insurance final

INSURANCE COMPANIES

INTRODUCTION

• Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for money. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium.

History of Insurance

• Insurance in India has its history dating back till 1818, when Oriental Life Insurance Company was started by Europeans in Kolkata to cater to the needs of European community

• The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today.

•  Insurance industry, earlier comprised of only two state insurer. 1 . Life Insurance Corporation of India (LIC) 2 . General Insurance Corporation of India

Contd…

• In the recent years when the Govt. of India in 1999 opened up the insurance sector by allowing private insurance companies to work in the market by depositing 100 crores rupees in the reserve of government and allowing FDI up to 26%.• This has encouraged many overseas insurance companies,

having a required amount in their reserve, to open their branch in our country

Functions of Insurance 

• Provide Protection: The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.

• Collective Bearing of Risk: Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.

• Assessment of Risk: Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also

• Provide Certainty: Insurance is a device, which helps to change from uncertainty to certainty. Insurance is device whereby the uncertain risks may be made more certain.

Classification Of Insurance

General Insurance

• General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance is typically defined as any insurance that is not determined to be life insurance• The general insurance companies are also known as property and

casualty or liability insurance companies and they specialise in insurance in such areas as fire, automobile, ocean & inland marine, aviation, theft, loss, damage, and liability.

General Insurance Corporation• The general insurance business was completely owned by the

government, and it was controlled by a single organization with four subsidiaries. Earlier, there were a number of Indian and many foreign companies did general insurance business in India and abroad. In addition, the LIC and some mutual companies and co-operative societies also conducted general assurance. On the eve of nationalization, 68 Indian insurers (including LIC) and 45 non-Indian insurers did business in this field. • In November 1972, the business of these organizations was

nationalized and vested in the hands of the General Insurance company (GIC) and its four subsidiaries viz. • National Insurance Co. Ltd., • New India Assurance Co. Ltd., • Oriental Fire and General Insurance Co. Ltd., and• United India Insurance Co. Ltd.

Contd..

• The general insurance business has been classified as marine, fire, and miscellaneous. Fire insurance is a single major business, although its share in the total general insurance has been declining. Miscellaneous business has grown substantially while, marine insurance is relatively less important in India.• GIC was incorporated as a holding company in 1992. The business of GIC

and its subsidiaries is transacted under the provisions of the Insurance Act, 1938, and General Insurance Act, 1972. The paid-up capital of GIC was fully subscribed by the Government, and that of four subsidiaries, fully by the GIC

Structure of Business

• The .general insurance policies are not financial claims in the way most life insurance policies are. The essence of general insurance is the collective pooling of risks arising from fortuitous occurrences.

• For insurance, to be worthwhile, the premium must be small in relation to the potential loss. The policies in general branch rarely run for a period longer than one year, and with some types (e.g. holiday insurance) the period is even much shorter.

• There is no guarantee of renewal of policy on the same terms or on any terms. The short-term contracts do not create large funds of invested assets as in the case of life insurance. The general insurance companies do not collect savings, yet they do accumulate pools of funds from premium and investment income out of which they meet claims under their policies.

Life Insurance

• Life Insurance is a contract between an insured (insurance policy holder) and an insurer or assurer, where the insurer promises to pay a designated beneficiary a sum of money (the "benefits") in exchange for a premium, upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness can also trigger payment. The policy holder typically pays a premium, either regularly or as one lump sum.

Life Insurance Corporation

• There has been life insurance business in India since 1818. Till 1956, the insurance business was mixed and decentralised. There were a large number of companies (245 on the eve of nationalisation) of different ages, sizes, and patterns of organisation, which conducted only life insurance business, and there were some companies whose main business was general insurance, but they did life assurance also.

• In 1956, the life insurance business of all companies as mentioned was nationalised and a single monolithic organisation, the Life Insurance Corporation of India (LIC), was set up. Today, life insurance is almost entirely in the hands of the LIC.

Objectives of LIC

To spread life insurance and provide life insurance protection to the masses at reasonable cost.

To mobilize people's savings through insurance-linked savings schemes. To invest the funds to serve the best interests of both the policy-holders and

the nation. To act as trustees of the policy-holders and protect their individual and

collective interests.To involve all the people working in the corporation to ensure efficient and

courteous service to the insured public

Structure of Insurance Plans

• A large number of insurance policies have been introduced and popularised by the LIC.• Life insurance policies make a very flexible financial instrument. There are

only a few basic types of such policies, viz. term insurance, whole life insurance, endowment policies, annuity contracts, individual insurance, group insurance, pension plans, children's plans, and equity-linked plans. These policies are mostly specific to different income and age groups. • The whole life policies charge a premium throughout one's life while

endowment policies are taken for a fixed period.

Contd..

• Like insurance companies in other countries, the LIC also offers various schemes, policies and plans to the investors. There are individual insurance, group insurance, group gratuity, group superannuation, non-medical insurance, salary saving insurance, annuities, and many other schemes. It offered under individual insurance alone, in 1986-87, as many as 26 plans. In response to changing needs, preferences, and conditions of the investors, the LIC goes on increasingly undertaking "product development" by adding newer and newer plans to its portfolio of plans.

• In 1993, it introduced two pension plans, apart from the annuity scheme, called Jeevan Dhara and Jeevan Akshay. The former is a deferred annuity plan, while the latter is voluntary immediate pension plan for senior citizens.

Reinsurance

• Reinsurance is insurance that is purchased by an insurance company from one or more other insurance companies directly or through a broker as a means of risk management, sometimes in practice including tax mitigation and other reasons .• The company who requests for the cover is called the cedant and the reinsurer is

called the ceded • The reinsurer may be either a specialist reinsurance company, which only

undertakes reinsurance business, or another insurance company. Insurance companies that sell reinsurance refer to the business as 'assumed reinsurance'.• A healthy reinsurance marketplace helps ensure that insurance companies can

remain solvent , particularly after a major disaster such as a major hurricane, because the risks and costs are spread.

2 Basic methods of Reinsurance

Facultative Reinsurance, which is negotiated separately for each insurance policy that is reinsured. Facultative reinsurance is normally purchased by ceding companies for individual risks not covered, or insufficiently covered, by their reinsurance treaties, for amounts in excess of the monetary limits of their reinsurance treaties and for unusual risks.

Treaty Reinsurance means that the ceding company and the reinsurer negotiate and execute a reinsurance contract under which the reinsurer covers the specified share of all the insurance policies issued by the ceding company which come within the scope of that contract. The reinsurance contract may oblige the reinsurer to accept reinsurance of all contracts within the scope (known as "obligatory" reinsurance), or it may allow the insurer to choose which risks it wants to cede, with the reinsurer obliged to accept such risks 

Insurance sector reforms

The insurance sector in India has gone through the process of reforms following these recommendations.

• The Insurance Regulatory and Development Authority (IRDA) Bill was passed by the Indian Parliament in December 1999. The IRDA became a statutory body in April 2000 and has been framing regulations and registering the private sector insurance companies. • The insurance sector was opened up to the private sector in August

2000. Consequently, some Indian and foreign private companies have entered the insurance business now. There are about seven general insurance and 11 life insurance companies operating in the private sector in India in the early part of 2004. Taking into account LIC, GIC and its four subsidiaries, there are 24 organisations doing life and general insurance business in India in 2004

• It is said that over a period of about 200 years, the insurance services sector in India has gone through a full circle from being an open competitive market to the nationalised market, and back to a liberalised market again. This is true in a limited sense only; the differences between then and now are noteworthy. • Earlier, the number of insurance companies was truly large; the

market was really competitive; and there was no presence of the State in the insurance market as a owner. Now, the number of companies is small; the market is oligopolistic in which one operator is a dominant leader; there is a heavy concentration of business in the hands of one or two companies; and the State is present in the sector as a owner. The earlier competitive private market has been replaced by the present mixed-ownership very weakly com petitive market

liberalization of insurance sector

Introduction• Insurance sector is one of the most powerful service sectors in the

world economy. It not only provides confidence against the risk but also the saving attitude among the people. • The Indian insurance industry has experienced drastic

transformations during the last two decades. From the nationalization of the Life Insurance corporation in the Assurance wing in 1956 and General Insurance Company in Insurance wing in 1972, the government companies enjoyed monopoly in the insurance market. But the changes have come into existence with the entry of the private sector insurance business in the year 2000 as a result of Liberalization, Privatization and Globalization concept.

• Malhotra Committee recommended to the Government to change the face of the industry and to give it a more meaningful direction. Regarding the liberalization of the insurance industry, the Committee strictly recommended to allow the Private sector to enter in the insurance business. As per the government decision plenty of the private owned companies enter in the insurance sector. Also FDIs are allowed up 49% of the share in the Indian Private Insurance companies is a major change to uplift the business as well as control the monopoly of the Government Insurance companies.

LIC of India Vs Private Insurance Companies

• a Case Study with East Godavari District .The study reveals that Life Insurance Corporation of India captured major role in the insurance business. 95% of the rural people agree that Government Insurance companies’ have greater impact rather than private companies. Only Urban and highly educational people have knowledge on Private insurance companies

Conclusion (Liberalization of insurance sector)

• Competition is a must in any form of business. Insurance Sector is not an exception to this. Before privatization in this sector there are only limited policies and business opportunities in the country. With privatization, there is a tremendous response and penetration is observed. Any innovation will take time to absorb in the economy. But we should not neglect the business opportunities to develop the economy.• Allowing FDIs is creating some agony in insurance field, but they could

not be continued. Finally we can say allowing private insurance companies from Indian origin as well as from FDIs will not create any problem but create many opportunities to Indian citizen not only in the developmental face but also in the security aspect.

Entry Norms in Insurance sector

• Requirement as to capital - No insurer carrying on the business of life insurance, general insurance or re- insurance in India on or after the commencement of the Insurance Regulatory and Development Authority Act, 1999, shall be registered unless he has-

(i) a paid-up equity capital of rupees one hundred crores, in case of a person carrying on the business of life insurance or general insurance . (ii) a paid-up equity capital of rupees two hundred crores, in case of a person carrying on exclusively the business as a re-insurer :

• Provided that in determining the paid-up equity capital specified under clause (I) or clause (ii), the deposit to be made under section 7 and any preliminary expenses incurred in the formation and registration of the company shall be excluded :

• Provided further that an insurer carrying on business of life insurance, general insurance or re- insurance in India before the commencement of the Insurance Regulatory and Development Authority Act, 1999 and who is required to be registered under this Act, shall have a paid-up equity capital in accordance with clause (I) and clause (ii), as the case may be, within six months of the commencement of that Act."

Guidelines for Entry of CICs into Insurance

1. Any Core Investment Company (CIC) registered with RBI which satisfies the eligibility criteria given below will be permitted to set up a joint venture company for undertaking insurance business with risk participation, subject to safeguards. The maximum equity contribution such a CIC can hold in the joint venture company will be as per IRDA approval.2. The eligibility criteria for joint venture participant will be as under, as per the latest available audited balance sheet.• The owned funds of the CIC shall not be less than Rs. 500 crore;• The level of net non-performing assets shall be not more than 1% of the total advances;• The CIC should have registered net profit continuously for three consecutive years;• The track record of the performance of the subsidiaries, if any, of the concerned CIC should

be satisfactory;

3. No CIC would be allowed to conduct such business departmentally. Further, an NBFC (in its group / outside the group) would normally not be allowed to join an insurance company on risk participation basis and hence should not provide direct or indirect financial support to the insurance venture.4. Within the group, CICs may be permitted to invest up to 100% of the equity of the insurance company either on a solo basis or in joint venture with other non-financial entities in the group. This would ensure that only the CIC either on a solo basis or in a joint venture with the group company is exposed to insurance risk and the NBFC within the group is ring-fenced from such risk.

5. CICs cannot enter into insurance business as agents. CICs that wish to participate in insurance business as investors or on risk participation basis will be required to obtain prior approval of the Reserve Bank. The Reserve Bank will give permission on case to case basis keeping in view all relevant factors. It should be ensured that risks involved in insurance business do not get transferred to the CIC.

INVESTMENT MANAGEMENT

POLICIES

INVESTMENT MANAGEMENT POLICIESThe pattern of investment of LIC funds has been governed by the provisions of the Insurance Act, 1938. Till very recently, it had to invest at least 50 per cent of its controlled funds in government and other approved securities; 15 per cent in "other" investments which included loans to state governments for housing and water supply schemes, municipal securities not included in category one, government guaranteed loans to municipal committees and co-operative sugar factories; and up to 35 per cent in "appro ved" investments which included shares and debentures of public and private limited companies, of co-operative societies, immovable property, loans to its policy holders, and fixed deposits with sched uled banks and co-operative societies.

Major Principles Guiding LIC's Investment Policy• The major principle underlying LIC investment policy appears to be

security of funds; maximization: the rate of return on investment is of secondary importance. Therefore, the investment for specula purposes or in assets which promise high capital gains have to be strictly avoided by insurance companies. The basis of investment policy in India is broadly similar to the one followed by insure companies in other countries. The high prescribed ratio of investment in government securities partly to ensure the provision of funds to the public sector.

• A second principle (related to the first one) governing the LIC investments is that it should finance priority sectors and socially desirable activities in the economy. It is for this reason that a certain minimum ratio has been laid down for investment in 'other' assets. In view of India's mixed economic system, it is necessary that financial institutions meet part of the financial requirements of the private sector. The LIC is therefore allowed to hold part of its funds in the form of industrial securities. Contrary to popular belief, the proportion of the LIC funds (35 per cent) earlier allowed to be invested industrial securities in India was higher than the ratio allowed in many other countries. For e.g. - insurance companies can invest in shares only up to 25 per cent in Canada, 30 per cent in Japan, and 15 per cent in Norway, of their respective total investible resources.

Investment Pattern of LIC Funds• The LIC gives housing loans to state governments, co-operative housing finance societies, HUDCO, Housing Boards, co-operative housing societies, and individuals. It may be again noted that the share of infrastructure, housing and mortgage loans of LIC has declined from about 23 per cent till 1995 to about 13 per cent in 2003. The next important items of investment are corporate securities and loans to companies which together account for about 17 to 18 per cent of total investments.• Investment in corporate securities has declined from 16 to

18 per cent during 1956-66 to 12 per cent in 1971-72 and then to about 6 per cent during 1978-87. Thereafter, it became about 11 to 14 per cent in 1996. The share of these investments has been between 16 to 20 per cent during 2000-03. The investments of LIC in government securities has been more than 60 percent in the year 2003-04 followed by investments in loans to companies.

EXPOSURE NORMSIRDA has prescribed exposure norms for investments made by life insurance businesses. These exposure norms are applicable for the investment assets pertaining to life insurance businesses, group term assurance, non-unit reserves of all categories of ULI business, funds of Pension, Annuity and Group Business and Unit reserves portion of ULI funds. Maximum exposure in a single investee company shall be the lower of: (a) 10% of all investment assets or, (b) An aggregate of the amount as calculated below. Type of Investment Limit for investee

CompanyLimit for entire groupof investee company

Limit for industrysector to which

a. Investment in equity, preference shares, convertible debentures

10% of outstanding equity sharesor 10% of investment assets discussed above considered separately,whichever is lower

Not more than 15% of the investment assets in all companies belonging to the group.

Exposure to any single industry/sector shallnot exceed 15% of investment assets considered separately or 15% of investment assets whichever is lower

b. Investment indebt/loans and any other permitted investments as per Act/Regulations other than item a above

10% of Paid-up ShareCapital, Free reserves and debenture/bonds of the investee companyor 10% of investment assets discussed above consideredseparately whichever is lower

The exposure norms are also linked to the size of the investment assets of the Insurance Company as described below:

Investment Assets Limit for Investee CompanyEquity Debt

Rs.250,000 Crores or more 15% of o/s equity shares 15% of Paid-up Share Capital, Free reserves (excluding revaluation reserve) and debenture/bonds

> Rs.50,000 Crores and < Rs.250,000 Crores

12% of o/s equity shares 12% of Paid-up Share Capital, Free reserves (excluding revaluation reserve) and debenture/bonds

< Rs.50,000 Crores 10% of o/s equity shares 10% of Paid-up Share Capital, Free reserves (excluding revaluation reserve) and debenture/bonds

Other Exposure Limits

1. Investment in securitized assets shall not exceed 10% of investment assets of life insurance companies2. Investment in immovable property shall not exceed 5% of investment assets of life insurance companies3. The exposure limit for financial and insurance activities shall stand at 25% of investment assets for all insurers.

Guidelines for Non-Life Insurance Companies

Investment Category Investment LimitInvestment in Central Govt. securities Not less than 20% of Investment assets

Investment in Central/State Govt. security or other approved securities

Not less than 30% of investment assets including above government securities

Investments in Approved Investments Not exceeding 70%

Other investments Not exceeding 25%

Investment in Housing Not less than 5% of investment assetsInvestment in Infrastructure Not less than 10% of investment assets

Debt Securities:65% of Investments in Debt Instruments should be in highly rated securities (sovereign bonds, AAA rated or equivalent). Not more than 8% of investments should have a rating of A or below.

THANK YOU Made

by : Deepak Singh (4678) Deepanshu Verma (4675)

Shakti Yadav (4676)