Insurance Management Module 1

Introduction
Insurance is a subject listed in the concurrent list in the Seventh Schedule to the Constitution of India where both centre and states can legislate. The insurance sector has gone through a number of phases and changes. Since 1999, when the government opened up the insurance sector by allowing private companies to solicit insurance and also allowing foreign direct investment of up to 26%, the insurance sector has been a booming market. However, the largest life-insurance company in India is still owned by the government. In India, insurance has a deep-rooted history. Insurance in various forms has been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra) and Kautilya (Arthashastra). The fundamental basis of the historical reference to insurance in these ancient Indian texts is the same i.e. pooling of resources that could be redistributed in times of calamities such as fire, floods, epidemics and famine. The early references to Insurance in these texts have reference to marine trade loans and carriers' contracts. Insurance in its current form 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. At the dawn of the twentieth century, many insurance companies were founded. In the year 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business. The Life Insurance Companies Act, 1912 made it necessary that the premium-rate tables and periodical valuations of companies should be certified by an actuary. However, the disparity still existed as discrimination between Indian and foreign companies. The oldest existing insurance company in India is the National Insurance Company Ltd., which was founded in 1906. It is in business. The Government of India issued an Ordinance on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. In 1972 with the General Insurance Business (Nationalisation) Act was passed by the Indian Parliament, and consequently, General Insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973.
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The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. Before that, the industry consisted of only two state insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.

Brief history of insurance sector

The insurance sector in India has completed all the facets of competition from being an open competitive market to being nationalized and then getting back to the form of a liberalized market once again. The history of the insurance sector in India reveals that it has witnessed complete dynamism for the past two centuries approximately. With the establishment of the Oriental Life Insurance Company in Kolkata, the business of Indian life insurance started in the year 1818. 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 ` 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.

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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.

Insurance companies in India

IRDA has till now provided registration to 12 private life insurance companies and 9 general insurance companies. If the existing public sector insurance companies are considered then there are presently 13 insurance companies in the life side and 13 companies functioning in general insurance business. General Insurance Corporation has been sanctioned as the "Indian reinsurer" for underwriting only reinsurance business.

Functions of Insurance
Basic functions of Insurance are as follows 1. 1.Primary Functions 2. 2.Secondary Functions 3. 3.Other Functions Primary functions of insurance

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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.

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. 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.

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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.

Problems Faced by insurance industry

Threat of New Entrants: The insurance industry has been budding with new entrants every other day.

Therefore the companies should carve out niche areas such that the threat of new entrants might not be a hindrance. There is also a chance that the big players might squeeze the small new entrants.

Power of Suppliers: Those who are supplying the capital are not that big a threat. For instance, if

someone as a very talented insurance underwriter is presently working for a small insurance company, there exists a chance that any big player willing to enter the insurance industry might entice that person off.

Power of Buyers: No individual is a big threat to the insurance industry and big corporate houses have

a lot more negotiating capability with the insurance companies. Big corporate clients like airlines and pharmaceutical companies pay millions of dollars every year in premiums.

Availability of Substitutes: There exist a lot of substitutes in the insurance industry. Majorly, the large

insurance companies provide similar kinds of services - be it auto, home, commercial, health or life insurance.

Types of Insurance
1. Life Insurance - Insurance guaranteeing a specific sum of money to a designated beneficiary upon the

death of the insured, or to the insured if he or she lives beyond a certain age.
2. Health Insurance - Insurance against expenses incurred due to illness of the insured. 3. Liability Insurance - This insures property such as automobiles, property and professional/business

mishaps
4. Insurance is

form

of risk

management primarily

used

to hedge against

the risk of

contingent, uncertain loss. Insurance is defined as the equitable transfer of the risk of a loss, from one
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entity to another, in exchange for payment. An insurer is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice.
5. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of

payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated. Meaning of Insurance 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. Any loss to the insured in case of happening of an uncertain event is paid out of this pool. Insurance works on the basic principle of risk-sharing. A great advantage of insurance is that it spreads the risk of a few people over a large group of people exposed to risk of similar type. Definition Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on happening of an uncertain event in case of general insurance.

.Concept of Insurance / How Insurance Works The concept behind insurance is that a group of people exposed to similar risk come together and make contributions towards formation of a pool of funds. In case a person actually suffers a loss on account of such risk, he is compensated out of the same pool of funds. Contribution to the pool is made by a group of people sharing common risks and collected by the insurance companies in the form of premiums.

Insurer - An individual or company who, through a contractual agreement, undertakes to compensate specified
losses, liability, or damages incurred by another individual. An insurer is frequently an insurance company and is also known as an underwriter. Insured - The person who obtains or is otherwise covered by insurance on his or
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her health, life, or property. The insured in a policy is not limited to the insured named in the policy but applies to anyone who is insured under the policy.

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