MBC – 307 : BANKING & INSURANCE MANAGEMENTSession 1 : MBC – 307 : BANKING & INSURANCE MANAGEMENTSession 1 Introduction to Insurance:
Definition and Basic Concepts
Evolution of Insurance Business
An Overview of the Insurance sector The Concept of Risk : 2 The Concept of Risk Integral to the concept of Insurance
Defined as the possibility of adverse results flowing from any occurrence.
Uncertainty gives rise to risk.
There should be at least two possible outcomes of which, one is Undesirable. Insurance : 3 Insurance Insurance is a cooperative device to spread the loss caused by a particular risk over a number of persons who are exposed to it.
Insurance is a legal contract that transfers risk from an insured to an insurer in exchange for a premium.
People exposed to the similar risks come together and pool funds to protect each individual against that risk.
Thus risk is spread out.
Insurance can not reduce the probability of risk.
It only spreads the financial loss. Insurance: functional definitions : 4 Insurance: functional definitions Insurance is the collective bearing of risk. (William Beveridge)
Insurance is a plan by which a large number of people associate themselves and transfer, to the shoulders of all, risks attached to individuals. (D H Magee)
Insurance is a source of distribution of loss of few persons into many persons. (Rock Fell) Insurance: legal definitions : 5 Insurance: legal definitions Insurance is a contract in which a sum of money is paid by the assured in consideration of the insurer’s incurring the risk of paying a large sum assured upon a given contingency. (Chief Justice Tindal)
An insurance transaction involves the following -
Insurer: Party agreeing to pay for the losses of the insured.
Insured: The party who insures his risk with the insurer.
Premium: The consideration payable to the insurer by the insured.
Policy: The contract between the insurer and the insured How Insurance Works : 6 How Insurance Works Example :
In a particular city there are 1000 houses each costing, say, Rs.1,00,000. Every year, there is a probability that 4 houses are destroyed by fire, resulting in a total loss of Rs. 4,00,000.
If all of the 1000 house owners join a common pool of fire insurance, amount payable by each house owner is Rs.400. (ignoring expenses / profit of the insurer) Slide 7: The Evolution of
Insurance Business Evolution of Life Insurance Business : Evolution of Life Insurance Business ENGLAND
Evolved in England in the 16th century
First Life Policy: William Gybbons (18.06.1653), as per recorded evidence
1st Registered Life office in England: Hand in Hand Society (1696)
Oriental Life Assurance (Calcutta: 1818)
Bombay Mutual Life assurance (Bombay: 1871) Evolution of Marine Business : Evolution of Marine Business Oldest form of insurance
Existed in the early days of marine trading to protect against risks due to natural hazards, sea piracy, capture by the enemy country and so on
Marine policies in the modern form started in Europe during 14th century
In the 19th century, Lloyd's and the Institute of London Underwriters developed between them standardized clauses for the use of marine insurance, and these have been maintained since. Evolution of Fire Business : Evolution of Fire Business Originated in Germany during 16th century
Got momentum in England after the Great Fire-1666
Continued for 5 days
13200(85%) houses and 87 churches destroyed
1.5 miles x 0.5 mile area reduced to ashes
Property worth 1 billion Sterling were destroyed
With colonial expansion of England, it spread all over the world
In India, it took off with Triton Insurance, Calcutta (1850) The History ofInsurance Business in India : The History ofInsurance Business in India Pre-Independence Scenario
1912: The Indian Life Assurance Companies Act - the first statutory measure to regulate life insurance business
1928: Indian Insurance Companies Act - enacted to enable the Government to collect statistical information about both life and non-life business
1938: Insurance Act, 1938 - enacted by consolidating the earlier legislations with a view to protect the interest of insuring public The History ofInsurance Business in India : The History ofInsurance Business in India Nationalisation Era
In spite of mushrooming insurance companies, the per capita insurance in India was only Rs.8 (as against Rs.2000 in US and Rs.600 in UK)
Lack of public faith due to malpractices and liquidation of many insurance companies
1956: Nationalisation of life insurance business with the enactment of LIC Act. LIC of India formed to take over the business of about 250 companies
1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business with effect from 1st Jan 1973 The History ofInsurance Business in India : The History ofInsurance Business in India Ready to Open Up (1999)
Govt. and the public were not satisfied with the growth of the insurance sector (only 20% of the insurable population were covered)
Monopoly resulted in lack of sensitivity to the policyholders
GOI commits at GATT (the earlier avataar of WTO) to open up insurance sector to local and global operators
Malhotra Committee appointed to look into the reforms in insurance sector Introduction to Insurance:Insurance Business in India : Introduction to Insurance:Insurance Business in India Post-IRDA era
Insurance Regulatory and Development Authority (IRDA) formed by IRDA Act 1999
Based in Hyderabad, this regulatory body is presently headed by Mr. Hari Narayana
No. of insures (still increasing):
Life – 22, Non-life – 21, Reinsurer – 1
Life Insurers have approx. 11,700 branches of which about 8,400 branches are set-up by private companies
The capital deployed - Rs. 232bn by life insurance companies (66% jump from Rs139bn in 2007)
Total assets of life insurance companies have grown to Rs.8,568 bn as on December 31, 2008. Slide 15: ?