Insurance Business in India

PowerPoint Presentation: 

1 Insurance Business in India

Overview of India’s BFSI Industry : 

Overview of India’s BFSI Industry Banking & Financial system of the country plays a substantial role in promoting the long term growth of the economy. The major segments of the Industry are Banking, Insurance and Mutual Funds. Banking and Insurance sector contributed 6% of GDP during the year ended 2008. Sector’s contribution to GDP during the period 2001 to 2008 has grown at a CAGR of 11.5% in real terms. 2

Insurance: 

Insurance The insurance industry in India has come a long way since the time when businesses were tightly regulated and concentrated in the hands of a few public sector insurers. Following the passage of the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector exclusivity in the insurance industry in favor of market-driven competition. This shift has brought about major changes to the industry. The inauguration of a new era of insurance development has seen the entry of international insurers, the proliferation of innovative products and distribution channels, and the raising of supervisory standards. 3

Insurance: 

Insurance Insurance has two sub-segments, life insurance and non-life insurance. Total premium collected by the insurance segment for all the life and non-life insurance policies has grown at a CAGR of 24.27% over the period 2002 to 2008. LIC is the largest player in the life insurance segment contributing to 74.39% to the total life insurance premium collected. Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company.  A pool is created through contributions made by persons seeking to protect themselves from common risk. Premium is collected by insurance companies which also act as trustee to the pool. 4

Indian Insurance Sector: 

Indian Insurance Sector Insurance in India has its history dating back until 1818, when Oriental Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community. The pre-independence era in India saw discrimination between the lives of foreigners (English) and Indians with higher premiums being charged for the latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer 5

Concept of Risk: 

Concept of Risk People seek security. A sense of security may be the next basic goal after food, clothing, and shelter. An individual with economic security is fairly certain that he can satisfy his needs (food, shelter, medical care, and so on) in the present and in the future. Economic risk (which we will refer to simply as risk) is the possibility of losing economic security. Most economic risk derives from variation from the expected outcome. One measure of risk, used in this study note, is the standard deviation of the possible outcomes. As an example, consider the cost of a car accident for two different cars, a Porsche and a Toyota. In the event of an accident the expected value of repairs for both cars is 2500. However, the standard deviation for the Porsche is 1000 and the standard deviation for the Toyota is 400. If the cost of repairs is normally distributed, then the probability that the repairs will cost more than 3000 is 31% for the Porsche but only 11% for the Toyota. 6

Basic categories of risk: 

Basic categories of risk Sectorial emphases on risk Banking sector Securities sector Insurance sector General approaches to the management of key risks Credit risk Market and asset liquidity risks Funding liquidity risk Interest rate risk Technical risk (insurance underwriting risk) Operational risk Risk consolidation 7

Markets for Pure Risks  : 

Markets for Pure Risks This course examines the supply side of global markets for pure risks. Pure risks can be broadly defined as risks that are beyond the core competencies of the majority of firms in the economy. These are risks that must be managed or avoided in order to enable management to add value by focusing on the firm’s primary activity. An important category of pure risks encompasses those risks that traditionally were managed by purchasing insurance – the risk of reduction of firm value due to fires, natural disasters, liability lawsuits, work injuries, and other types of accidents or legal actions. However, pure risks also include other sources of volatility that have not traditionally been traded in insurance markets. The latter category includes weather risk, credit risk, and foreign exchange risks, among others. The course examines insurance and financial markets, “alternative market” approaches to dealing with pure risks such as captive insurance companies, the global market for reinsurance, and markets for securitized risk product such as catastrophe bonds. 8

Risk Management Tools: 

Risk Management Tools Risk management ensures that an organization identifies and understands the risks to which it is exposed. Risk management also guarantees that the organization creates and implements an effective plan to prevent losses or reduce the impact if a loss occurs. A risk management plan includes strategies and techniques for recognizing and confronting these threats. Good risk management doesn’t have to be expensive or time consuming. The most common tool used in risk management is insurance. Besides the standard health, life, and possibly disability insurance, you need to look at the types of liability and property insurance you may need. Specialized insurance for particular risks in your business can also be necessary. For instance, if you have a chemical component of your production process, you may want special toxic risk insurance. Think comprehensive, then pare it down to fit the level of risk you are comfortable with. Many people prefer a comprehensive policy that has a large deductible which reduces the cost of the policy. 9

Insurance Contracts: 

Insurance Contracts Simple contracts do not need to be “in writing” (which term includes typing and printing, for example by computer output) but it is very rare for an insurance contract not to be in writing. What are called speciality” contracts are comparatively rare in insurance, and we shall not consider them at this stage. A contract of insurance is usually “embodied” or set down in a written (typed or printed) document known as a ‘policy form’ or simply a ‘policy’. However, it is important for you to note that the policy itself is not the contract; it is merely evidence of the contract, that is, it is written proof that the contract has been made. The contract is actually the “invisible” agreement between the parties to that contract 10

Principle of indemnity: 

Principle of indemnity Life insurance is not a contract of indemnity. But property insurance or personnel accident insurance contracts are contracts of ‘indemnity’. Indemnity merely means to make good any financial loss suffered by the insured and to put him or her back in the same financial position as he or she was before the occurrence of the loss. It is the duty of the insurer to make good the loss suffered so as to enable the insured to again derive the benefits from the insured assets as he used to earlier. An example is the Householders Insurance policy where the insurer pays the actual loss to the policyholder in case of any theft or damage that has been caused to his household appliances or gadgets covered under the policy. In accordance with this principle, the insured cannot claim more than the actual loss caused to an insured risk. 11

Indisputability clause: 

Indisputability clause Non-disclosure This clause is intended to protect consumers from unfair rejection of claims due to non- is closure of material facts. Quite often, the consumer may not be aware of an adverse medical condition and may have not disclosed it unintentionally. If the insurance company discovers the fact after the period of 1 or 2 years, the insurance company is not allowed to bring it up to reject or dispute the claim. Fraud The insurance company has the option to prove that the consumer is aware of the fact and has hidden the fact deliberately to defraud the insurance company. In this case, the onus is on the insurance company to prove the intent to carry out a fraud. 12

Indisputability clause: 

Indisputability clause Trigger happy Due to weak consumer protection in Singapore, some insurance companies seemed to be quite trigger happy in rejecting claims on dubious grounds. This is unfair to the consumers, as they do not have the money to engage lawyers. In the past, the regulator does look into complaints of unfair practices, but they now pass the matter to be resolved by FIDREC, considering it to be a dispute Savings If insurance companies cannot be relied to treat their customers fairly in the settlement of claims, it is better for consumers to make their own savings and pay the expenses out of savings, rather than use the money to buy insurance and still be uncertain about the outcome. 13

Basic features for insurance: 

Basic features for insurance There must be a large numbers of similar risks. The loss caused by the risk must be definite The occurrence of the loss must be accidental The potential loss must be large enough to cause hardship The cause of insuring must be economically feasible It must be possible to calculate the chance of loss There must be an insurable interest to protect It must be consistent with public policy 14

Fundamental principle of insurance: 

Fundamental principle of insurance Utmost good faith Insurable interest Indemnity Mitigation of loss Attachment of risk Subrogation 15

Insurable interest: 

Insurable interest At its simplest, the doctrine of insurable interest requires that someone taking out insurance gains a benefit from the preservation of the subject matter of the insurance or suffers a disadvantage should it be lost. Statutes requiring policyholders to show a requirement of insurable interest in the subject matter they were insuring, began to appear from the mid eighteenth century and it still remains a requirement for many forms of insurance today. Statutory requirements for insurable interest developed as a result of concerns about moral hazard and gambling. Insurable interest was first developed as a statutory requirement for English insurance contracts in the mid-eighteenth century. At the time, there were grave concerns that insurance created an incentive to destroy the insured matter or murder the insured life. This is known as moral hazard. A requirement for insurable interest was developed as the solution. It would ensure that insurance could only be taken out by those who had an independent interest in the continuing existence of the subject matter. 16

Insurable interest: 

Insurable interest It means that the insured stands in such a relation to the subject matter of insurance that he suffers loss by its destruction or damage and is benefited by its safety or existence It must satisfy some conditions like: There must be a physical object There must be potential liability There must be legally recognized relationship with the subject matter. 17

Doctrine of contribution: 

Doctrine of contribution The doctrine of contribution states that "in case of double insurance all insurers must share the burden of payment in proportion to the amount assured by each. If an insurer pays more than his ratable proportion of the loss, he has a right to recover the excess from his co-insurers, who have paid less than their ratable proportion." Thus the essential conditions required for the application of the doctrine of contribution are: There must be double insurance, i.e., there must be more than one policy from different insurers covering the same interest, the same subject matter and the same peril which has caused the loss. 18

Doctrine of contribution: 

Doctrine of contribution There must be either over- insurance or only partial loss. If the amount of different policies is just equal to the value of the subject matter destroyed, the different insurers are liable to contribute towards the loss upto the full amount of their respective policies and as such the question of contribution between themselves does not arise. The assured must recover the whole of his loss from one or more of the insurers and not from all the concerned insurers in proportion to the amount assured by each. 19

Doctrine of subrogation: 

Doctrine of subrogation Subrogation in its most common usage refers to circumstances in which an insurance company tries to recoup expenses for a claim it paid out when another party should have been responsible for paying at least a portion of that claim. More specifically, subrogation is the legal technique under common law by which one party, commonly an insurer (I-X) of another party (X), steps into X's shoes, so as to have the benefit of X's rights and remedies against a third party such as a defendant (D). Subrogation is similar in effect to assignment, but unlike assignment, subrogation can occur without any agreement between I-X and X to transfer X's rights. Subrogation most commonly arises in relation to policies of insurance, but the legal technique is of more general application. Using the designations above, I-X (the party seeking to enforce the rights of another) is called the subrogee . 20

Doctrine of subrogation: 

Doctrine of subrogation Types of Subrogation Indemnity insurer's subrogation rights Surety's subrogation rights Subrogation rights of business creditors Lender's subrogation rights Banker's subrogation rights 21

Causa Proxima: 

Causa Proxima It is a rule of law that in actions on fire policies, full regard must be had to the causa proxima . If the proximate cause of the loss is fire, the loss is recoverable. If the cause is not fire but some other cause remotely connected with fire, it is not recoverable, unless specifically provided for. Fire risks do not cover damage by explosion, unless the explosion causes actual ignition, which spreads into fire. The cause of the fire is immaterial, unless it was the deliberate act of the insured. 22

Steps to be taken in fire insurance claims: 

Steps to be taken in fire insurance claims It is the duty of the insured, or any other person on his behalf, to give immediate notice of fire to the insurance company so that they can safeguard their interest, such as, deal with the salvage, judge the cause and nature of fire and assess the extent of loss caused by the fire. Failure to give notice may avoid the policy altogether. The insured is further required by the terms of the policy, to furnish within the specified time, full particulars of the extent of loss or damage, proof of the value of the property and if it is completely destroyed, proof of its existence. Delivery of all these details to the company is a condition precedent to the claim of the assured to recover the loss. If the assured prefers a fraudulent claim, whether for whole or part of the policy, he would forfeit all benefits under the policy, whether or not there is a condition to this effect in the policy. Generally, the fraud consists in over -valuation, but over-valuation due to mistake is not fraudulent. In a majority of fire insurance claims, the expert assessors of the company are able to arrive at mutually acceptable valuation. 23

Uberrima fides: 

Uberrima fides Uberrima fides (sometimes seen in its genitive form, uberrimae fidei ) is a Latin phrase meaning "utmost good faith" (or translated literally, "most abundant faith"). It is the name of a legal doctrine which governs insurance contracts. This means that all parties to an insurance contract must deal in good faith, making a full declaration of all material facts in the insurance proposal. This contrasts with the legal doctrine of caveat emptor (let the buyer beware). Thus the insured must reveal the exact nature and potential of the risks that he transfers to the insurer, while at the same time the insurer must make sure that the potential contract fits the needs of, and benefits, the assured. A higher duty is exacted from parties to an insurance contract than from parties to most other contracts in order to ensure the disclosure of all material facts so that the contract may accurately reflect the actual risk being undertaken. 24

Utmost good faith: 

Utmost good faith It means each party to a proposed contract is legally obliged to reveal to the other party all information which would influences the other’s decision to enter the contract , whether such information is required or not. Material facts are of two types Those facts which affects the nature or incidence of risk Those facts which affects the character of the insured. There are many facts concerning any proposed insurance contract which are not of vital consideration to the insurer and insured Facts of public, Common or professional knowledge . Facts which results in reducing the risk Facts embodied in the policy itself 25

Average Clause: 

Average Clause A clause in an insurance policy that restricts the amount payable to a sum not to exceed the value of the property destroyed and that bears the same proportion to the loss as the face of the policy does to the value of the property insured — compare coinsurance. A clause in a marine insurance policy that exempts the insurer from particular average and in respect of some things from all average. 26

Types of Insurance: 

Types of Insurance Life insurance General Insurance 27

Important milestones in the Indian life insurance business: 

Important milestones in the Indian life insurance business 1912: The Indian Life Assurance Companies Act came into force for regulating the life insurance business. 1928: The Indian Insurance Companies Act was enacted for enabling the government to collect statistical information on both life and non-life insurance businesses. 1938: The earlier legislation consolidated the Insurance Act with the aim of safeguarding the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies were taken over by the central government and they got nationalized. LIC was formed by an Act of Parliament, viz. LIC Act, 1956. It started off with a capital of Rs. 5 crore and that too from the Government of India. The history of general insurance business in India can be traced back to Triton Insurance Company Ltd. (the first general insurance company) which was formed in the year 1850 in Kolkata by the British. 28

Important milestones in the Indian general insurance business: 

Important milestones in the Indian general insurance business 1907: The Indian Mercantile Insurance Ltd. was set up which was the first company of its type to transact all general insurance business. 1957: General Insurance Council, an arm of the Insurance Association of India, framed a code of conduct for guaranteeing fair conduct and sound business patterns. 1968: The Insurance Act improved for regulating investments and set minimal solvency levels and the Tariff Advisory Committee was set up. 1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India. It was with effect from 1st January 1973. 107 insurers integrated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC was incorporated as a company. 29

Insurance Companies in India: 

Insurance Companies in India Life Insurance Companies Aviva Life Insurance Bajaj Allianz Life Insurance Birla Sun-Life Insurance HDFC Standard Life Insurance ING Vysya Life Insurance Life Insurance Corporation Max New York Life Insurance MetLife Insurance Om Kotak Mahindra Life Insurance Reliance Life Insurance Sahara India Life Insurance SBI Life Insurance TATA AIG Life Insurance 30

Insurance Companies in India : 

Insurance Companies in India General Insurance Companies Agriculture Insurance Amsure Insurance ANZ Insurance Bajaj Allianz General Insurance Cholamandalam General Insurance Employee State Insurance Export Credit Guarantee Corporation ICICI Lombard General Insurance IFFCO- Tokio General Insurance National Insurance Oriental Insurance Peerless Smart Financial Royal Sundaram Alliance TATA AIG General Insurance 31

PowerPoint Presentation: 

LIFE INSURERS Websites Public Sector Life Insurance Corporation of India www.licindia.com Private Sector Allianz Bajaj Life Insurance Company Limited www.allianzbajaj.co.in Birla Sun-Life Insurance Company Limited www.birlasunlife.com HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com ING Vysya Life Insurance Company Limited www.ingvysayalife.com 32

PowerPoint Presentation: 

LIFE INSURERS Websites Private Sector Max New York Life Insurance Co. Limited www.maxnewyorklife.com MetLife Insurance Company Limited www.metlife.com Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com SBI Life Insurance Company Limited www.sbilife.co.in TATA AIG Life Insurance Company Limited www.tata-aig.com AMP Sanmar Assurance Company Limited www.ampsanmar.com Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com 33

PowerPoint Presentation: 

GENERAL INSURERS Public Sector Websites National Insurance Company Limited www.nationalinsuranceindia.com New India Assurance Company Limited www.niacl.com Oriental Insurance Company Limited www.orientalinsurance.nic.in United India Insurance Company Limited www.uiic.co.in Private Sector Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com IFFCO- Tokio General Insurance Co. Ltd. www.itgi.co.in 34

PowerPoint Presentation: 

GENERAL INSURERS Private Sector Websites Reliance General Insurance Co. Limited www.ril.com Royal Sundaram Alliance Insurance Co. Ltd. www.royalsun.com TATA AIG General Insurance Co. Limited www.tata-aig.com Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com Export Credit Guarantee Corporation www.ecgcindia.com HDFC Chubb General Insurance Co. Ltd. REINSURER General Insurance Corporation of India www.gicindia.com 35

Basic functions of Insurance : 

Basic functions of Insurance 1. Primary Functions 2. Secondary Functions 3. Other Functions 36

Primary functions of insurance: 

Primary functions of insurance Providing protection – The elementary purpose of insurance is to allow security against future risk, accidents and uncertainty. Insurance cannot arrest the risk from taking place, but can for sure allow for the losses arising with the risk. Insurance is in reality a protective cover against economic loss, by apportioning the risk with others. Collective risk bearing – Insurance is an instrument to share the financial loss. It is a medium through which few losses are divided among larger number of people. All the insured add the premiums towards a fund and out of which the persons facing a specific risk is paid. Evaluating risk – Insurance fixes the likely volume of risk by assessing diverse factors that give rise to risk. Risk is the basis for ascertaining the premium rate as well. Provide Certainty – Insurance is a device, which assists in changing uncertainty to certainty. 37

Secondary functions of insurance: 

Secondary functions of insurance Preventing losses – Insurance warns individuals and businessmen to embrace appropriate device to prevent unfortunate aftermaths of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Covering larger risks with small capital – Insurance assuages the businessmen from security investments. This is done by paying small amount of premium against larger risks and dubiety. Helps in the development of larger industries – Insurance provides an opportunity to develop to those larger industries which have more risks in their setting up. 38

Other functions of insurance: 

Other functions of insurance Is a savings and investment tool – Insurance is the best savings and investment option, restricting unnecessary expenses by the insured. Also to take the benefit of income tax exemptions, people take up insurance as a good investment option. Medium of earning foreign exchange – Being an international business, any country can earn foreign exchange by way of issue of marine insurance policies and a different other ways. Risk Free trade – Insurance boosts exports insurance, making foreign trade risk free with the help of different types of policies under marine insurance cover. Insurance provides indemnity, or reimbursement , in the event of an unanticipated loss or disaster. There are different types of insurance policies under the sun cover almost anything that one might think of. There are loads of companies who are providing such customized insurance policies. 39

Indian Insurance Sector: 

Indian Insurance Sector The US$ 41-billion Indian life insurance industry is considered the fifth largest life insurance market, and growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance Council. Since the opening up of the insurance sector in India, the industry has received FDI to the tune of US$ 525.6 million. The government is likely to reintroduce the Insurance Bill which proposes to increase the FDI cap in private sector insurance companies from 26 per cent to 49 per cent. The total number of life insurers registered with the Insurance Regulatory Development Authority (IRDA) has gone up to 23. The Life Insurance Corporation (LIC) posted a 50 per cent growth in new premium collection in the first nine months of the 2010 fiscal, increasing its market share to 65 per cent from 56 per cent a year ago. 40

General Insurance: 

General Insurance The total number of general insurers registered with IRDA has gone up to 22, with the registration of SBI General Insurance Company Limited, a joint venture general insurance company promoted by State Bank of India and Insurance Australia Group, Australia, as a general insurer in December 2009. Overall, the non-life insurance sector grew 9.95 per cent in April-December 2009, compared to the corresponding period last year According to IRDA data, out of the US$ 5.46 billion premium underwritten by the industry during the April-December 2009 period, US$ 3.24 billion came from the four public sector companies as compared to US$ 2.91 billion during the same period in 2008. The Gross Premium underwritten by public sector non-life insurers for the April-December 2009 period posted year-on-year growth of 11.37 per cent as compared to the year-on-year growth of 7.93 per cent posted by private sector non-life insurers Moreover, in the 2010-11 budget, Finance Minister, Mr Pranab Mukherjee , has decided to roll back the government’s decision to tax the unrealized gains of non-life insurance companies. 41

Project Insurance: 

Project Insurance Insurance companies are also witnessing increasing demand for project insurance in the last few months. Corporates are beginning to demand project insurance across sectors such as power generation with the cover beginning right from the start of the project till it is declared ready for commercial use. Some of the big projects also take cover for financial loss arising out of delay in completion. Industry players estimate that premiums collected from project insurance will be around US$ 216.2 million for the industry as a whole and is expected to increase significantly. Oriental Insurance Company Ltd will be offering comprehensive project insurance for the Tata Power Project at Mundra in Gujarat. 42

Health Insurance: 

Health Insurance The health insurance market stood at around US$ 1.5 billion in 2008-09 and is expected to grow to US$ 9 billion by 2016-17. While health insurance policies are mostly provided by general insurance companies, life insurers contribute about five per cent to the overall health insurance business. Apollo DKV Health Insurance has renamed itself Apollo Munich Health Insurance as a part of its five-year strategic plan to gain a five per cent market share. Apollo Munich is a joint venture between Asia’s largest integrated healthcare provider, The Apollo Hospitals Group, and Germany-based Munich Re's segment, Munich Health. Max India is planning to invest US$ 43.25 million in its health insurance joint venture (Max Bupa ) and will launch a product over the January–June 2010 period. Star Health and Allied Insurance expects to invest US$ 38.9 million during the current financial year to grow its health insurance business, taking the total invested capital to US$ 67 million. 43

Reinsurance: 

Reinsurance Reinsurance is a contract between the insurance company (insurer) and a third party (re-insurer), wherein the latter will protect the former by paying losses sustained by it under the original contract of insurance. Re-insurers from London, as well as other parts of Europe, see significant potential in the re-insurance market in India. Top four global re-insurers, Lloyds, Swiss Re, Munich Re and Berkshire Hathaway are amongst those eyeing India. 44

Bancasssurance: 

Bancasssurance Private insurers have adopted bancassurance in a much bigger way than the state-owned Life Insurance Corporation (LIC) in the recent years. Bancassurance is distribution of insurance products through a bank's network. In 2008-09, private insurers forked out US$ 44.4 million as commission for banassurance , while the payout by LIC for this distribution model was US$ 25,948. 45

India Insurance Policy: 

India Insurance Policy The Insurance Policy India is regulated by certain acts like the Insurance Act(1938), the Life Insurance Corporation Act(1956), General Insurance Business (Nationalization) Act(1972), Insurance Regulatory and Development Authority (IRDA) Act(1999). The insurance policy determines the covers against risks, sometime opens investment options with insurance companies setting high returns and also informs about the tax benefits like the LIC in India. There are two types of insurance covers: 1. Life insurance 2. General insurance 46

PowerPoint Presentation: 

Life insurance – this sector deals with the risks and the accidents affecting the life of the customer. Alongside, this insurance policy also offers tax planning and investment returns. There are various types of life Insurance Policy India: a. Endowment Policy b. Whole Life Policy c. Term Life Policy d. Money-back Policy e. Joint Life Policy f. Group Insurance Policy g. Loan Cover Term Assurance Policy h. Pension Plan or Annuities i . Unit Linked Insurance Plan 47

PowerPoint Presentation: 

General Insurance – this sector covers almost everything related to property, vehicle, cash, household goods, health and also one's liability towards others. The major segments covered under general Insurance Policy India are: a. Home Insurance b. Health Insurance c. Motor Insurance d. Travel Insurance 48