. Life Insurance affects
everyone either directly or indirectly.
Legal Framework of LIC
Life insurance Business in India was nationalized with effect
from January 19, 1956. On the date, the Indian business of 16 non-

39. 27
Indian insurers operating in India and 75 provident societies were
taken over by Govt. of India. LIC of India, Act was passed by the
parliament on June 18, 1956 and came into effect from July1, 1956.
LIC of India commenced its functioning as a corporate body from
September 1, 1956. Its working is governed by the LIC Act. Certain
important provisions of the Act (as amended by IRDA Act, 1999) are
discussed below:
Constitution- Establishment and Incorporation of LIC of India
(Section 3)
1. With effect from such date as the central Government may, by
notification in Official Gazette, appoint, there shall be established
a Corporation called the LIC of India.
2. The Corporation shall be a body corporate having perpetual
succession and a common seal with power, subject to the
provisions of this Act to acquire, hold and dispose of property and
may by its name sue and be sued.
Constitution of the Corporation (Section 4)
1. The Corporation shall consist of such number of persons not
exceeding sixteen as the Central Government may think fit to
appoint there to and one of them shall be appointed by the central
Government to be the chairman thereof.
2. Before appointing a person to be a member the Central
Government shall satisfy itself that the person has no such
financial or other interest as is likely to affect prejudicially the
exercise or performance by him of his functioning as a member,
and the Central Government shall also satisfy itself from time to
time with respect to every member that he has no such interest

40. 28
and any person who is, or whom the central Government proposes
to appoint and who has consented to be a member shall, whenever
required by the central Government considers necessary for the
performance of its duties under sub-section.
3. A member who is in any way directly or indirectly interested in a
contract made or proposed to be made by the corporation shall as
soon as possible report to the corporation.
Capital
The original capital of the corporation shall be five crore of
rupees provided by the central Government after due appropriation
made by Parliament by law for the purpose, and the terms and
conditions relating to the provisions of such capital shall be such as
may be determined by the Central Government.
The Central Government may on the recommendation of the
corporation, reduce the capital of the corporation to such extent and
in such manner as the Central Government may determine
(section 5).
Objectives of LIC
At the time of nationalization of life insurance business, the
former Finance Minister, Dr. C.D. Deshmukh, had expressed during
the hope that ‘It will be possible to spread the message of insurance
as far and as wide as possible, reaching out beyond the more
advanced urban areas and into hitherto neglected, viz. rural areas.’1
Pandit Jawaharlal Nehru also expressed confidence that “Its
(LIC's) objective will be to serve the individual as well as the state.

41. 29
The profit motive goes out of it and the service motive becomes
much more dominant.”2
Dr. Desmukh, while piloting the bill for nationalization, out
lined the objectives of LIC thus:
a. To conduct the business with the utmost economy in a sprit of
trusteeship.
b. To charge premium no higher than warranted by strict actuarial
consideration.
c. To invest the funds for obtaining maximum yield for the policy
holder consistent with safety of the capital.
d. To render prompt and efficient service to policy holder, thereby
making insurance widely popular.
e. To spread life insurance much more widely and in particular to
the rural areas, including the socially and economically backward
classes, with a view to reaching all insurable persons in the
country and providing them, at a reasonable cost, adequate
financial cover against death.
f. To maximize the mobilization of people’s saving by making
insurance-linked saving adequately attractive.
g. To bear in mind, in the investment of funds, the primary
obligation to its policyholders, whose money it holds in trust,
without losing sight of the interest of the community as a whole-
the funds to deployed to the best advantage of the investors as
well as the community as a whole, keeping in view national
priorities and obligations of attractive return.
h. To conduct business with utmost economy and with the full
realization that the moneys belong to the policyholders.

42. 30
i. To act as trustees of the insured public in their individual and
collective capacities.
j. To meet the various life insurance needs of the community that
would arise in the changing social and economic environment.
k. To involve all people working in the corporation to the best of
their capability in furthering the interest of the insured public by
providing efficient service with courtesy.
l. To promote amongst all agents and employees of the corporation
a sense of participation, pride and job satisfaction through
discharge of their duties with dedication towards achievement of
corporate objectives.
Functions of LIC
It is the general duty of the corporation to carry on life
insurance business, whether in or outside India and the corporation
shall so exercise its powers, under this Act, as to secure that the life
insurance business is developed to the best advantage of the
community.
The corporation also:
a. Carry on capital redemption business, annuity-certain business, or
reinsurance business in so far as such reinsurance business
appertains to life insurance business.
b. Subject to the rules, if any, made by the Central Government in
this behalf, to invest the funds of the corporation in such manner
as the Corporation may think fit and to take all such steps as may
be necessary or expedient for the protection or realization of any
investment: including the taking over of and administering any

43. 31
property offered as security for the investment until a suitable
opportunity arises for its disposal.
c. To acquire, hold and dispose of any property for the purpose of its
business.
d. To transfer the whole or any part of the life insurance business
carried on outside India to any other person or persons, if in the
interests of the Corporation it is expedient so to do.
e. To advance or lends money upon the security of any movable or
immovable property.
f. To borrows or raise any money in such manner and upon such
security as the Corporation may think fit.
g. To carry on any other business which may seem to the
Corporation to be capable of being conveniently carried on in
connection with its business and calculated directly or indirectly
to render profitable the business of the Corporation.
h. To carry on either by itself or through any subsidiary any other
business in any case where such other business was being carried
on by a subsidiary of an insurer whose controlled business has
been transferred to an vested in the Corporation under the Act.
i. Doing also such things as may be incidental conducive to the
proper exercise of any of the powers of the corporation.
Products Diversification by LIC
Product diversification is essential to meet the varying needs,
changing preferences and rising aspirations of the customers.
Realizing the importance of product diversification LIC has
introduced various insurance plans so as to increase its business
multifold. Money back polices have increased to the level of

44. 32
Rs.20000 crore. It is prominent assurance policy because of its
advantages of investment.3
The life insurance products can be classified into two groups-
packaged and non-packaged. LIC has been introducing new plans
almost every year. However, all these fall under one category,
packaged plans. That is, the benefits under each plan are pre-defined
and the customer has to choose that plan that is closest to his
requirements. Whether or not he will be able to make the right choice
will depend on the patience and ability of the agent to explain clearly
all the different plans that are available. If the agent lacks this ability,
the customer may end up with a plan that does not fully meet his
requirements.4
Like LIC, the companies in other countries too sell packaged
plans with pre-defined benefits. At the same time, they have
introduced plans that allow the customer to choose his requirements.
For example, the two basic plans of insurance are the
Endowments and Money Back. The customer has to first choose
between the two. Based on his needs, he can than expand it by
choosing appropriate rider benefits. The choice available in respect
of rider benefits is quite wide-accident cover, critical illness cover,
hospitalization cover and similar covers for the spouse and children.
The life insurance products can also be classified in a different
way-participating and non- participating (also known as with profit
and without profit). Participating policies are like equity stocks.
Costlier, but eligible for a share in the companies profits. Non-
participating polices are like preference shares. Cheaper, but not

45. 33
eligible to participate in the profits of the company. The premium
rates under non-participating policies will be substantially lower than
those under the participating ones.
Under both participating and non-participating policies, the
sum assured is guaranteed. Additional premium is charged under
participating policies with a promise that in case the company
performs well, a substantial portion of the profits earned will be
given to these policyholders in the form of bonus. However, the
bonus portion is not guaranteed. A company will be considered
solvent as long as it is able to meet its commitment to pay the sum
assured, even if it is not able to declare any bonus under its
participating policies.
A share of the profit accruing even under non-participating
policies goes to the participating policies goes to the policyholder.
However, if the company strikes a bad patch due to adverse claim
experience or falling yield on investments or rising cost resulting
from runaway inflation, the additional premium being paid by the
participating policyholders will be utilized to meet the guaranteed
commitment (regarding sum assured) to both participating and non-
participating policyholder. So, if most of the policies being sold by a
company are under the “participating” category, that company will
have the capacity to meet its guaranteed commitments even under
highly adverse condition. On the other hand, if most of the policies
are under the “non-participating” category, the company will lack the
resilience to withstand even moderately adverse conditions.
The ratio of the size of the non-participating portfolio to that of
the participating portfolio is thus one of the indices for measuring the

46. 34
strength of a company and is similar to the well known “debt equity
ratio”. Higher this ratio, less stable will be the company. A well
established company that has built up sufficient reserves over the
years can gradually increase its (non-participating/participating) ratio
so that profit from the former can increase the bonus rates under the
latter and give it a competitive edge.
Soon after the insurance sector is opened and the new
companies commence their operations, the Indian market may
witness the introduction of non-participating plans with competitive
premium rates and also flexible products with multiple options. LIC
may not be able to introduce the flexible products immediately
because of logistical difficulties. It can however preempt the new
entrants by cutting the premium rates under its non-participating
plans. But, a better strategy will be to wait for the new entrants to
publish their products and premium rates and then reduce its
premium rates under non-participating plans to a level lower than
that of the lowest. The best bet for the new companies will therefore
be to concentrate on flexible and innovative products and avoid
direct comparison or confrontation with LIC.
Two methods of classification of life insurance products have
so far been seen, namely, packaged/non packaged and
participating/non-participating. It has also been implicitly assumed
that life insurance products provide cover only against the risks of
death, accident, critical illness and hospitalization and are sold to
individuals. Such products are known as individual Assurances.
So, life insurance products can be broadly classified into four
groups, namely, individual assurance, individual annuities/ pensions,

47. 35
group assurances, group annuities / pensions. Each of the four groups
can be further classified as packaged / non-packaged and
participating / non-participating.
The life insurance contract provides elements of protection and
investment. After getting insurance, the policy- holder feels a sense
of protection because he shall be paid a definite sum at the death or
maturity. Since a definite sum must be paid, the element of
investment is also present. In other word, life insurance provides
protection against pre-mature death and a fixed sum at the maturity
of policy. The two elements of protection and investment exist in
various degrees in different type of policies. Not only this, but these
elements will vary according to the different times in the same
policy. The older the policy, the lesser the elements of protection and
higher the element of investment.
Having different element in different policies, the policy-
holders are free to choose the best policies according to their
requirements. It would be known that no one policy is the best policy
for all the policy-holders due to variance in cost, elements of
Individual
Assured
Individual
Annuities /
Pensions
Group
Assured
Group
Annuities/
Pensions
Life Insurance Products
Non-
Packaged
Participating
Non- Participating
Packaged

48. 36
investment and protection, requirements of the policy-holders and
availability of the policy.5
The life insurance policies can be divided on the basis of:
A. Duration of policy
B. Method of premium payments
C. Participation in profit
D. Number of persons insured
E. Method of payment of claim amounts
F. Non-conventional policies
A. Policies According to Duration
The life insurance policies according to the duration may be:
1. Whole-life policies
2. Term Insurance
3. Endowment Insurance
4. Survivorship Policy
1. Whole-Life Policies
Whole-life policies are issued for life. It means that the policy
amount will be paid on the death of the life assured. The life assured,
thus, cannot get the policy amount during his life time. Only his
dependents will get the advantages of this policy. This is a policy at
lower rates of premium. The whole life policies can be affected
either by payment of:
a. Single Premium
b. Continuous Premium, Payments or
c. Limited Premium

49. 37
2. Term Insurance Policies
In the case of a term life Insurance contract, the sum assured is
payable only in the event of death during the term. In case of
survival, the contract comes to end at the end of term. There is no
refund of premium. These policies are usually non-participating.
Since only death risk is covered, the premium is low and the contract
is simple. Terms of life insurance contract are usually long, even up
to 40 years or more. The term may also be restricted to as short
periods. This policy is useful to those:
i. Who need extra protection for a short duration.
ii. Who need protection for long duration but are unable to
purchase for the time-being due to ill-health or lesser income.
iii. A father can take this policy during the period of education of
his child.
iv. Any such persons who are willing to provide insurance for a
shorter period.
3. Endowment Policies
The endowment policies can be several of which important
endowment policies are discussed below:
i. Pure Endowment Policy
The sum assured is payable on the life assured surviving the
endowment term. In the event of his death within the term
(endowment), premiums may be returnable or not. In case of LIC, all
premiums paid, without any deduction, will be refunded too. Thus
the pure endowment policy is opposite of the term policy, because
the insured is paid if he survives in pure endowment and if dies with-

50. 38
in the term policy. These two policies, i.e. pure endowment and term
policies are the base of all other policies. Pure endowment is for the
benefits of the policy holder and term policy is for the benefits of
others. So, the pure endowment policy has the element of investment
and the term policy has the element of protection. Pure endowment
grants protection against' living too long' while the term policy grants
protection against 'while the term policy grants protection against
'living too short'.
ii. Ordinary Endowment Policy
This is the most popular and sought after plan. The premiums
under the plan are paid for a fixed term. In case the death takes place
during the term, the sum assured along with accumulated bonus is
paid to the policyholders. The plan offers the advantage of making a
provision for the family of the life assured in case of his early death
and also assures a lump sum amount at any desired age.
iii.Double Endowment Policy
Under this policy, if the life assured dies during the
endowment period, the basic sum assured is payable and if he
survives to the end of the term, double of the sum assured is paid.
Premiums are payable throughout the endowment terms or till the
prior death of the life insured.
iv. Joint Life Endowment Policy
This policy covers more than one life under a single policy.
Under this plan the sum assured is payable on the expiry of the term
or on the death of one of the assured lives during the endowment
period. Premiums are payable throughout the endowment period or

51. 39
till the prior death of any one of the lives assured. The premium is
calculated with certain modification according to age of all insured
partners. Paid-up and surrender values are payable on the policy.
This policy is suitable to partners of a firm because firm will
not discontinue on the tremendous outflow of the funds at the death
of a partner. This policy is also beneficial to a couple.
v. Marriage Endowment Policy
Under this plan, the sum assured is payable only at the end of a
stipulated period, but the premium ceases if death of the policyholder
occurs earlier. In such an event the policy will remain fully paid until
the maturity date but the beneficiary may discount the policy before
maturity. This plan is issued on without profit basis, paid-up values
are paid under this policy. This policy is designed to meet the needs
of a family man who wants to make available a certain sum for
marriage of female dependents.
vi. Educational Annuity Policy
Like marriage endowment policy, this policy is also taken out
on the life of the father or guardian who undergoes medical
examination. The child for whose benefit (education) policy is taken
is called beneficiary.
vii.Triple Benefit Policy
This policy is a combination of a whole life limited payment
and a pure endowment (without return of premium) with a
guaranteed annual bonus payable on death during the endowment
term. This policy is granted for a fixed terms of 15, 20 or 25 years.
Premiums are payable throughout the term or till prior death of the
life assured.

52. 40
4. Survivorship Assurance Policy
There are two persons in this policy, first a named insured and
another named person. The sum assured is payable if the life assured
dies before another specified person (named person) or counter life.
If the counter life dies first, nothing is payable and the contract
ceases. These assurances usually arise in connection with
reversionary transactions.
B. Policies According to Premium Payment
i. Single Premium Policy
In this policy, the whole premium is paid at the beginning of
the policy. As compared to annual premium payable, it is costlier;
but as compared to aggregate of all annual premiums payable, it is
much smaller because all the premiums are received in advances and
the insurer can earn additional amount on the premiums received.
ii. Level Premium Policy
Under this policy regular and equal premiums are paid at
definite interval. This premium is lesser than the single premium and
is convenient to make premium at a regular period. This may take the
shape of an expense and can be constantly paid. The equal
installments may be paid monthly, tri-monthly, half-yearly and
yearly. So, it suits the requirements of different types of the policy-
holders. . Since, originally the premium is calculated and charged on
annual basis, the unpaid premiums for the year are required to be
paid at the time of payment of claims due to death. The amount of
each monthly, quarterly and half-yearly is not just the one twelfth,
one fourth and one half of the annual premium because the insurer is

53. 41
involved in more expenses while collecting more frequent premiums
and is at loss of the interest for the balance of the annual premium.
C. Policies According to Participation in Profits
Policies according to participation in profits may be:
i. Without Profit Policies or Non-Participating Policies
The holders of without profit policies are not entitled to share
the profit of the insurer. These policy-holders get only the sum
assured and no bonus is given to them.
ii. With Profit Policies or Participating Policies
The holders of without profit policies are entitled to share the
profit of the insurer. Since the policy-holder can share the profit and
not the loss, they cannot be treated as co-owners of the insurance
business. If there is loss, the policy-holders cannot get bonus, i.e. the
share in profit. They are entitled to get the share of profit, i.e. the
bonus only when there is profit.
D. Policies According to the Numbers of Persons Insured
On the basis of number of persons insured in policy, the policy
may be:
i. Single Life Policies
Under single life policies, only one individual is insured. It is
not necessary that the policy should be issued in one’s own life; it
may be in other’s life.
ii. Multiple Life Policy
In this policy more than one life is insured. It may be:

54. 42
a. Joint Life Policy: This policy covers two or more lives and the
policy amount is payable on the first death. This is beneficial to
the partners of a firm and to a couple.
b. Last Survivorship Policy: The policy amount is payable at the
last death. So long as any one of the insured is alive, no
payment is made.
E. Policies According to the Method of Payment of Claims
Amount
This policy amount may be paid in:
i. Lump Sum Policies
Where the sum assured is paid in lump sum at the events
insured against.
ii. Installment or Annuity Policies
Under this policy, the policy amount is payable in installments.
It is beneficial to those whose earning capacities are reduced to
minimum in old age.
F. Non- Conventional Policies
The Life Insurance Corporation of India has introduced several
non- conventional policies to meet the requirements of the
population. The conventional policies have the main attributes of
production at early death or living too long; but majority of the
population is interested mainly in investment.
1. Jeevan Akshay
In return for purchase price paid the purchases a monthly
pension will be paid during the lifetime of the purchaser of the

55. 43
pension. The last payment would be falling due prior to the date of
death of the pensioner. No medical examination is necessary to get
the policy.
2. Jeevan Dhara
The payment of annuity in respect of policies under Jeevan
Dhara has to start one month after the completion of the deferment
period. In order to enable the annuitant to get the payment on the due
date, the annuity cheques have to be posted at least two weeks
earlier. Since Jeevan Akshay / Jeevan Dhara payment are centralized
at Zonal Offices, it means that the input forms for building master
records for payment of annuities have to reach the Zonal Machine
Department well in advance to enable them to process it and dispatch
the cheques to the annuitant about two weeks before the date of
vesting.
3. Jeevan Kishore
With profit plans further curtails the age from which the risk
on child’s life is covered. As per provision of this policy, risk
commences either two years from the date of commencement or
from the policy anniversary following immediately after the
completion of 7 years of age, whichever is later. Contrary to
participation in bonus from the deferred date, or the risk date or
vesting date, this policy allows participation in bonuses from the
very date of commencement of policy.
4. Jeevan Chhaya
'Jeevan Chhaya' introduced in March 1991, can be considered
to be a combination of 'Jeevan Mitra' and 'Money Back' plans.

56. 44
Couples having a child(not an adopted one), of age less than one year
can avail of this plan, in order to ensure that an adequate financial
provision is made for the higher education of the child. The child
should not have completed one year of age on the date of registration
of the proposal. Either father or a mother or each one of them
individually can take policies under this plan.
5. Jeevan Sukanya
With profit is designed exclusively for female children. The
premium under this plan are payable for limited period only. The
premium ceases from the policy anniversary following on or
immediately after completion of 20 years of age by the life assured.
The policy matures on the policy anniversary following or
immediately after completion of 50 years by the child.
6. Children Money Back Plan
Yet another innovative plan has been introduced by LIC with
effect from 16th
January 1995. The plan envisages full and complete
growth of the child. The plan provides for educational as well as start
in life expenses-a series of financial benefits at the time when the
child needs them most.
7. Jeevan Suraksha
Jeevan Suraksha plan was introduced on 15th
August 1996. It
enables individuals to provide for retirement income from a chosen
date. The policy is with life cover but can be taken without life cover
under certain conditions.

57. 45
8. Jeevan Sneha
Jeevan Sneha introduced on 16th
June 1997 is specially
designed for women. The plan is without profit money back type
plan with the added feature of guaranteed additions.
9. Jeevan Aadhar
This policy is introduced in January 1996 is specially designed
for the benefit of handicapped dependents. This plan is basically a
limited payment whole life assurance on the life if the proposer with
provisions for Guaranteed Addition and Terminal Addition to the
basic sum assured.
10. Jeevan Sanchaya
This plan was introduced on 16th
Jan. 1997. It is without profits
money back type of plan with provision of loyalty addition
guaranteed addition. Accident benefit is also granted under this plan
with an upper limit of Rs. 5 Lakh in addition to existing limit of Rs.
5 Lakh under other plan.
11. LIC's Jeevan Plus
This is unit-linked whole life plan which offers investment-
cum-insurance through out life. The allocated premium will be
applied to purchase units as per the fund type chosen. The
policyholders unit Accounts will be subject to deduction of charges
as specified in the policy conditions.
12. LIC's Money Plus
In this policy, the investment risk in investment portfolio is
borne by the policyholders. This is a unit-linked endowment plan

58. 46
which offers investment cum insurance during the term of the policy.
The allocated premiums will be applied to purchase units as per the
fund type chosen.
13. Jeevan Saral Policy
LIC launched a new policy “Jeevan Saral” offering a risk cover
of 250 times the monthly premium. The policy offers flexibility to
policy holder to first decide the sum assured and then workout the
premium and payment based on age and terms of the policy. The
policy offers refund of the premium value at the time of maturity,
loyalty addition, term and accident benefits riders.
14. LIC's Future Plus
Future plus is essential unit linked deferred pension plan. The
policyholder can take the plan with or without risk cover. In case the
policy is taken without risk cover then the Bid value of the units held
in the policyholder’s unit Account shall be payable either or a lump
sum or as a pension on his/her life, which will be based on the then
prevailing immediate annuity rates under the relevant annuity option.
Growth of Life Insurance Business
By 1956,229 Indian insurers, provident insurance societies, and
16 non-Indian insurers were carrying on life insurance business in
India. But since January 19, 1956, the life business came under the
control and ownership of Govt. In June 1956, a Bill was passed for
establishing Life Insurance Corporation of India, which started
functioning since September 1, 1956. The Corporation is a body
corporate having perpetual succession and a common seal with

59. 47
powers to acquire, hold and dispose of property and may by its name
sue and be sued. There will be not more than 15 members including a
Chairman thereof. The Corporation is charged with the main duty to
carry on life insurance business. It has one Central Office, 5 Zonal
Offices and several Divisional and Branch Offices.
The growth of life insurance business has been analyzed under
new business inclusive of new business individual insurance
excluding annuities, growth in sum assured and number of policies,
rural new business, lapses, number of offices, and productivity of
assets.
Growth of life insurance business will be shown in the
following tables:
Table 2.1
New Business Individual Insurance (Excluding Annuities)
(No. of Policies in Lakh and sum assured in Crore)
Source: Annual Report of LIC
This table depicts the new business of Individual Insurance
(excluding annuities) has increased from 86.54 lakh policies in 1990-
Year In India Outside India Total % Growth in
No. of policiesNo. of
policies
Sum
Assured
No. of
policies
Sum
Assured
No. of
policies
Sum Assured
1995-96 110.21 51815.54 0.130 255.99 110.34 52071.53 1.34
1996-97 122.68 56740.50 0.123 253.44 122.81 56993.94 11.30
1997-98 133.11 63617.69 0.163 310.14 133.25 63927.83 8.5
1998-99 148.43 75316.28 0.170 283.72 148.60 75600.00 11.51
1999-00 169.54 90872.02 0.230 342.23 169.77 91214.25 14.2
2000-01 196.98 124771.62 0.310 179.01 197.29 124950.63 16.2
2001-02 224.91 192572.27 0.380 212.69 224.99 192784.96 14.1
2002-03 242.67 179504.34 0.103 298.95 242.77 179803.29 7.90
2003-04 264.56 198707.12 0.115 341.40 264.67 199048.52 17.4
2004-05 218.18 179481.39 0.138 405.27 218.31 179886.66 17.5
2005-06 292.85 283763.74 0.133 416.10 292.98 284179.84 34.2
2006-07 302.64 293462.43 0.142 425.12 325.92 299072.38 11.2

60. 48
91 to Rs. 108.88 lakh policies in 1994-95.It indicates that the LIC is
trying hard to increase its new business at a very rapid speed. The
growth in number of policies have been witnessed more than 3 times
over a period of 15 years where as the sum assured has been more
than 700 percent during the same period. The business outside India
is growing at a slow rate i.e. 10-12 percent per annum.
Table 2.2
Average Sum Assured Per Policy (New Business)
(Rs. in crore)
Year India Outside India Total
1995-96 47015 196915 47192
1996-97 46250 211200 46408
1997-98 47793 221528 47975
1998-99 50738 223061 50889
1999-00 53728 212838 53853
2000-01 63474 223762 63539
2001-02 85622 265862 85682
2002-03 90213 298943 90328
2003-04 98624 301943 98729
2004-05 102319 310419 102414
2005-06 112163 320418 112238
2006-07 123940 336049 123964
Source: Annual Report of LIC
The above table reveals growth in average sum per policy was
not as fast as the sum assured had risen. The rise in the average sum

61. 49
outside India was higher than the rise in India. The sum assured per
policy went up to Rs. 63539 in 2001 and Rs. 85682 in 2002. The
average sum assured per policy has tremendously increased during
these four years i.e, 2001, 02, 03 and 04.
Table 2.3
Rural New Business
Year
Rural New Business % Share of Rural New
Business in Total New
Business
No. of Policies
(Rs in Lakh)
Sum Assured
(Rs. in crore)
No. of Policies Sum
Assured
1995-96 52.57 21263.59 47.70 41.00
1996-97 60.33 24278.73 49.20 42.80
1997-98 68.40 27550.69 51.40 43.30
1998-99 81.23 2800.00 54.70 47.00
1999-00 97.04 44168.19 57.50 48.70
2000-01 35.34 17955.88 18.20 14.60
2001-02 37.01 25461.94 13.65 16.94
2002-03 54.19 29146.48 15.12 19.16
2003-04 62.19 35651.99 17.85 22.79
2004-05 55.03 46037.01 25.18 22.97
2005-06 74.66 60971.85 21.21 23.65
2006-07 88.50 68497.21 23.18 22.60
Source: Annual Report of LIC
Life Insurance Corporation has been targeting rural areas right
from its nationalization. Rural new business and its percentage to
total new business is shown in the above table 2.3. According to the

62. 50
table the percentage share of rural new business to total new business
has registered modest growth rate. With regard to sum assured it has
registered significant growth over time.
Table 2.4
Percentage of Net Lapses to Mean Life Insurance
Business in Force
Year Percentage
1995-96 6.4
1996-97 5.1
1997-98 5.0
1998-99 4.9
1999-00 5.1
2000-01 4.9
2001-02 5.5
2002-03 5.0
2003-04 4.0
2004-05 5.2
2005-06 5.8
2006-07 5.1
Source: Annual Report of LIC
The above table depicts the percentage of net lapses to mean
life insurance business- in- force has declined from the highest of 6.4
percent in 1994 to 4.9 percent in 1999. But it could not improve the
problems of lapses as the lapses ratio increased to 5.5 percent in

63. 51
2002 but declined to 4.0 percent in 2004 and again increased to 5.2
percent in 2005 and 5.8 percent in 2006.
Table 2.5
Number of LIC's Offices
Year
Zonal
Offices
Division
Offices
Branch
Offices
Sub
Offices
Development
Centers
Total
Offices
1995-96 7 100 2021 - - 2128
1996-97 7 100 2023 - - 2130
1997-98 7 100 2046 - - 2153
1998-99 7 100 2048 - - 2155
1999-00 7 100 2048 - - 2155
2000-01 7 100 2048 - - 2155
2001-02 7 100 2048 - - 2155
2002-03 7 101 2048 - - 2156
2003-04 7 101 2078 - - 2156
2004-05 7 101 2048 - - 2156
2005-06 7 101 2048 - - 2156
2006-07 7 101 2048 - - 2156
Source: Annual Report of LIC
The number of offices has not increased satisfactorily. As
compared to the bank branches, the expansion in LIC offices has
been almost negligible. The total offices of LIC have increased from
2128 in 1996, 2153 in 1998. From 1990 to 2002, it has constant to
2155. Thereafter it has increased 2156 in 2003 to 2007, respectively.
Branch offices has been growing from 2021 in 1996,thereafter 2023
in 1997 and 2046 in 1998 from 2000 to 2007 it has constant to 2048.

64. 52
Over the year zonal offices has been constant to 7and number
of division offices are 100, and increased to 101 in 2003-2007.
Table 2.6
Productivity of Agents
Year No of Active Agents
Business Per Active
Agents in Rs.(crores)
1995-96 513897 1008286
1996-97 533133 1064284
1997-98 558517 1139047
1998-99 598217 1259013
1999-00 683190 1328292
2000-01 743064 1656370
2001-02 744083 2355697
2002-03 792038 2362798
2003-04 821296 2498212
2004-05 980836 2684321
2005-06 987689 2892416
2006-07 992648 2982341
Source: Annual Report of LIC
This table depicts the productivity of agents has been
constantly increasing from Rs.1008286 crore in 1996 to Rs. 1656360
crore in 2001. The productivity of agent has been Rs. 2355697 crore
in 2002, Rs.2362798 crore in 2003, and Rs.2982341 crore in 2007.

65. 53
Impact of Economic Reforms on Life Insurance
The govt. of India in 1993 had set up a high powered
committee headed by R.N. Malhotra former Governor RBI, to
examine the structure of the insurance industry and recommend
changes to make it more efficient and competitive keeping in view
structural changes in other parts of the financial system of the
economy.
The committee submitted its report in January 1994
recommending that private insurance be allowed to coexist along
with Govt. companies like LIC and GIC companies. This
recommendation had been prompted by several factors such as need
for greater and deeper insurance coverage in the economy and a
much greater scale of insurance sector is at least partly driven by
fiscal necessity of tapping the big reserves of savings in the
economy. Committee’s recommendations were as follows:-
i. Raising the capital base of LIC and GIC up to Rs 200 cr. half
retained by the govt. and rest sold to the public at large with
suitable reservations for employees.
ii. Private sector be granted permission to enter insurance industry
with a minimum paid up capital of Rs. 100 cr.
iii. Foreign insurance companies are allowed to enter by floating an
Indian companies preferably joint venture with Indian partners.
iv. Steps to be initiated to setup a strong and effected insurance
regulatory in the form of statutory autonomous board on the
lines of SEBI.

66. 54
v. Limited number of private companies to be allowed in the
sector. But no firm be allowed to operate in both lines of
insurance (life or non- life).
vi. Tariff Advisory Committee is delinked from GIC to function as
a separate statutory body under necessary supervision by the
insurance regulatory authority.
vii. All insurance companies be treated on equal footing and
governed by the provisions of the insurance Act. No special
dispensation is given to govt. companies.
viii. Setting up of a strong and effective regulatory body with
independent sources for financing before allowing private
companies into sector.6
The forms of controls and regulations exercised over insurance
industry have differed from country to country. The nature and
pattern of controls in a country are shaped by its political and
economical philosophy, economic and social compulsions, pressure
different countries have evolved their own regulatory mechanism
being application on insurance industry. Some of the countries have
and healthy competition amongst them, while other has encouraged
self control mechanism through greater role being assigned to
services grew as early as in 16th
century. The sector was practically
without government control and intervention till 1870, when Life
Insurance Act was passed. The act as such did not impose any
companies to disclose their financial and other details to the public
and get their financers evaluated by an actuary. The companies were
required to be transparent in their dealings and make their accounts
and valuation report available to the Board of Trade.

67. 55
IRDA Regime
The Government of India realized the necessities of setting-up
Insurance Regulatory and Development Authority (IRDA) in 1999.
The IRDA was set-up to provide for the establishment of an
Authority, for protecting the interests of holders of insurance
policies, to regulate, promote and insurer orderly growth of the
insurance industry and for matters connected there with or incidental
there to. With the birth of IRDA, the Government amended the
Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and
the General Insurance Business (Nationalization) Act, 1972 for the
sake of proper control at apex level.
IRDA exercise the supervisory control or insurance companies
and these powers flow from Insurance Act, 1938 as well as from
IRDA Act, 1999 states.
“Subject to the provision of this Act and any other law for the
time being in force, the Authority shall have the duty to regulate
promote and ensure orderly growth of insurance business and
reinsurance business”. Regulatory and supervisory powers of the
authority are wide and pervasive.7
Profile of IRDA and its Functioning
1. Establishment and Incorporation of Insurance Authority is:
a. With effect form such date as the Central Government may, by
notification, appoint, there shall be established, for the
purposes of this Act, an Authority to be called. “The
Insurance Regulatory and Development Authority.”

68. 56
b. The Authority shall be a body corporate by the name aforesaid
having perpetual succession and a common seal with power,
subject to the provision of this Act, to acquire, hold and
dispose of property, both movable and immovable, and to
contract and shall, buy the said name, sue or be sued.
c. The head office of the Authority shall be at such place as the
Central Government may decide from time to time.
d. The authority may establish offices at other places in India.
Composition of Authority
The Authority shall consist of the following members namely:
a. A Chairperson;
b. Not more than five whole-time members;
c. Not more than four part-time members.
To be appointed by the Central Government from amongst
persons of ability, integrity and standing who have knowledge or
experience in life insurance, general insurance, actuarial science,
finance, economic, law, accountancy, administration or any
discipline which would, in the opinion of the Central Government, be
useful to the Authority.
Provided that the Central Government shall, while appointing
the chairperson and the whole-time members, ensure that at least the
person is having knowledge or experience in life insurance, general
insurance or actuarial respectively.

69. 57
Main Provisions of IRDA Act
Preamble of IRDA Act, 1999 read. “An Act to provide for the
establishment of an authority to protect the interests of holders of
insurance policies, to regulate, promote and ensure orderly growth of
the insurance industry and for matters connected therewith and
incidental there to”. Sections 14 of IRDA Act, lays the duties,
powers and function of the authority. The power and functions of the
authority shall include the following.
a. Issue to the applicant a certificate of registration, to review,
modify, withdraw, suspend or cancel such registration.
b. To protect the interest of policyholders in all matters concerning
nomination of policy, surrender value of policy, insurable
interest, and settlement of insurance claims, other term and
conditions of contract of insurance.
c. Specifying requisite qualification and practical training for
insurance intermediary and agents.
d. Specifying code of conduct for surveyor and loss assessors.
e. Promoting deficiency in the conduct of insurance business.
f. Promoting efficiency in the conduct of insurance business.
g. Promoting and regulating professional regulation connected with
the insurance and reinsurance business.
h. Specifying the form and manner in which books of accounts will
be maintained and statement of accounts rendered by insurer and
insurance intermediaries.
i. Adjudication of disputes between insurers and intermediaries.

70. 58
j. Specifying the percentage of life insurance and general business
to be undertaken by the insurers in rural or social sectors, etc.
k. Section 25 provides that Insurance Advisory Committee will be
constituted and shall consist of not more than 25 members.
l. Section 26 provides that authority may in consultation with
insurance advisory committee make regulation consistent with
this Act and the rules made there under to carry out the purpose
of this Act.
m. Section 29 seeks amendment in certain provisions of Insurance
Act, 1938 in the manner as set out in first schedule. The
amendment to the insurance Act is consequential in order to
empower IRDA to effectively regulate, promote, and insure
orderly growth of the insurance industry.
n. Section 30 and 31 seeks to amend LIC Act, 1956 and GIC Act
1972.
The role of IRDA in the present liberalized market is such that
it has to regulate the business of the insurance companies to ensure
accelerated and balanced development of insurance market. While
protecting the right of the policy holders and by providing equal
opportunities to the insurers, agents, brokers and other
intermediaries. The IRDA must formulate the accounting principles
to be adopted by the private sectors. The IRDA also hopes to
promote its product on the internet without having to be
supplemented with the paper work. This could only be possible with
the major amendments in the insurance Act of 1938. This Act lays
down certain operating guidelines which makes its compulsory for
the insurance company to follow there guidelines in order to make

71. 59
the contract legally valid. Section 64 V.B. which states that the
premium must be received in advance, needs some amendments to
make way for payment through credit cards. Another provision
relates to the affixing of stamps on the policy in order to make the
contract valid in the court of law the stamps should be affix on it as
per the present regulation. This regulation also needs relaxation if the
transactions are to be carried out on the net.
How the insurance companies are equipping themselves to
cope up with these developments is yet to be seen and there worth
will be soon put to test. It is high time that these companies review
their marketing strategies, budget allocation, sales target, staff
training adopting sophisticated technology, office automation in
order to compete with their counter parts emerging in the scenario. It
is very important to set goals for the new millennium in such a
fashion that it does not allow the new entrants to lure the old
customers with their baits.
It is possible for India to push its share in the world insurance
market which has stagnated around 0.21 percent for many years
(as against 4.5 percent total share of the developing third worlds).
According to the IRDA, in the year 2000, the share of India in the
world market, both for life and non-life insurance was a mere 0.34
percent as against China’s share of 0.67 percent. The vast potential is
waiting to be tapped. How for the Indian players will take advantage
of the same is to be seen. Given the political will, and some effort, it
should not be too difficult to derive the full benefits of the emerging
situation.8

72. 60
Privatizing Insurance Sector
Recently, the government of India permitted private companies
of foreign countries with Indian partner for doing life insurance
business under the rules and regulations of insurance Regulatory and
Development Authority (IRDA). One of the reasons and why
insurance sector is opened for the private players is that in order to
cover this huge distance India needs many more players. That is the
justification for opening up insurance to the private sector. Despite
so many life and non-life insurance companies functioning in India,
it still has a long way to go.9
Major Private life insurance companies, which entered the
Indian market, are given in table 2.7.
Table 2.7
Pvt. Life Insurance Companies with Foreign Partners
S.
No.
Name Name of
Indian Partner
Name of Foreign
Insurance Co.
Country
1. ICICI Prudential Life
Insurance Co. td.
I.C.I.C.I Prudential U.K.
2. H.D.F.C Standard Life
Insurance Co. Ltd.
H.D.F.C Standard Life U.K.
3. Birla Sun Life Insurance
Co. Ltd.
Aditya Birla
Group
Sunlife Canada
4. Om Kotak Mahindra Life
Insurance Co. Ltd.
Kotak Mahindra Old mutual South
Africa
5. Max- AIG Life Insurance
Co. Ltd.
Max India Old New York
Life
U.S.A.
6. Tata AIG Life Insurance
Co. Ltd.
Tata Group A.I.G U.S.A.
7. S.B.I Life Insurance Co.
Ltd.
State Bank of
India
Cardiff France
8. ALIANZ Bajaj Life
Insurance Co. Ltd.
Bajaj Auto Allianz German
9. ING- VYSYA Life
Insurance Co. Ltd.
Vysya Bank ING Group GMR
Group
Netherlands
10. AVIVA a Life Insurance
Co. Ltd.
Daubour India C.G No. O U.K.
11. AMP Sanmar Assurance
Co. Ltd.
Sanmar Group Amp Australia
12. Met Life Insurance
Co. Ltd.
M.Palljonji Co.
life ltd.
Pvt. Matro Policita
J. and Bank Ltd.
U.S.A.
Source: Life Insurance Agents Guide, 1998