Insurance Broking Business

7/29/2019 Insurance Broking Business

1/70

PROJECT REPORT

ON

INSURANCE BROKING BUSINESS

IN FULFILLMENT OF MMS COURSE

SUBMITTED BY:

VAISHALI R. CHAUGHULE

MMS (IV) FINANCE

2002 04

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND

RESEARCH

MUMBAI

I EXECUTIVE SUMMARY


2/70

The insurance business is complex whether one is a Life

Insurer, a General Insurer, a Re-insurer or an Insurance

Brokerage house. Taking the complexity of the industry

into account one has to invest a great deal in

understanding such business. In insurance and risk

management, the specialist helps in identifying,

evaluating, reducing and managing risk in all the

countries that one does business. Globally Insurance

Brokers play this very vital role.

The Indian insurance market is in transitory phase; the

sector has been opened up to competition with the entryof private insurance companies in late 1999 with majority

of the companies starting operations in 2000. In the last

2 years significant changes have come about in the

Insurance market, the independent regulator namely

Insurance Regulatory and Development Authority (IRDA)

has tried to evolve a level playing field. Quite a few

innovations have been introduced such as Third party

Administrators, Brokers, Corporate Agents and Bank

2


3/70

assurance etc.

The global practice of using Brokers to act as the

principal distribution arm of the insurance companies is

evolving in fits and starts. Based on the amendment to

the Insurance Act, 1938, which was passed by the

Parliament after a lot of deliberations, over 100 brokers

have been granted licence. The brokers play a very vitalrole in the Insurance industry.

II DEFINITION AND EXPLAINATION ON WHO AN

INSURANCE BROKER IS:

WHO IS AN INSURANCE BROKER?

3


4/70

With the recent developments a new insurance

intermediary - The INSURANCE BROKER is now visible

on the insurance horizon and is likely to play a very

important role in the future of the insurance business. So

let us understand an insurance broker. The insurance

brokers are such individuals who contribute maximum

share of insurance business. A high standard of

professional skills and conduct is expected of the broker.

The insurance broker can be issued license under section

42-D of the Insurance Act, 1938.

DEFINITION:

The insurance broker acts as an intermediary

between the insurance customer and the insurance

company.

4

BUYER

BROKER

Intense

INSURANCEMARKET


5/70

In the past, most insurance business was conducted

directly between customers and insurance companies.

Today, however, insurance buyers requirements have

become more complex, demanding and varied and this

has led to more important role in the market for the

insurance broker. The most important feature is that the

broker acts on behalf of the insured both at the time of

placing the risk and also during settlement of the claim

whereas an agent acts on behalf of insurer. The broker

works with a number of Insurance Companies and is

much well positioned to obtain a good deal for insured on

favorable terms. The brokers task is to help & identify

the risks to which an insureds business may be exposed.

He analyses the

risk and advices which risks should be insured and

explores the insurance market by canvassing to obtain

the best insurance protection at a most competitive price.

The brokers are to arrange for all the policies and tocomplete all documentation for or on behalf of the

insured. Insurance brokers are specialists in insurance

protection. They are independent, have a deep

knowledge of the market and can provide professional

5


6/70

objective advice on identification and exposures and

recommend cost effective solution.

WHO CAN BECOME AN INSURANCE BROKER?

Any person may be an individual, a partnership firm or a

company formed and registered under the Companies

Act, 1956 can apply for grant of license to be a broker.

(In case of a company the aggregate holding of equity

shares by a foreign company either by itself or through

its subsidiaries or nominees or persons should be within

the prescribed limits laid down by the Reserve Bank of

India)

FUNCTIONS OF AN INSURANCE BROKER:

Acts as a Link: This is one of the most important

function of an Insurance broker. They are the only link

between the insurance company and the client or theinsured.

Understands Clients requirements Insurance brokers

are trained to understand and be able to match available

6


7/70

policies in the market to their Clients requirements as

well as to advise them on such policies. Their

independence and detailed insurance knowledge, ensures

that they provide complete and in depth advice on a

whole range of options, from different insurance suppliers

to meet the clients insurance requirements.

Carrying out risk inspection and suggesting risk

improvement/ loss minimization measures: An

insurance broker will have to provide his expertise in

evaluating and analyzing what are the possible risk that

the insured could face. Based on which he should give

professional advice to minimize the same.

Preserve their destiny: All brokers are required to

retain their independence from insurance suppliers in

order to be in a position to act in their clients best

interests.

Free service to Clients: Unlike many other

intermediaries, who receive commission both from the

buyer and the seller, insurance broker only receive

commission from seller. When a client uses the services

7


8/70

of a broker, the insurance cover purchased is no different

in price to that purchased by a buyer directly from the

insurer. What happens is that costs for distributing the

policy, which are fixed, are shared between the insurer

and the broker.

Offers after sales service: Another client function of

insurance broker is that of claims handling, which in

many cases is also offered without charge. The

professional relationship between broker and insurers

ensures that clients claims are processed efficiently and

expeditiously.

Matching customers needs: An insurance brokers

office is a center offering a variety of insurance policies

from different insurance companies for the clients varied

needs. Having one point of advice on insurance facilities

insurance purchases for the buyer and ensures that

covers are arranged to fit the buyers requirements. Thusthe principal aim of a Broker is to foster a better

understanding between the insured and the insurer. This

aim, coupled with the observance of a professional code

of ethics, will maintain and enhance the publics image of

8


9/70

insurance brokers as the agents of insurance buyers and

their advisers, a true Friend, Guide and Philosopher.

Thus functions of both Life and General insurance brokers

will inter alia consist of:

a.Relationship with clients

b.Sales practices

c. Duty to disclose information

d.Explanation of the contract

e.Renewal procedures

f. Claims

g.Complaints

h.Documentation

i. Handling clients/insurers money

TYPES OF BROKERS

The application under sub-regulation (1) shall be made

for any one of the following categories, namely:

9


10/70

(a) Category - I

A. Direct General Insurance Brokermeans a person

who is for the time being registered in respect of

general insurance business but not reinsurance

business.

B. Direct LifeInsurance Brokermeans a person whois for the time being registered in respect of life

insurance business but not reinsurance business.

The functions of both general insurance broker and life

insurance broker will inter alia consist of:

(i) obtaining a detail knowledge of the clients

business and philosophy; maintaining clear records

of the clients business so that this can be

explained to an insurer and other parties;(ii) provision to the client of technical advice and

advice on developments in the insurance market

and the law;

(iii) maintaining a detailed knowledge of available markets;

10


11/70

(iv) selection and recommendation of an insurer or

group of insurers;

(v) negotiating with insurers on the clients behalf;

(vi) acting promptly on instructions from a client

and providing written acknowledgements and

progress reports;

(vii) collecting and remitting premiums and claims;

(viii) where appropriate and dependent on the

size of both the client and broker, providing

additional services, such as insurance consultancy

services, risk management services and uninsured

loss recoveries;

(ix) assisting in the negotiation of claims;

(x) maintaining precise records of past claims.

Category II

Reinsurance Broker, whose functions will inter aliaconsist of:

(i) obtaining a detailed knowledge of the Insurers

business and philosophy;

11


12/70

(ii) maintaining clear records of the Insurers business

so that this can be explained to a reinsurer and

other parties

(iii) provision to the Insurer of technical advice and

advice on developments in the International

insurance and reinsurance market;

(iv) maintaining a detailed knowledge of available

markets;

(v) selection and recommendation of a reinsurer or

group of reinsurers;

(vi) negotiating with reinsurer on the insurers behalf;

(vii) acting promptly on instructions from a client and

providing

written acknowledgements and progress

reports;

(viii) collecting and remitting premiums and claims;

(ix) assisting in the negotiation of claims;

(x) maintaining precise records of past claims.

(c) Category - III

12


13/70

Composite Broker, whose functions consists of both that

of a Direct Insurance Broker and Reinsurance Broker as

stated in (a) and (b) above.

(d) Category - IV

Others Insurance consultant, Risk management

consultant or any other nomenclature description as may

be approved by the Authority.

QUALIFICATION & CONSIDERATION OF

APPLICATION

IRDA shall take into account, for consideration of

grant of the license, for all the matters which are

relevant to the activities relating to Insurance

Broker and in particular that applicant has to

satisfy the following requirements, namely:

(1) the applicant has the necessary infrastructure like

including adequate office

13


14/70

space, equipment and manpower to effectively

discharge his activities;

(2)the applicant has in his employment a minimum of

two persons who have the experience to conduct the

business of the Insurance Broker.

(3)A person directly or indirectly connected with the

applicant has not been rejected granted license by the

Authority in granting license in the past.

Explanation:- For the purposes of this clause the

expression directly or indirectly connected means

any person being an associate, subsidiary,

interconnected or group company of the applicant in

case of the applicant being a body corporate.

(4) the applicant fulfils the capital adequacy

requirements specifies in

regulation 7;

(5) the applicant, his every partner of the firm, directoror principal

officer

14


15/70

(i) is not a minor;

(ii) has not been found to be of unsound mind by a

court of competent jurisdiction;

(iii) has not been found guilty of criminal

misappropriation or criminal breach of trust or

cheating or forgery or an abatement of or

attempt to commit any such offence by a court

of competent jurisdiction provided that where at

least five years have elapsed since the

completion of the sentence imposed on

applicant, his partner, director or principal

officer in respect of any such offence, the

authority shall ordinarily declare in respect of

such person that his conviction shall cease to

operate as a qualification under this clause;

(iv) that in the course of any policy of insurance of

the winding up of an Indian Insurance Company

or in the course of an investigation of the affairs

of an insurer it has not been found that he hasbeen guilty of or has knowingly participated in or

connived at any fraud, dishonestly or

misrepresentation against an insurer or an

insured;

15


16/70

(6) The applicant, a minimum of two

partners/directors in a firm and the principal officer

possesses

(i) a minimum qualification as an Associate of

Insurance Institute of India or its equivalent or

any other professional qualification from an

institution recognized by the government in

finance, law, engineering or business

management; and

(ii) theoretical and practical training for a

specified period to be conducted by National

Academy, Pune on the basis of a syllabus

approved by the Authority.

Provided that in the case of a person carrying on

reinsurance broking and/or insurance

consultancy for a continuous period of ten years

or who has sufficient experience of runninginsurance business with any insurer for ten

years or more before these regulations come

into force and who is required to be licensed

under this regulation, the Authority on

16


17/70

consideration of the qualifications and

experience of such a person may exempt the

person from the provisions of minimum

qualification of this section. Such persons

however will have to undergo training as

required under sub-regulation 6(ii) above

(7) The applicant, a partner, a director or the principal

officer does not violate the Code of Conduct as

specified in Schedule III.

(8) Grant of license to the applicant is in the interest

of policyholders.

These are very clear guidelines, which clearly spell out

the requirements for an insurance broker. Failing on

which, a person may not be given broker ship.

CAPITAL ADEQUACY REQUIREMENT

(1) The capital adequacy requirement referred

to in sub-regulation (4) of Regulation 6 shall not be

17


18/70

less than the net worth of the person making the

application for grant of license.

(2) For the purpose of sub-regulation (1), the

net worth shall be as follows, namely:

CATEGORY MINIMUM AMOUNT

Category I A Rs.25 lakhs

Category I B Rs.25 lakhs

Category II Rs.100 lakhs

Category III Rs.125 lakhs

Category IV Rs. 10 lakhs

Explanation:- For the purposes of this regulation net

worth means in the case of an applicant which is a

partnership firm or a body corporate, the value of the

capital contributed to the business of such firm or thepaid up capital of such body corporate plus free reserves

as the case may be at the time of making application.

SOLVENCY REQUIREMENTS

18


19/70

(1) Every Insurance Broker shall, throughout the

license period, maintain an excess of the value of his

assets over the amount of his liabilities of not less

than the amount specified (hereinafter referred to as

the required solvency margin), in accordance with

each category of license, namely;

Category I A Direct General Insurance Broker/

Category I B Direct Life Insurance Broker

The greater of Rs.50,000 and 10% of Net retained

brokerage and fees in a year subject to minimum of

Rs. 50,000.

Category II Reinsurance Broker



Rs. 200,000.

Category III Composite Broker

19


20/70



Rs. 250,000.

Explanation: - For the purpose of this regulation

asset means those assets which are either in the

form of cash or can reasonably be expected to be

turned into cash within one year from the date of the

balance sheet. Liability means those liabilities,

which are expected to have been paid within one

year from the date of the balance sheet.

(2) If, at any time an Insurance Broker does not

maintain the required solvency margin in accordance

with sub-regulation (1), he shall, in accordance with

the directions issued by the Authority, submit a

financial plan, indicating a plan of action to correct

the deficiency to the Authority within a specified

period not exceeding three months.

(3) An insurance broker who has submitted a plan

under sub-regulation (2) to the Authority shall

propose modifications to the plan if the Authority

20


21/70

considers it inadequate, and shall give effect to any

plan accepted by the Authority as adequate.

(4) An Insurance broker who does not comply with

the provisions of sub-regulation (3) shall be deemed

to be insolvent and may be wound up by the court

on the application of the Authority.

(5) Every Insurance broker shall furnish to the

Authority under sub-regulation (3) of regulation 19,

a statement certified by an auditor, of the required

solvency margin maintained by the Insurance Broker

in the manner required by sub regulation (1).

PROCEDURE FOR LICENSING

(1) The Authority on being satisfied that the applicant

is eligible shall

grant a license in Form B and send an imitation to

the applicant

mentioning the category for which the Authority has

granted the

21


22/70

license.

(2) (i) Notwithstanding anything contained in sub-

regulation (1),

where a license has been granted for a category

other than for

what has been applied for, the applicant, may

make an

application to the Authority at any time after the

expiry of one

year from the date of grant of such license.

(ii) The Authority may consider an application made

under clause

(i) and grant a license for other category.

(3) An application made under clause (i) of sub-

regulation (2) shall

be considered in the same manner as anapplication made under

regulation 3.

22


23/70

(4) On the grant of a license the applicant shall be liable

to pay the

fees for the category for which the license is

granted in

accordance with schedule II:

Provided the amount of fees payable shall be

proportionately

reduced by the amount of fees already paid by the

Insurance

broker for the year in which the licensing is granted

in the higher

category.

(5) A license granted to an insurance broker, in terms of

these

regulations, shall remain valid for a period of three

years from

the date of issue thereof in the manner prescribedtherein.

DIFFERENCE BETWEEN BROKER AND AGENT

23


24/70

The distinction between insurance agents and brokers is

that an agent represents one or more insurers for the

purpose of writing policies, while a broker represents

consumers to assist them in obtaining coverage from one

of the companies with which that broker deals

To begin with the most fundamental difference between

broker and an agent is that, an agent works for the

Insurance Company and the broker works on behalf of

the Insured.

The broker works with a number of Insurance companies

as a result is much well positioned to obtain a good deal

for the insured on favorable terms. As against this an

agent works with only one company and promotes

products of one company.

Insurance broking is essentially a full time work where, abroker not only acts as an insurance broker but also risk

management and financial planning for the insured. An

agent as compare is nothing but an insurance

intermediary.

24


25/70

III DUTIES AND RESPONSIBILITIES OF BROKER

CODE OF CONDUCT:

There is a code of conduct that has been chartered which

outlines what are the duties and responsibilities of an

insurance broker. The objective of the code of conduct is

to establish a recognized standard of professional

conduct to which all insurance brokers should, in the

interest of the public and in the performance of their

duties, conform and in doing so they should bear in mind

this objective and the underlying spirit of this code in this

matter of regulation of their professional standards.

The code is not exhaustive or all embracing and while it

shall serve as a guide to insurance brokers and other

persons concerned with their conduct nevertheless the

mention or the lack of mention in it of a particular act oromission shall not be taken as conclusive of any question

of professional conduct. Claims against insurance

brokers for compensation arising from acts or omissions

amounting to negligence are matters for determination

25


26/70

by the courts. Nevertheless, acts of gross negligence or

repeated acts of negligence may amount to

unprofessional conduct and notwithstanding that the

matter be the subject of legal proceedings, the Authority

may still investigate the conduct of the Insurance

brokers.

The ethical requirements of any Insurance Brokers

should be based upon the following fundamentals

principles by which an Insurance broker should be

governed in the conduct of his professional relations with

others:-

conduct his dealing with clients with the utmost good

faith and integrity at all times;

act with care and diligence;

inform his clients about the extend of the choice of

products they that are being offered;

inform his clients about the product they are buying

and its price;

26


27/70

ensure that all products or services he is offering are

suitable to the needs of his clients;

deal prudently with assets held on behalf of others;

maintain adequate financial resources to meet his

commitments;

avoid conflicts of interest;

correct errors and handle complaints fairly and

speedily;

preserve and enhance the reputation of the

profession;

comply with rules and regulations in an open,

transparent and co-operative manner

a. RELATIONSHIP WITH CLIENTS

An insurance broker must:

Conduct their dealings with clients with utmost good

faith and integrity at all times;

act with care and diligence;

27


28/70

ensure that the client understands his relationship

with the broker and on whose behalf the broker is

acting;

treat all information supplied by the prospective

clients as completely confidential to themselves and

to the Insurer(s) to which the business is being

offered;

take appropriate steps to maintain the security of

confidential documents in their possession;

understand the type of client that they are dealing

with and the extent of the clients awareness of risk

and insurance. This knowledge should be taken into

account in their dealings with their client, and

avoid conflicts of interest.

b. SALES PRACTICES

Insurance Broker must:

Confirm that they are members of the Insurance

Broker Association of India (IBAI); as approved by

the Authority.

28


29/70

Identify who they are and explain as soon as

possible the degree of choice in the products that

they are able to offer;

Ensure that the client understands the type of

service they can offer

Ensure that the policy proposed is suitable to the

needs of the prospective client;

Give advice only on those matters in which they are

knowledgeable and seek or recommend other

specialist advice when necessary;

Not make inaccurate or unfair criticisms of any

insurer or IBAI member;

Explain why a policy or policies are proposed and

provide comparisons in terms of price, cover and/or

service where they are able to offer more than one

choice of product;

Explain the period for which the quotation remains

valid if cover is not effected immediately;

Explain when and how the premium is payable and

how it is to be collected. Where another party is

financing all or art of the premium, full details should

be given to the client including any obligations that

29


30/70

the client may owe to that party, and explain the

procedures to follow in the event of a complaint.

c. DUTY TO DISCLOSE INFORMATION

Insurance Brokers must:

Ensure that the consequences of non-disclosure and

inaccuracies are pointed out to the prospective

client;

Avoid influencing the prospective client and make it

clear that all the answers or statements given are

the latters own responsibility. The client should

always be asked to check the details of information

given;

Request their clients to make true, fair and complete

disclosure where they believe that the client has not

done so. If further disclosure is not forthcoming

they should consider declining to act further;

Explain to their clients the importance of disclosing

all subsequent changes that might affect the

insurance throughout the duration of the policy; and

30


31/70

Disclose on behalf of their client all material facts

within their knowledge and give a fair presentation

of the risk.

d. EXPLANATION OF CONTRACT


Identify the insurer and insurers. Any changes once

the contract has commenced must be advised

immediately;

Explain all the essential provisions of the cover

afforded by the policy(ies), they are recommending

so that, as far as possible, the prospective client

understands what is being purchased;

Draw attention to any major or unusual restrictions

and exclusions in the policy, explain how the

contract may be cancelled;

Provide the client with prompt written confirmation

that insurance has been affected. If the full working

of the contract is not included with this confirmation,

it should be forwarded as soon as possible;

31


32/70

Notify changes to the terms and conditions of any

insurance contract and give reasonable notice before

any changes take effect;

Advise their clients of any insurance proposed on

their behalf which will be effected with an insurer

outside India and, if appropriate, of the possible

risks involved; and

Advise their client that any non-insurance product

will not be subject to IBAI and, if appropriate,

implications in terms of consumer redress and

solvency.

e. RENEWAL PROCEDURES


Ensure that their clients are aware of the expiry date

of the insurance even if they choose not to offer

further cover to the client,

Ensure that renewal notices contain a warning about

the duty of disclosure including the necessity to

advise changes affecting the policy, which have

32


33/70

occurred since the policy inception or the last

renewal date;

Ensure that renewal notices contain a warning that

the proposer should keep a record (including copies

of letters) of all information supplied to the insurer

for the purpose of renewal of the contract; and

Ensure that their client always receives the insurers

renewal invitation (unless they have delegated

authority from an Insurer to issue one on their

behalf).

f. CLAIMS


Explain to their clients their obligations to notify

claims promptly and to disclose all material facts and

advise subsequent developments as soon as

possible;

Request their clients to make true, fair and complete

disclosure where they believe that the client has not

done so. If further disclose is not forthcoming they

should consider declining to act further for the client;

33


34/70

Give prompt advise to the client of any requirements

concerning the claim;

Forward any information received from the client

regarding a claim or an incident that may give rise to

a claim without delay, and in any event within three

working days;

Advise the client without delay of the insurers

decision or otherwise of a claim, and on request give

all reasonable assistance to a client in pursuing his

claim.

g. COMPLAINTS


Ensure that letters of instruction, policies and

renewal documents contain details of complaints

handling procedures;

Accept complaints either by phone or in writing;

Acknowledge a complaints not later than 14 days

from the receipt of correspondence, advise the

member of staff who will be dealing with the

complaint and the timetable for dealing with it;

34


35/70

Ensure that response letters inform the complaints of

what they should do if they are unhappy with the

response;

Ensure that they have a procedure so that

complaints are dealt with at a suitably senior level;

Have in place a system for recording and monitoring

complaints.

h. DOCUMENTATION


Ensure that any documents issued by them comply

with all statutory or regulatory requirements from

time to time in force;

Send policy documentation without avoidable delay;

Make available, with policy documentation, advice

that the documentation should read carefully and

retained by the client;

Not withhold documentation from their clients

without their consent, unless adequate and

justifiable reasons are disclosed in writing and

without delay to the client. Where documentation is

35


36/70

withheld, the client must still receive full details of

the insurance contract;

Acknowledge receipt of all money received in

connection with an insurance policy;

Ensure that they reply promptly or use their best

endeavors to obtain a prompt reply to all

correspondence;

Ensure that all written terms and conditions are fair

in substance and set out clearly and in plain

language clients rights and responsibilities; and

Subject to the payment of any monies owed to them,

make available to any new Insurance Broker

instructed by the client all documentation to which

the client is entitled and which is necessary for the

new Insurance Broker to act on behalf of the client.

i. HANDLING CLIENTS/ INSURERS MONEY


ensure that the moneys belonging to clients or

insurers are not mixed with their/his own;

36


37/70

separate accounts are properly maintained in regard

to those amounts and proper information is

periodically made to the client/insurer.

Ensure that these moneys are banked in a proper

manner;

Ensure that moneys belonging to others are kept

with them for a reasonable period only;

Ensure strict compliance of the provisions of

regulation 17 (i.e Segregation of Insurance moneys).

Insurance Money Segregation this is something very

specifically given in the draft bill by IRDA. Subject to the

provision of Section 64 VB of the Insurance Act, 1938

every Insurance Broker must:

1. treat all money (premiums and claims) received

from or on behalf of an Insured as Insurance

money.

2. ensure that Insurance money is held in an

Insurance Bank Account with one or more

approved scheduled banks or with such other

institutions as approved by the Authority.

37


38/70

3. give written notice to, and receive written

confirmation from, the bank, or other institutions

that he is not entitled to combine the account with

any other account, or to exercise any right of set-

off, charge or lien against money in the account.

4. ensure that all money received from or on behalf

of an Insured is paid into the Insurance Bank

Account and will remain there until it is passed on

to the insurer or to the insured.

5. only remove from the Insurance Bank Account

charges, fees or commission earned and interest

received from any funds comprising the account.

6. take immediate steps to restore the required

positions if at any time he becomes aware of any

deficiency in the required segregated amount.

j. REMUNERATION

Insurance brokers must:

Reveal all fees or charges (not commission) they

propose to charge the client, which will be in addition

to the insurance premium. Score back of

38


39/70

commission will be considered as a charge for these

purposes;

Recommend the client in writing of the Insurance

premium and any fees or charges separately and the

purpose of any related services;

If requested by a client, disclose the amount of their

commission or other remuneration they receive as a

result of effecting Insurance for that client. This will

include any payment received as a result of securing

on behalf of the client any service additional to the

arrangement of the contract of Insurance; and

Advice their clients prior to effecting the Insurance of

their intention to make any deductions from the

amount of claim collected for a client where this is a

recognized practice for the type of Insurance

concerned.

DOS AND DONTS OF INSURANCE BROKERS

Giving below are some Dos and Donts of what a

professional Brokers with ethics should follow which has

been compiled from the existence practices worldwide.

39


40/70

This can assist them in establishing a recognized

standard of professional conduct.

The following are the acts, which if not observed by a

licensed insurance broker may constitute unprofessional

conduct:

Business is to be conducted with utmost good faith and

integrity.

The insurance requirements of the client

and interests of the same client must be satisfies

before all other considerations.

Advertising shall not be misleading and extravagant.

The following are some examples for the application of

these principles:

1. advice is to be provided objectively and independently

2. the description insurance broker must only be used

in connection with the business of insurance inaccordance with the requirements of the guidelines of

IRDA, India.

3. Insurance broker must equip himself with the required

product knowledge and the developments in the

40


41/70

Insurance field which will help the insured to have

most appropriate policy at an economical rate.

4. all work carried out in connection with insurance

broking must be under the supervision of a qualified

and experience insurance broker.

5. the different types of insurance and relative costs

must be explained on request of the client.

6. a sufficient number of insurance companies policies

must be made available by the broker to satisfy the

insurance requirements of the client.

7. the amount of commission paid by the insurer under

any relevant policy of insurance must be disclosed to

the client on request.

8. the broker must use his skill objectively in the best

interests of the client when choosing an insurance

policy

9. written evidence or documentation relating to the

contract of insurance must not be withheld from the

policyholder.10. the name of all insurers with whom a contract of

insurance is placed must be revealed to the client.

41


42/70

11. the amount to be charged must be disclosed to the

client before any work involving a charged is

concluded.

12. any payment which is received as a result of securing

any service additional to the arrangement of a

contract of insurance on behalf of the client is to be

disclosed

13. there is to be proper regard for the wishes of a policy

holder or client who seeks to terminate any

agreement with the broker.

14. any information acquired by an insurance broker from

his client shall not be misused.

IV WHAT KIND OF BUSINESS SHALL A BROKER BE

DOING?

CLASSIFICATION FROM BUSINESS POINT OF VIEW

From business point insurance can be classified into two

broad categories:

1. Life insurance; and

2. General insurance

42


43/70

Life insurance contains the element of investment and

protection, while the accidental, sickness or health

insurance contains the element of indemnity only. Also

the contract provides for the payment of periodic

premium periodically to the insurer by the insured for a

long period of time. This is something very unique to

this.

General insurance business refers to fire, marine, and

miscellaneous insurance business whether carried on

singly or in combination with one or more of them but

does not include capital redemption business and annuity

certain business.

CLASSIFICATION FROM RISK POINT OF VIEW

From risk point of view, insurance can be classified intofour categories:

1. Personal insurance

2. Property insurance

3. Liability insurance

43


44/70

4. Fidelity guarantee insurance

A brief description of each is given below.

Personal insurance

Personal insurance refers the loss to life by accident, or

sickness to individual, which is covered by the policy.

The insurer undertakes to pay the sum insured on the

happening of certain event or on maturity of the period of

insurance. The insurable sum is determined at the time

of affecting the policy and includes life insurance,

accident insurance, and sickness insurance.

Property insurance

Contract of property insurance is a contract of indemnity.

Proof by the assured of loss is an essential element of

property insurance. The policies of insurance against

burglary, home breaking or theft etc. fall under this

category. The assured is required to protect the insuredproperty. After the loss has taken place, the assured

usually required notifying the police as to losses.

Liability insurance

44


45/70

Liability insurance is the major field of General insurance

whereby the insurer promises to pay the damage of

property or to compensate the losses to a third party.

The amount of compensation is paid directly to third

party. The fields of liability insurance include: workmen

compensation insurance, third party motor insurance,

and professional indemnity insurance. There may be

various reasons for the arising of liability, viz, accident of

a worker at the workplace, defective goods, explosion in

the factory during the process of production and

formation of poisonous gas within the factory due to the

uses of chemicals and other such substances in the

manufacturing process.

Fidelity guarantee insurance

In this type of insurance, the insurer undertakes to

indemnity the assured (employer) in consideration of

certain premium, for losses arising out of fraud, orembezzlement on the part of the employees. This kind of

insurance is frequently adopted as a precautionary

measure in cases where new and untrained employees

are given position of trust and confidence.

45


46/70

GLOBAL INDUSTRY STATISTICS

This section gives the important and detailed statistics of

the Indian as well as the Global insurance industry:

The global life insurance market stands at $1,521.2

billion while the non-life insurance market is placed

at $922.4 billion. The United States itself accounts for about one-third

of the $2443.6 billion global insurance market and

Japan stands next with a 20.62% share.

India takes the 23rd position with US $9.933 billion

annual premium collections and a meagre 0.41%

share.

Out of one billion people in India, only 35 million

people are covered by insurance.

India's life insurance premium as a percentage of

GDP is just 1.77 per cent.

The income derived by GIC and its subsidiary

companies through investment was Rs.2491.76 crore

and the investible funds generated was Rs.2843

crore in 1999-2000.

46


47/70

Indian insurance market is set to touch $25 billion by

2010, on the assumption of a 7 per cent real annual

growth in GDP.

Brokers' commissions amounted to 134 million in

2002

Following are some tables which show the business of

Insurance Internationally and Indias ranking in the

world.

Global Insurance Scenario

(Total in 1999:$2,128.7 billion)

(%)

(Total in 2000:$2,244.3 billion)

(%)

North

America

34.5 37.32

47


48/70

Europe 31.4 31.93

Asia 29.1 26.46

Oceania 1.9 1.59

Latin

America

1.8 1.67

Africa 1.3 1.03

Total premiums by Country, 2000

Country

Premiums

(USD

millions)

Share ofworld

market

(in %)

*Premiums

in % of

GDP

*Premiums

per capita

(in USD)

United

States865327 35.41 8.76 3152.1

Japan 14 504005 20.62 10.92 3973.3United

Kingdom236960 9.7 15.78 3759.2

Germany + 123722 5.06 6.54 1491.4

France + 121910 4.99 9.4 2051.1

Italy 63062 2.58 5.8 1084.3

South

Korea 1458348 2.39 13.05 1234.1

Canada 11 46587 1.91 6.56 1516.8

Spain 37617 1.54 6.73 954.2

Netherlands 36450 1.49 9.87 2290.2

India 14* 9933 0.41 2.32 9.9

48


49/70

* estimated

11 Life business: net premiums

14 Financial year 01.4.200031.3.2001

+ provisional

V POTENTIAL IN INDIA

INSURANCE SECTOR IN INDIA

India, with a population of 1 Billion offers great potential

and opportunity for the insurance industry. The insurance

business in India is pegged at $ 6.6 Billion whereas

industry leaders feel privatization will increase it to $ 40

Billion within next 3-5 years.

Today hardly 20 per cent of the population in India is

insured and insurance premium (life as well as non-life)

account for just 2 per cent of GDP as against the G-7

average of 9.2 per cent.

The Malhotra Committee estimated that the insurance

penetration in India is to the extent of about 25 % of the

insurable population. The poor reach of insurance in the

49


50/70

country and the sheer numbers make India a market with

tremendous potential.

The following facts show how under-developed the Indian

insurance business is due to state monopoly and lack of

aggressive marketing of insurance policies:

Per capita insurance premium in India is a mere

US$ 6, one of the lowest in the world. In South

Korea, the corresponding figure is US$1,338, in

USA it is $ 2250 and in UK it is $1589.

Insurance premium in India accounts for a mere 2

per cent of GDP compared to the world average of

7.8 per cent and G-7 average of 9.2 per cent.

As of 1999-2000, LICs Insurance premium Income was

approximately Rs.32000 crores. It is observed that

currently LIC has about 10 crore policies in force, which

contributes a premium of about 6% of the Gross Domestic

Saving of households in India.

By the year 2010, the premium Income is expected to

account for 18% of the GDS, amounting to Rs.512,000

50


51/70

crore. In the previous fiscal (2002-03), 8.36 lakh policies

were sold by 12 private insurance companies.

All this reports suggest that there is a huge potential

market to be tapped in India.

IRDA GUIDELINES AS OF TODAY

The Insurance Regulatory and Development Authorityhave stipulated the withdrawal of the five per cent

discount offered by the companies to their clients. A

special discount of 5% in lieu of Agency Commission /

Broker's Remuneration is now available for companies with

a paid up capital above Rs. 10 lakhs.

IRDA has now fixed the agency commission and brokers'

remuneration rates, which vary between 5-17.5 per cent

depending on the type of risks covered and the size of the

company. The new rates will be applicable from April one

for a period of one year.

IRDA had made it compulsory for brokers to invest Rs. 50

lakh in order to offer professional services. Brokers also

have to take up professional indemnity policy three-times

51


52/70

their brokerage income, with a minimum amount of Rs. 50

lakh.

PRIVATE COMPANIES STATUS

The following table summaries current status of various

companies, which have shown keen interest in this

industry.

COMPANY FOREIGN

PARTNER

SECTOR STATUS

Birla Ltd. Sunlife Life

Insurance

Active

Cadila

Pharmaceuticals

- General

Insurance

Planning

Corporation

bank

- Life

Insurance

Planning

Dabur Allstate,

USA

Life

Insurance

Applied for

License

Gujurat Ambuja

Cement

Money Life

Insurance

Life

Insurance

Planning

HDFC Standard

Life

Life

Insurance

License

Received

ICICI Lombard,

Canada

General

Insurance

Joint

Venture

52


53/70

formed

ICICI Prudential,

UK

Life

Insurance

Active

India Farmer

Fertilizer Co-

operative

Tokio

Marine,

Japan

Non Life

Insurance

In principal

clearance

Kotak Mahindra

Finance

Old Mutual,

South Africa

Life

Insurance

Active

Max India New York

Life

International

Life

Insurance

Active

Punjab National

Bank, Bank of

Baroda

- Life

Insurance

Planning

Punjab National

Bank, Vijaya

Bank, Allahabad

Bank, Bank of

India

- Non Life

Insurance

Planning

Reliance Group - Life

Insurance

License

Received

Reliance Group - Non Life

Insurance

License

Received

Sundaram

Finance

Royal &

Sundaram

Non Life

Insurance

License

Received

53


54/70

Alliance

PRIVATE COMPANIES PREPAREDNESS OR ATTITUDE

TOWARDS BROKERS:

Of the companies, which have started their operation, all

are ready to accept business brought in by insurance

brokers. For them it shall be another mode of business

generation along with the agents or the insurance

consultants as they call. Internationally also it is the

Brokers who bring the majority of the business for the

insurance companies as against the agents.

VI AREAS FROM WHERE REVENUES CAN BEGENERATED

AMOUNT OF COMMISSION THAT COMPANIES PAY:

It is expected that brokers are going to be treated on the

same lines, as are the agents today, as far as the

commission is concerned. The structure for paying

commission for the insurance policies is given by IRDA

where it has given the upper limits or the maximum

54


55/70

commission payable. So a company is free to pay

commission as per its wish provided it does not exceed the

upper limits. Brokers' commissions amounted to 134

million in 2002

Avenues for income, for an insurance agent/broker are

one time commission recurring commission and annual

bonuses. One time commission and recurring commission

are paid as percentage of premium and annual bonus is

paid out of the income that is been generated from the

investments.

The limits for the same is given below.

TYPE OF POLICY COMMISSON LIMITSImmediate Annuity 2% of Premium

Deferred Annuity

(Single Premium)

2% of Premium

Deferred Annuity

(regular Premium)

7.5% of the first years

Premium

2% of PremiumAll other cases

(Endowments, Money

back

etc.)

A maximum of 40%

of the first years

Premium

A maximum of 7.5%

55


56/70

of the 2nd & 3rd years

Premium

A maximum of 5% of

the 4th & 5th years

Premium

Thereafter, 5% of

the renewal Premium

Total commission

payable in the first 5n

years cannot exceed

60% of the annual

premium payable on

the policy.

These are the upper limits but the exact amount of

commission given companies is not available. Being an up

coming industry and a very competitive one the players in

the industry are not ready to spell out openly what is the

commission that they are offering.

However all have to adhere the to IRDA guidelines which

has given the upper levels beyond which the company

cannot give commission to an agent/consultant.

56


57/70

VII LIABILITIES TOWARDS BOTH THE PARTIES

MEMBERSHIP TO CLAIM SETTLEMENTS

Insurance broker has to be registered broker with the

IRDA. IRDA has made it mandatory for every broker to

appear for a certification exam every three years

irrespective of he or she having cleared it before. Also

every insurance broker shall take out and maintain a

professional indemnity insurance cover throughout the

validity of the period of license granted by the Authority.

The terms and conditions of the insurance cover must

comply with the following requirements.

1) The insurance cover must indemnify, as a minimum,

an insurance broker against:

(i) breach of duty in relation to any aspect of the

brokers business by reason of any negligent act,

error or omission;

57


58/70

(ii) Libel or slander committed in the course of

business;

(iii) any loss of money or other property for which

the broker is legally liable in consequence of any

financial or fraudulent act or omission;

(iv) legal liability incurred by the broker by reason of

loss of documents and costs and expenses

incurred in replacing or restoring such

documents;

(v) dishonest or fraudulent acts or omissions by

brokers employees or former employees; and

(vi) any financial penalty imposed by the authority

or by any ombudsman scheme to which the

broker belongs.

2) The insurance policy must not contain any terms

to the effect that payments of claims depend upon the

insured having first made payment.

3) The insurance policy must ensure the payment ofall claims made and reported during the period of the

insurance regardless of the time at which the event-

giving rise to the claim may have occurred.

58


59/70

4) The insurance policy period shall not be more than 12

months form

Inception or the last renewal date (unless approved

by the Authority). The broker will be required to take

insurance policy on a yearly basis for the entire period

of license.

5) Limit of Indemnity to any one claim and in the

aggregate shall be:

Category I A and Category I B 4 times of brokerage and

fees in a year subject to a minimum limit of Rs 60 lakhs.

Category II 4 times of brokerage and fees in a year

subject to a minimum limit of Rs.3 crores.

Category III 4 times of brokerage and fees in a year

subject to a minimum limit of Rs.6 crores.

Category IV 4 times of brokerage and fees in a yearsubject to a minimum limit of Rs.30 lakhs.

6) The uninsured excess in respect of each claim must

not exceed Rs.

59


60/70

50,000. The excess may be increased above Rs.

50,000 provided that

the solvency margin required in sub-regulation 18 is

maintained.

7) The insurance policy must be taken out with any

licensed insurer in

India who has agreed to :

(i) provide the broker with an annual certificate as

evidence that the cover meets the requirements

of the Authority. The certificate will contain the

name and address, including the license number

of the broker, the policy number, the limit of

indemnity, the excess and the name of the

Insurer; and

(ii) send a duplicate certificate to the Authority at the

time the certificate is issued to the broker; and

(iii) inform the authority by means of

monthly lists, of any case of voidance, non-renewal or cancellation of cover mid-term.

Every insurance broker must:

60


61/70

(i) inform the authority immediately should any

cover be cancelled or voided or if any policy is not

renewed;

(ii) immediately inform the insurer in writing of any

claim made by or against it;

(iii) immediately advise the insurer of all

circumstances or occurrences that may give rise

to a claim under the policy; and

(iv) advise Authority as soon as an insurer has

intimated that it intends to decline indemnity in

respect of a claim under the policy.

Since a broker acts on behalf of the insured he should

see that even the claim settlements takes place very

easily. At the same time it is very important that the

broker is only an intermediary he can facilitate in claim

procedure but not settle the claim. An insurance

agreement is between the insured and the insuring

company. So in case if there are any complications orthe errors as to settlement of the claims the two parties

involved are only the insured and the insurance

company. The broker has no capital commitment towards

the insured. He purely works on the principle of utmost

61


62/70

good faith where the insured provide all the information

which are true and fair and at the same time it is the

duty of the company to honor genuine claims.

VIII MISCELLANEOUS

OTHER INTERMEDIARIES IN INSURANCE BUSINESS

Ideally an insurance company would have openings in the

marketing, distribution, actuarial, underwriting, operations

and investing departments. Though some jobs like

investing, marketing and distribution are the same in any

other industry, actuarial and underwriting jobs are

exclusive to the insurance industry.

Actuaries

An actuary is the heart of an insurance business. An

actuary solves a wide range of financial problems in

insurance, investment, financial planning andmanagement through the use of mathematical, statistical

and economic models. An actuary not only fixes the

premium rates for new products, but also revises both

products and prices. Generally, a big insurance firm

62


63/70

abroad has about 50 actuaries. Even a medium sized firm

has to have half-a-dozen actuaries, one or two qualified

and the rest apprentices.

Underwriters

Both life and non-life segments require professional

underwriters, who assess the risk in the business. In the

life insurance business, an underwriter is expected to filter

the bad or substandard lives, whereas he takes care of

risk management in the general insurance segment.

Surveyors

Surveyors are professionals who assess the loss or

damage. An insurance surveyor must possess a license

issued by the Controller of Insurance under Ministry of

Finance, Govt. of India. Licenses are issued to technically

qualified people who are engineering graduates or diploma

holders in any discipline, Chartered Accountants,

Graduates in Medical Sciences or Associates in Insuranceof the Chartered Insurance Institute of London or

Federation of Insurance Institute of India. A surveyor

after obtaining the license may be empanelled by any or

all of the insurance companies.

63


64/70

Operations

Its InfoTech everywhere! The new players would require

elaborate database, a network, and in-house packages to

have an edge over their rivals. Database and network

professionals will, therefore, be in great demand. The

industry would also require software programmers to

develop customized off-the-shelf packages.

Investment

Like banks and mutual funds, an insurance firm will also

need investment professionals to manage its assets.

People with experience in banks and mutual funds would

be preferred. Remuneration would be on par with the

financial sector.

Marketing and Distribution

Insurance is a push product and marketing plays a major

role in a companys success. And the key marketing menwould be the traditional agents. But the private insurance

companies would look at a more professional agent who

not only sells insurance products but also acts like a

personal finance consultant to the customers. There

64


65/70

would be openings for both the experienced and the

novice. Remuneration would be on commission basis.

IT IN THE INSURANCE INDUSTRY

Today the companies are actively pursuing new IT

initiatives, such as, data ware housing, e-commerce and

componentization. The objective is to get clarity around

the products channels and service features for new

entrants investments in information technology is crucial

for success. It takes time to build it systems and the new

firms need to get of the block soon as possible. Core

processes such as finance policy administration investment

management and basic rate system need to be set up

first. The following processes should be set up after the

core processes:

Sales system and publicity

Claim management and loss control

MIS, product design and supply system,

Data ware housing solutions will be helpful to the

insurance industry in:

65


66/70

Facilitate strategic decision based on the timely

and accurate data.

Functioning as an effective decision support

system and executive information system.

Capture data quickly from disparate databases

and translating into a format easily

understandable to business and system

professionals.

Assist in understanding customer behaviour and

trends

Freeing up internal technical staff.

Worldwide interest in E-commerce and India's

predominant position in information technology and

software development is also likely to be a major factor

in the marketing of insurance products in the immediate

future.

66


67/70

CONCLUSION

With the opening up of insurance business in the country

Broker in insurance, are going to play a very importantrole in days to come. They are not just going to be

provider of insurance schemes but shall be acting as the

professional financial intermediaries providing risk

management services to the prospective insured.

67


68/70

Broking in insurance is going to be a big industry as it

has been internationally with insurance brokers evolving

to be the main business generator for the Insurance

Company. With the amount of commission that has been

offered to insurance agents it is expected that the same

or probably more shall be offered to insurance brokers.

Super imposing this to the fact that about only 20 %

insurable population of the country is currently insured

this business holds very good prospect.

This industry also makes a very good business as it

attracts a very less investment and has virtually no

liability that a broker has to take on his name.

To conclude insurance broking shall be a pure financial

service intermediary, which shall put life in all the non-

life activities of the Indians.

68


69/70

BIBLOGRAPHY

irdaindia.org

irdaonline.org

bimaguru.com

bimaonline.com

bimakoj.com

themanagementor.com

69


70/70

Insurance Broking Business

Documents

Transcript of Insurance Broking Business