Insurance Industry - Copy

8/6/2019 Insurance Industry - Copy

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Insurance IndustryInsurance Industry

Purnendu Shakunt

Ravi Bhartia

Shilpa Nayak

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Insurance SectorInsurance Sector

Introduction and Overview

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Insurance IntroductionInsurance Introduction

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What is Insurance?What is Insurance?

y Commercial mechanism for transferring riskand spreading loss

y

Economic Concept of Insurance:1. Insurer offers policy to cover specifiedrisks

2. Insurer collects policy premiums from

customers3. Insurer invests premiums

4. Insurer pays money to insured customersin the event of losses covered by policy.

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What is InsuranceWhat is Insurance

y Theoretically, everybody comes out ahead(so long as losses do not exceed returns

of invested premiums; and all parties

honor their contractual obligations).

y Theoretically, the insurance industry

bridges private interests and public good.

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Why do we need insurance?Why do we need insurance?

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Why do we need insurance?Why do we need insurance?

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Insurance LawInsurance Law

Sources of Insurance Obligations

y Policy/Insurance Agreement

y Common Law (contract theories; tort

theories)y Statutes

y Regulations

The law of insurance is multi-layered. The prudentresearcher will consider each of the layerswhen approaching a research problem.

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The History of InsuranceThe History of Insurance

y 3000 B.C.E. Mesopotamian merchantsassess risk surcharges in transactions

with caravan operators and traders to

protect their capital.

y 1750 B.C.E. Code of Hammurabi

formalizes concepts of bottomry andrespondentia (protection against loss of

hull and cargo, respectively) the

underpinnings of maritime insurance. 9


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Contd.Contd.

y Mid-18th Century Many insurance companiesare more likely than banks to have substantialcash reserves. Insurance companies function aslending institutions.

y Mid-18th Century Insurance underwriting isprosperous industry in America. Lloyds ofLondon also draws a significant share ofColonial Americas underwriting business(capitalization).

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Contd.Contd. -- LloydsLloyds of Londonof London

y Today, Lloyds ofLondon is aninsurance icon

y Not an insurancecompany, but anexclusive insurancemarket


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ClassesClasses of Insuranceof Insurance

A. Life insurance

B. General insurance

General insurance is further classified:-

1.Fire insurance

2.Marine insurance

3.Miscellaneous insurance


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Miscellaneous Insurances:Miscellaneous Insurances:--

1.Motor insurance

2.Mediclaim insurance

3.Householders insurance4.Shopkeepers insurance

5.Engineering insurances

etc.


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1.Insurable interest1.Insurable interest-- Means financial interestMeans financial interest

2.Utmost good faith2.Utmost good faith-- Greater duties ofGreater duties of faith onfaith on proposer &proposer &insurerinsurer

3.Indemnity3.Indemnity--Actual compensation ofActual compensation of loss; notloss; not applicable in lifeapplicable in lifepoliciespolicies

4.Subrogation4.Subrogation--Transfer of rights of insured toTransfer of rights of insured to

insurer. Not applicable in life policies.insurer. Not applicable in life policies.

5.Contribution5.Contribution--Sharing of loss by all insurers. NotSharing of loss by all insurers. Not

applicable in life policies.applicable in life policies.

Fundamental Principles of Insurance


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Market IntermediariesMarket Intermediaries

Who procure the insurance business:

y Agents

y Corporate agentsy Insurance brokers

y Banks (Banc assurance)


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Basic Life Insurance PoliciesBasic Life Insurance Policies

Term assurance policyy Provides death cover only

during policy periody Premium is low

y No refund of premium

y Sum assured paid on death


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Whole Life PolicyWhole Life Policy

Death cover only

Period is not specified

Premium is low & paid during lifetime

o refund of premium

Sum assured paid on death


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Endowment Assurance PlanEndowment Assurance Plan

Covers death & survival

Benefits

Sum assured paid on death or on

maturity of policy

Period of policy at the option ofproposer

Most common plan


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Money Back PolicyMoney Back Policy

y Available for different periods

y Covers death & survival benefits

y Lump sum paid periodically

y Full sum assured paid on death


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Unit Linked Insurance PoliciesUnit Linked Insurance Policies(ULIP)(ULIP)

y Each premium split into units and risk

premium for life cover

y Units are priced as per currentmarket value

y Sum assured & current value of units paid

on death

as per policy conditiony Current value of units paid on maturity


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Annuity (Annuity (Pension) PlansPension) Plans

y These are pension plans

y Immediate annuity or deferred annuity

starts at specified age periodicallyy Single premium paid for immediate

annuity

y

Premium in installments paidfor deferred annuity

y Life cover simultaneously


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Important aspects of Life InsuranceImportant aspects of Life Insurance

PoliciesPolicies

y Policies available with bonus or without bonus

y Death due to accidents can be covered for

additional S.A.y Policies available exclusively for women &

children

y Additional cover for major diseases available

y Guaranteed bonus policies available


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PoliciesPolicies

y Policies available for limited period

premium payment & risk for longer policy

period

y Premium can be paid in monthly,

quarterly, half yearly, yearly installments


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PoliciesPolicies

y Loans are available on policies

y Lapsed policies can be revived

y Policy can be surrendered after threeyears

y Nomination & assignment can be done


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Growth of Insurance BusinessGrowth of Insurance Business

y Life Insurance Premium from Rs.400 croresin 1956 to Rs.221791 crores in 2008-09

with 10.15 % growth over 2007-08

y General Insurance Premium from Rs.200

crores in 1972 to Rs.38182 crores in 2009-

10 with 16.55 % growth over 2008-09


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Economic GrowthEconomic GrowthGDP 8.7 % in 2007GDP 8.7 % in 2007--0808

Sector Growth % of GDP

Agriculture 2.6 17.5

Industry 8.9 26.8

Services 10.7 55.7

(Fin.& 11.7 14.7

Insurance)


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GROWTH POTENTIALGROWTH POTENTIAL

y At present insurance penetration in India

is quite low 2.26% of GDP.

y In Korea the penetration stands at 6.77%,

y In Singapore 6.38%.

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Emerging TrendsEmerging Trends

y Detariffing in General Insurance from1.1.2007 leading to greater price war &

new products in future

y Banks entering insurance market through

joint ventures with foreign finance majors


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Increasing Role of

y Insurance Brokers

y Banc assurancey Corporate Agency

y IT intervention & uses


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Greater Job Opportunities:

y For thousands of Insurance

Managers, IT Professionals

y For lacs of Insurance Advisors

y For Insurance Professionals

y For Risk Managers

y For Underwritersy For claim Settlements


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Increasing No. of Insurance companies &

Intermediaries

Increasing Awareness about Insurance

Growth in GDP

Increasing No. of Middle Class

Vast No. of uninsured population

Untapped potential for General Insurance


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y Increasing awareness about HealthInsurance

y Increasing awareness about Personal Line

Insurance like House, Shop, PersonalAccident

y Market flooded with new insurance

products


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Changing Customer ExpectationsChanging Customer Expectations -- LIFELIFE

Role of IRDA

Educate public on regulatory safeguards,investment guidelines and plough backof profits

(several people had expressed concern aboutsecurity of their money, credibility of privateinsurance companys investment of funds inforeign markets and repatriation of profits toforeign countries)

Inform public on Social and Rural obligations ofprivate players (several people believed that onlyLIC was responsible for insuring the poor)

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Changing Trends in Savings PatternChanging Trends in Savings Pattern

Pre Liberalization Post Liberalization

Saving Instruments % of Respondents

Insurance 23

Bank Deposit 28

PPF 19

NSC 12

Shares 7

Post office 7

Bonds 0

Gold 4_

TOTAL 100

Saving Instruments % of Respondents

Insurance 33

Bank Deposit 44

PPF 8

NSC 0

Shares 3

Post office 3

Bonds 9

Gold 0_

TOTAL 100

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PerformancePerformance

Contribution of Life Insurance Sector in

the Indian Economy

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STRUCTURE OF INSURANCESTRUCTURE OF INSURANCE

INDUSTRYINDUSTRY

Historical Perspective

Prior to 1956: 242 companies operating

1956 2001: Nationalisation

(LIC Monopoly player; Governmentcontrol)

2001 : Opened up sector 37


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Present Structure of Insurance IndustryPresent Structure of Insurance Industry

LIC Fully owned by Government

Postal Life Insurance

Private Players

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CONTRIBUTIONCONTRIBUTIONTOTO INDIANINDIAN ECONOMYECONOMY

y Life Insurance is the only sector which

garners long term savings

y Spread of financial services in rural areas

and amongst socially less privileged

y Long term funds for infrastructure

y Strong positive correlation between

development of capital markets andinsurance /pension sector

y Employment generation

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AggregationAggregation ofof LongLongTermTerm SavingsSavings

Industry is growing @ 19 p.a.

Life Insurance funds account for 15% ofhousehold savings.

The industry has the potential to increasethe share to 20%.

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Spread offinancial services in rural areasSpread offinancial services in rural areas

and amongst socially underprivilegedand amongst socially underprivileged

IRDA Regulations provide certain minimum

business to be done

(i) in rural areas(ii) in the socially weaker sections

Life Insurance offices are spread over nearly

1400 centres. Presence of representative in every tehsil

deeper penetration in rural areas.

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Development ofCapital Markets/EconomicDevelopment ofCapital Markets/Economic

GrowthGrowth

Helps inculcate a sense of security byprotecting earning of people in case of

untimely death.

Benefits to Policy Holders

2002 2003 20,800 cr

2003 2004 24,200 cr

2004 2005 28,700 cr

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EMPLOYMENT GENERATIONEMPLOYMENT GENERATION

Life insurance industry provides increased employmentopportunities.

Employees in insurance sector as on 31st March, 2005 is

around 2 lakhs.

Many agents depend on insurance for their livelihood No.

of agents on 31st March 2004 15.59 lakhs

Brokers, corporate agents, training establishments provideextra employment opportunities.

Many of th

ese openings are in rural sectors 43


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ConductConduct

Indian insurance industryMajor players of general insurance

market

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