Term Paper Fis Vijay

8/8/2019 Term Paper Fis Vijay

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TERM PAPER

2010

FINANCIAL

INSTITUTIONS AND

SERVICESBY-VIJAY DEEP SINGH (RT-1901B-44)

REG.NO-10900926

L O V E L Y P RO F E S S IONA L UN IV E R S I T Y ( P H A G W A R A )


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INDEX-Introduction to the scope of life Insurance business in INDIA..

History of Insurance sector.

Parties in Insurance.

Functions of Insurance.

Present scenario.

Types of Life Insurance.

Distribution Channel of Life Insurance.

Benefits of Life Insurance.

List of insurance companies.

FDI Policies in Insurance Sector.

Indian Life Insurance overview.

Data collaction.

Regulatory Framwork.

Future of Life Insurance sector in India.

Conclusion.

References.

Introduction to the Scope of Life Insurance Business in IndiaThe financial sector in India has become stronger in terms of capital and the number ofcustomers. It has become globally competitive and diverse aiming, at higher productivity andefficiency.Exposure to worldwide competition and deregulation in Indian financial sector has led to theemergence of better quality products and services.Diversifying into insurance has increased revenues. As large number of players in various fieldsenter the market from both domestic and foreign players. All this would lead to increasedsophistication and technology in the sector. Corporate governance would come into the pictureand other financial institutions would have to reach global standards. There are many challengesahead for the insurance sector such as technology, consumer satisfaction, corporate governance,risk management, etc. and they are redefining their priorities, which are now focused on costreduction, product differentiation and customer centric services. The insurance sector has openedup for private insurance companies with the enactment of IRDA Act, 1999. A large number ofcompanies are competing under both life and general Insurance. The FDI cap/equity in this


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sector is 26% and the proposals have to be cleared by Insurance Regulatory and DevelopmentAuthority (IRDA) established to protect the interest of holder of Insurance policy and act as aregulator and facilitator in the industry. Some of the major players in this sector are LIC, Max New York Life Insurance, Bajaj Allianz, ICICI Prudential, HDFC Standard Life, MetLifeInsurance, Birla Sun Life Insurance, etc. Various types of policies and instruments are coming up

in the market to attract more customers. Most of the population of India is not insured, hencethere is a lot of scope in this sector and a number of companies are planning to enter the sector.Every futuristic individual would want himself to get insured.Capital markets have a long history of over 100 years in India. Bombay Stock Exchange cameinto existence more than a hundred years ago to remove direct government control. Indiancompanies are now allowed to raise capital from abroad and Foreign Institutional Investors areallowed to enter the market due to an important policy initiative in 1993. The depository andshare dematerialization has enhanced the performance of the capital market reducing processingtime and increasing returns. The major players are India Bulls Securities, Kotak, and many more.Many new instruments have been introduced in the market such as index futures, index options,derivatives, including futures and options. Also commodities market is gaining pace. There is a

huge potential available in the market and to realize it venture capitalists are coming up with lotsof finance. To make use of the human capital, technical skills, cost competitive workforce,research and entrepreneurship VCFs and VCCs are ready to invest in potential projects. For astronger and resilient financial system, India needs to move beyond peripheral issues and actmaturely by increasing profitability and efficiency, providing better solutions to the customers.

History of Insurance SectorThe insurance sector in India has came a full circle from being an open competitive market tonationalization and back to a liberalized market again.Tracing the developments in the Indian insurance sector reveals the 360-degree turnwitnessed over a period of almost 190 years.The business of life insurance in India in its existing form started in India in the year 1818 withthe establishment of the Oriental Life Insurance Company in Calcutta.

Some of the important milestones in the life insurance business in India are: 1912 - The Indian Life Assurance Companies Act enacted as the first statute to regulate

the life insurance business.

1928 - The Indian Insurance Companies Act enacted to enable the government to collectstatistical information about both life and non-life insurance businesses.

1938 - Earlier legislation consolidated and amended to by the Insurance Act with theobjective of protecting the interests of the insuring public.

1956 - 245 Indian and foreign insurers and provident societies taken over by the centralgovernment and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956,with a capital contribution of Rs. 5 crore from the Government of India. The Generalinsurance business in India, on the other hand, can trace its roots to the Triton Insurance


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Company Ltd., the first general insurance company established in the year 1850 inCalcutta by the British.

Some of the important milestones in the general insurance business in India are: 1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transact all

classes of general insurance business.

1957 - General Insurance Council, a wing of the Insurance Association of India, frames acode of conduct for ensuring fair conduct and sound business practices. 1968 - The Insurance Act amended to regulate investments and set minimum solvency

margins and the Tariff Advisory Committee set up. 1972 - The General Insurance Business (Nationalization) Act, 1972 nationalized the

general insurance business in India with effect from 1st January 1973. 107 insurersamalgamated and grouped into four companies viz. the National Insurance CompanyLtd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. andthe United India Insurance Company Ltd. GIC incorporated as a company.

Parties in Insurance

There is a difference between the insured and the policy owner (policy holder), although theowner and the insured are often the same person. For example, if Joe buys a policy on his ownlife, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she isthe owner and he is the insured. The policy owner is the guarantee and he or she will be the person who will pay for the policy. The insured is a participant in the contract, but notnecessarily a party to it. However, "insurable interest" is required to limit an unrelated party from

taking life insurance on, for example, Jane or Joe.

The beneficiary receives policy proceeds upon the insured's death. The owner designates thebeneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiaryunless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary,that beneficiary must agree to any beneficiary changes, policy assignments, or cash valueborrowing.

In cases where the policy owner is not the insured (also referred to as the celui qui vitor CQV),insurance companies have sought to limit policy purchases to those with an "insurable interest"in the CQV. For life insurance policies, close family members and business partners will usually

be found to have an insurable interest. The "insurable interest" requirement usually demonstratesthat the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirementprevents people from benefiting from the purchase of purely speculative policies on people theyexpect to die. With no insurable interest requirement, the risk that a purchaser would murder theCQV for insurance proceeds would be great. In at least one case, an insurance company whichsold a policy to a purchaser with no insurable interest (who later murdered the CQV for theproceeds), was found liable in court for contributing to the wrongful death of the victim


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Porter model of insurance sector

Threat of new entrants- HIGH

Bargaining power Bargaining power

Suppliers-LOW buyers- HIGH

Threat of substitutes- LOW

y Threat of New Entrants: The insurance industry has been budding with new entrantsevery other day. Therefore the companies should carve out niche areas such that thethreat of new entrants might not be a hindrance. There is also a chance that the bigplayers might squeeze the small new entrants.

y Power of Suppliers: Those who are supplying the capital are not that big a threat. Forinstance, if someone as a very talented insurance underwriter is presently working for asmall insurance company, there exists a chance that any big player willing to enter theinsurance industry might entice that person off.

y Power of Buyers: No individual is a big threat to the insurance industry and bigcorporate houses have a lot more negotiating capability with the insurance companies.Big corporate clients like airlines and pharmaceutical companies pay millions of dollarsevery year in premiums.

y 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.

Functions Of Insurance

Basic functions of Insurance

INDUSTRY

COMPETITORS -

LOW

SUBSTITUTES

BUYERSSUPPLIERS

NEW ENTRANTS


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1. 1.Primary Functions2. 2.Secondary Functions3. 3.Other Functions

Primary functions of insurance

y Providing protection The elementary purpose of insurance is to allow security againstfuture 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 aprotective cover against economic loss, by apportioning the risk with others.

y Collective risk bearing Insurance is an instrument to share the financial loss. It is amedium through which few losses are divided among larger number of people. All theinsured add the premiums towards a fund and out of which the persons facing a specificrisk is paid.

y Evaluating risk Insurance fixes the likely volume of risk by assessing diverse factorsthat give rise to risk. Risk is the basis for ascertaining the premium rate as well.

yProvide Certainty Insurance is a device, which assists in changing uncertainty tocertainty.

Secondary functions of insurance

y Preventing losses Insurance warns individuals and businessmen to embraceappropriate device to prevent unfortunate aftermaths of risk by observing safetyinstructions; installation of automatic sparkler or alarm systems, etc.

y Covering larger risks with small capital Insurance assuages the businessmen fromsecurity investments. This is done by paying small amount of premium against largerrisks and dubiety.

yHelps in the development of larger industries Insurance provides an opportunity todevelop to those larger industries which have more risks in their setting up.

Other functions of insurance

y 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 taxexemptions, people take up insurance as a good investment option.

y Medium of earning foreign exchange Being an international business, any countrycan earn foreign exchange by way of issue of marine insurance policies and a differentother ways.

y Risk Free trade Insurance boosts exports insurance, making foreign trade risk freewith 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.


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Insurance Sector Reforms

In 1993, Malhotra Committee- headed by former Finance Secretary and RBI Governor R.N.Malhotra- was formed to evaluate the Indian insurance industry and recommend its futuredirection.The Malhotra committee was set up with the objective of complementing the reforms

initiated in the financial sector. The reforms were aimed at creating a more efficient andcompetitive financial system suitable for the requirements of the economy keeping in mind thestructural changes currently underway and recognising that insurance is an important part of theoverall financial system where it was necessary to address the need for similar reforms. In 1994,the committee submitted the report and some of the key recommendations included:

i) StructureGovernment stake in the insurance Companies to be brought down to 50%. Government shouldtake over the holdings of GIC and its subsidiaries so that these subsidiaries can act asindependent corporations. All the insurance companies should be given greater freedom tooperate.

ii) CompetitionPrivate Companies with a minimum paid up capital of Rs.1bn should be allowed to enter thesector. No Company should deal in both Life and General Insurance through a single entity.Foreign companies may be allowed to enter the industry in collaboration with the domesticcompanies.Postal Life Insurance should be allowed to operate in the rural market. Only one State Level LifeInsurance Company should be allowed to operate in each state.

iii) Regulatory BodyThe Insurance Act should be changed. An Insurance Regulatory body should be set up.

Controller of Insurance- a part of the Finance Ministry- should be made independent

iv) InvestmentsMandatory Investments of LIC Life Fund in government securities to be reduced from 75% to50%. GIC and its subsidiaries are not to hold more than 5% in any company (there currentholdings to be brought down to this level over a period of time)

v) Customer ServiceLIC should pay interest on delays in payments beyond 30 days. Insurance companies must beencouraged to set up unit linked pension plans. Computerisation of operations and updating oftechnology to be carried out in the insurance industry.

The committee emphasised that in order to improve the customer services and increase thecoverage of insurance policies, industry should be opened up to competition. But at the sametime, the committee felt the need to exercise caution as any failure on the part of new playerscould ruin the public confidence in the industry. Hence, it was decided to allow competition in alimited way by stipulating the minimum capital requirement of Rs.100 crores.


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The committee felt the need to provide greater autonomy to insurance companies in order toimprove their performance and enable them to act as independent companies with economicmotives. For this purpose, it had proposed setting up an independent regulatory body- TheInsurance Regulatory and Development Authority.

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament inDecember 1999. The IRDA since its incorporation as a statutory body in April 2000 hasfastidiously stuck to its schedule of framing regulations and registering the private sectorinsurance companies. Since being set up as an independent statutory body the IRDA has put in aframework of globally compatible regulations. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurancecompanies was the launch of the IRDA online service for issue and renewal of licenses to agents.The approval of institutions for imparting training to agents has also ensured that the insurancecompanies would have a trained workforce of insurance agents in place to sell their products.

Present ScenarioLife Insurance is the fastest growing sector in India since 2000as Government allowed Private players and FDI up to 26%. Life Insurance in India was nationalised by incorporating LifeInsurance Corporation (LIC) in 1956. All private life insurance companies at that time weretaken over by LIC.In 1993 the Government of Republic of India appointed RN Malhotra Committee to lay down aroad map for privatisation of the life insurance sector.

While the committee submitted its report in 1994, it took another six years before the enablinglegislation was passed in the year 2000, legislation amending the Insurance Act of 1938 andlegislating the Insurance Regulatory and Development Authority Act of2000.The same year that the newly appointed insurance regulator - Insurance Regulatory andDevelopment Authority IRDA -- started issuing licenses to private life insurers. The Governmentof India liberalised the insurance sector in March 2000 with the passage of the InsuranceRegulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreignownership. Under the current guidelines, there is a 26 percent equity cap for foreign partners inan insurance company. There is a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of insurance inIndia and this may also include restructuring and revitalizing of the public sector companies. Inthe private sector 12 life insurance and 8 general insurance companies have been registered. Ahost of private Insurance companies operating in both life and non-life segments have startedselling their insurance policies since 2001.


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In December 2000, the GIC subsidiaries were restructured as independent insurance companies.At the same time, GIC was converted into a national re-insurer. In July 2002, Parliamant passeda bill, delinking the four subsidiaries from GIC.

Presently there are 12 general insurance companies with 4 public sector companies and 8 private

insurers. Although the public sector companies still dominate the general insurance business, the private players are slowly gaining a foothold. According to estimates, private insurancecompanies have a 10 percent share of the market, up from 4 percent in 2001. In the first half of2002, the private companies booked premiums worth Rs 6.34 billion. Most of the new entrantsreported losses in the first year of their operation in 2001.

With a large capital outlay and long gestation periods, infrastructure projects are fraught with amultitude of risks throughout the development, construction and operation stages. These includerisks associated with project implementaion, including geological risks, maintenance,commercial and political risks. Without covering these risks the financial institutions are notwilling to commit funds to the sector, especially because the financing of most private projects is

on a limited or non- recourse basis.

Insurance companies not only provide risk cover to infrastructure projects, they also contributelong-term funds. In fact, insurance companies are an ideal source of long term debt and equityfor infrastructure projects. With long term liability, they get a good asset- liability match byinvesting their funds in such projects. IRDA regulations require insurance companies to investnot less than 15 percent of their funds in infrastructure and social sectors. International Insurancecompanies also invest their funds in such projects.

Insurance costs constitute roughly around 1.2- 2 percent of the total project costs. Under theexisting norms, insurance premium payments are treated as part of the fixed costs. Consequently

they are treated as pass-through costs for tariff calculations.

Premium rates of most general insurance policies come under the purview of the governmentappointed Tariff Advisory Commitee. For Projects costing up to Rs 1 Billion, the TariffAdvisory Committee sets the premium rates, for Projects between Rs 1 billion and Rs 15 billion,the rates are set in keeping with the committee's guidelines; and projects above Rs 15 billion aresubjected to re-insurance pricing. It is the last segment that has a number of additional productsand competitive pricing.

Insurance, like project finance, is extended by a consortium. Normally one insurer takes the lead,shouldering about 40-50 per cent of the risk and receiving a proportionate percentage of thepremium. The other companies share the remaining risk and premium. The policies are renewedusually on an annual basis through the invitation of bids.


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Types of life insurance

Life insurance may be divided into two basic classes temporary and permanent or followingsubclasses - term, universal, whole life and endowment life insurance.

Term InsuranceTerm assurance provides life insurance coverage for a specified term of years in exchange for aspecified premium. The policy does not accumulate cash value. Term is generally considered"pure" insurance, where the premium buys protection in the event of death and nothing else.

There are three key factors to be considered in term insurance:

1. Face amount (protection or death benefit),2. Premium to be paid (cost to the insured), and3. Length of coverage (term).

Various insurance companies sell term insurance with many different combinations of thesethree parameters. The face amount can remain constant or decline. The term can be for one ormore years. The premium can remain level or increase. Common types of term insurance includeLevel, Annual Renewable and Mortgage insurance.

Level Term policy has the premium fixed for a period of time longer than a year. These terms arecommonly 5, 10, 15, 20, 25, 30 and even 35 years. Level term is often used for long term planning and asset management because premiums remain consistent year to year and can be budgeted long term. At the end of the term, some policies contain a renewal or conversionoption. Guaranteed Renewal, the insurance company guarantees it will issue a policy of equal orlesser amount without regard to the insurability of the insured and with a premium set for theinsured's age at that time. Some companies however do not guarantee renewal, and require proofof insurability to mitigate their risk and decline renewing higher risk clients (for instance thosethat may be terminal). Renewal that requires proof of insurability often includes a conversionoptions that allows the insured to convert the term program to a permanent one that the insurancecompany makes available. This can force clients into a more expensive permanent programbecause of anti selection if they need to continue coverage. Renewal and conversion options canbe very important when selecting a program.

Annual renewable term is a one year policy but the insurance company guarantees it will issue a policy of equal or lesser amount without regard to the insurability of the insured and with apremium set for the insured's age at that time.

Another common type of term insurance is mortgage insurance, which is usually a levelpremium, declining face value policy. The face amount is intended to equal the amount of themortgage on the policy owners residence so the mortgage will be paid if the insured dies.


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A policy holder insures his life for a specified term. If he dies before that specified term is up(with the exception of suicide see below), his estate or named beneficiary receives a payout. If hedoes not die before the term is up, he receives nothing. However, in some European countries(notably Serbia), insurance policy is such that the policy holder receives the amount he hasinsured himself to, or the amount he has paid to the insurance company in the past years. Suicide

used to be excluded from ALL insurance policies

, however, after a number of court judgmentsagainst the industry, payouts do occur on death by suicide (presumably except for in the unlikelycase that it can be shown that the suicide was just to benefit from the policy). Generally, if aninsured person commits suicide within the first two policy years, the insurer will return thepremiums paid. However, a death benefit will usually be paid if the suicide occurs after the twoyear period.

Permanent Life InsurancePermanent life insurance is life insurance that remains in force (in-line) until the policy matures(pays out), unless the owner fails to pay the premium when due (the policy expires OR policies

lapse). The policy cannot be canceled by the insurer for any reason except fraud in theapplication, and that cancellation must occur within a period of time defined by law (usually twoyears). Permanent insurance builds a cash value that reduces the amount at risk to the insurancecompany and thus the insurance expense over time. This means that a policy with a milliondollar face value can be relatively expensive to a 70 year old. The owner can access the money inthe cash value by withdrawing money, borrowing the cash value, or surrendering the policy andreceiving the surrender value.

The four basic types of permanent insurance are whole life, universal life, limited pay andendowment.

Whole life coverageWhole life insurance provides for a level premium, and a cash value table included in the policyguaranteed by the company. The primary advantages of whole life are guaranteed death benefits,guaranteed cash values, fixed and known annual premiums, and mortality and expense chargeswill not reduce the cash value shown in the policy. The primary disadvantages of whole life arepremium inflexibility, and the internal rate of return in the policy may not be competitive withother savings alternatives. Also, the cash values are generally kept by the insurance company atthe time of death, the death benefit only to the beneficiaries. Riders are available that can allowone to increase the death benefit by paying additional premium. The death benefit can also beincreased through the use of policy dividends. Dividends cannot be guaranteed and may be

higher or lower than historical rates over time. Premiums are much higher than term insurance inthe short-term, but cumulative premiums are roughly equal if policies are kept in force untilaverage life expectancy.

Cash value can be accessed at any time through policy "loans" and are received "income-taxfree". Since these loans decrease the death benefit if not paid back, payback is optional. Cashvalues support the death benefit so only the death benefit is paid out.


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Dividends can be utilized in many ways. First, if Paid up additions is elected, dividend cashvalues will purchase additional death benefit which will increase the death benefit of the policyto the named beneficiary. Another alternative is to opt in for 'reduced premiums' on somepolicies. This reduces the owed premiums by the unguaranteed dividends amount. A third optionallows the owner to take the dividends as they are paid out. (Although some policies provide

other/different/less options than these - it depends on the company for some cases)

Universal life coverageUniversal life insurance (UL) is a relatively new insurance product intended to providepermanent insurance coverage with greater flexibility in premium payment and the potential forgreater growth of cash values. There are several types of universal life insurance policies whichinclude "interest sensitive" (also known as "traditional fixed universal life insurance"), variableuniversal life (VUL), guaranteed death benefit, and equity indexed universal life insurance.

A universal life insurance policy includes a cash values. Premiums increase the cash values, but,

the cost of insurance (along with any other charges assessed by the insurance company) reducescash values. However, with the exception of VUL, interest is credited on cash values at a ratespecified by the company and may also increase cash values. With VUL, cash values will ebband flow relative to the performance of the investment subaccounts the policy owner has chosen.The surrender value of the policy is the amount payable to the policyowner after applicablesurrender charges, if any.

Universal life insurance addresses the perceived disadvantages of whole life - namely thatpremiums and death benefit are fixed. With universal life, both the premiums and death benefitare flexible. Except with regards to guaranteed death benefit universal life, this flexibility comesat a price: reduced guarantees.

Depending on how interest is credited, the internal rate of return can be higher because it moveswith prevailing interest rates (interest-sensitive) or the financial markets (Equity IndexedUniversal Life and Variable Universal Life). Mortality costs and administrative charges areknown. And cash value may be considered more easily attainable because the owner candiscontinue premiums if the cash value allows it.

Flexible death benefit means the policy owner can choose to decrease the death benefit. Thedeath benefit could alos be increased by the policy owner but that would (typically) require thatthe insured go through new underwriting. Another example of flexible death benefit is the abilityto choose option A or option B death benefits - and to be able to change those options during the

life of the insured.

Option A is often referred to as a level death benefit. Generally speaking, the death benefit willremain level for the life of the insured and premiums are expected to be lower than policies withan Option B death benefit.

Option B pays the face amount plus the cash value. If cash values grow over time, so would thedeath benefit which is payable to the insured's beneficiaries. If cash values decline, the death


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benefit would also decline. Presumably option B death benefit policies require greater premiumthan option A policies.

Limited-payAnother type of permanent insurance is Limited-pay life insurance, in which all the premiumsare paid over a specified period after which no additional premiums are due to keep the policy inforce. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.

EndowmentsEndowments are policies in which the cash value built up inside the policy, equals the deathbenefit (face amount) at a certain age. The age this commences is known as the endowment age.Endowments are considerably more expensive (in terms of annual premiums) than either wholelife or universal life because the premium paying period is shortened and the endowment date isearlier.

Accidental DeathAccidental death is a limited life insurance that is designed to cover the insured when they passaway due to an accident. Accidents include anything from an injury, but do not typically coverany deaths resulting from health problems or suicide. Because they only cover accidents, thesepolicies are much less expensive than other life insurances.

It is also very commonly offered as "accidental death and dismemberment insurance", alsoknown as an AD&D policy. In an AD&D policy, benefits are available not only for accidentaldeath, but also for loss of limbs or bodily functions such as sight and hearing, etc.

Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is notcovered, or the coverage is not maintained after the accident until death occurs. To be aware ofwhat coverage they have, an insured should always review their policy for what it covers andwhat it excludes. Often, it does not cover an insured who puts themselves at risk in activitiessuch as: parachuting, flying an airplane, professional sports, or involvement in a war (military ornot). Also, some insurers will exclude death and injury caused by proximate causes due to (butnot limited to) racing on wheels and mountaineering.

Accidental death benefits can also be added to a standard life insurance policy as a rider. If thisrider is purchased, the policy will generally pay double the face amount if the insured dies due toan accident. This used to be commonly referred to as a double indemnity coverage. In somecases, some companies may even offer a triple indemnity cover.


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BENEFITS GIVEN BY LIFE INSURANCE POLICIES

Protection:

Savings through life insurance guarantee full protection against risk of death of the saver. Also,

in case of demise, life insurance assures payment of the entire amount assured (with bonuses

wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is

payable.

Aid To Thrift:

Life insurance encourages 'thrift'. It allows long-term savings since payments can be madeeffortlessly because of the 'easy instalment' facility built into the scheme. (Premium payment for

insurance is either monthly, quarterly, half yearly or yearly).

For example: The Salary Saving Scheme popularly known as SSS, provides a convenient method

of paying premium each month by deduction from one's salary.

In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme

is ideal for any institution or establishment subject to specified terms and conditions.

Liquidity:

In case of insurance, it is easy to acquire loans on the sole security of any policy that has

acquired loan value. Besides, a life insurance policy is also generally accepted as security, evenfor a commercial loan.

Tax Relief:

Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is

available for amounts paid by way of premium for life insurance subject to income tax rates in

force.

Assessees can also avail of provisions in the law for tax relief. In such cases the assured in effect

pays a lower premium for insurance than otherwise.

MoneyW

hen You Need It:A policy that has a suitable insurance plan or a combination of different plans can be effectively

used to meet certain monetary needs that may arise from time-to-time.

Children's education, start-in-life or marriage provision or even periodical needs for cash over a

stretch of time can be less stressful with the help of these policies.

Alternatively, policy money can be made available at the time of one's retirement from service

and used for any specific purpose, such as, purchase of a house or for other investments. Also,


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loans are granted to policyholders for house building or for purchase of flats (subject to certain

conditions).

Distribution channel of life insuranceThough a multi-channel strategy is better suited for the Indian market as well, it is important tokeep in mind that this market is really a conglomeration of multiple markets. Each of the marketswithin this conglomeration requires a different approach.Apart from geographical spread the socio-cultural and economic segmentation of the market isvery wide, exhibiting different traits and needs. Let us look at the various insurance distributionchannels and the challenges faced by them from these perspectives.

AgentsToday's insurance agent has to know which product will appeal to the customer, and also knowhis competitor's products in the same space to be an effective salesman who can sell hiscompany, the product, and himself to the customer. To the average customer, every new

company is the same.Perceptions about the public sector companies are also cemented in his mind. The newcompanies are looking for educated, aware individuals with marketing flair, an elite group whocan be attracted only with high remuneration and the lure of a fashionable job, all of which maynot be possible in this business with its price pressures and the complexity of selling insurance.Unable to attract this segment, they have started easing recruitment conditions as against thestringent norms they had earlier, thereby diluting the process.While the public sector companies are able to attract agents, they continue to suffer from highattrition rates due to indiscriminate agent appointment. The most successful of these companies'tied agents are hardly of the elite variety of salesman. They are still the neighborhood do gooders-- the postman, the schoolteacher, and the shopkeeper -- who know the people and are

themselves known in the community. The challenge here is the lack of knowledge of thecompetitive market and the inability to do intelligent comparisons with the competitor's products.Educating and training these agents is a serious challenge for the insurance company. Therelevance of this kind of agent continues even today as agents are sought or contacted by families by word of mouth. Insurance companies are advised not to follow the path of FMCG's/creditcard companies, believing that a suited and booted customer care consultant or financialconsultant will necessarily appeal to the average Indian customer. Another social feature in themarket is the considerable respect for age in Indian society and a belief that an older personknows better. A very young up-market agent who is a typical salesman may not appeal to a largesegment of the middle class, which is looking for a solid trustworthy person from whom they canbuy insurance.

In this context it might be a rewarding exercise to recruit some older people (who have takenVRS2 from banks and other financial institutions) to sell some lines of products like pensionplans, annuities etc. Gender of agents is another relevant feature in the rural context that makes adifference, especially for the female population. Women to whom the customers can relate --e.g.,nurses, gram sevikas3 -- can target the female segment of the population more effectively. Whatis applicable for the rural women and children health programs and population control programsis equally applicable for insurance selling also. Max New York Life has adopted a version of thisstrategy by appointing gram sahayaks4 to sell and service the rural customers. With this kind of


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segmentation of intermediaries the challenge for the insurance company lies in training andeducating these people to become effective sales persons. But this in no way diminishes thebenefits of intermediary segmentation.

BanksBanks in India are all pervasive, especially the public sector banks. Can they also become theforemost channel for distribution of insurance? Perhaps in the future. The public sector banks,with their vast branch networks, are also plagued by a rigid unionized workforce and archaicsystems, and lack vision of a broader service spectrum encompassing non-banking products. Thenewer banks are constrained by their lack of reach and meager branch strength. For banks to become a predominant channel for selling insurance will require a paradigm shift. But theencouraging fact for insurance companies waiting for bancassurance to take off is that bank branches are here to stay, and customers do want them. A customer survey by DeloitteConsulting5 in the western developed markets found that for banking activities, customers placehigh importance on having convenient branches in their banking relationships. This is good newsfor the Indian banks with their many branches, and also makes a strong case for taking up

bancassurance.The major lines of business that can be sold through bancassurance successfully are terminsurance, creditor insurance, and non-life products like Property, Motor and Personal accident,Homeowners comprehensive insurance etc. The strategy should be to use multiple banksaccording to their presence in different regions. Success would come by using bancassurancewhere it will be most effective - i.e., selling simple, cheap products to the masses at a low cost.This awareness is growing and is evident from the fact that nearly every insurance company haspartnered with one or many banks to implement bancassurance.

BrokersWith the broker regulation under review and expected any time, this could be the next hope,especially for the urban market. This will be a new experience for the insurance customer,accustomed to brokers in financial services, real estate, and travel and tourism. For historicalreasons the image that 'broker' carries in the minds of the customer is not very favorable. Thusthe new breed of insurance brokers face the challenge of establishing credibility. The positivesare that brokers in the urban arena can attract the elite and the upper middle class customer.Brokers represent the customer and will sell the products of more than one company. They seekto determine the best fit for the client and can effectively address the mind block faced by thepublic about the various companies. This is applicable in the case of life insurance for the high-end and corporate/group segment.In the non-life segment, broking is not entirely new, as reinsurance brokers were arranging exoticcovers. For individual customers also, with a wide range of competitive products, the broker canget a good deal. The corporate broking companies will have to play a prominent role. If NGOsbased in rural areas can be attracted into the rural sector cooperatives arena, they stand a goodchance of succeeding and can help the new players get a foothold in the rural market. These arethe players with the potential to make the difference, as they have the trust of the people. Weenvisage scenarios like that in Bangladesh's micro lending growth and the milk co-operatives7 inGujarat selling insurance in addition to milk production and distribution. It would be a new dawnin Indian insurance distribution! With the right impetus the Indian rural insurance scenario couldbe one with high business volume and tremendous growth potential. ICICI Prudential Insurance


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and HDFC Standard Life Insurance have already partnered with NGOs8 to sell some low costinsurance in rural areas.However, the challenge lies in establishing regulations that protect the customer and attract theright players into the brokerage market rather than creating another middlemen segment erodingthe premium.

Work site marketingThis area needs to be tapped, as in any country one of the biggest markets is through theworksite. With changes in human resources management polices and compensation packages,group products or work site products do have a definite market that cannot be ignored.Here the advantages would be:o Captive customer baseo Potential to sell individual insurance and group insuranceo High trust factoro High hit ratio for the intermediariesThe challenges would be the cost effectiveness, product customization and efficient post sales

servicing, which would determine continued business. Technology has a key role to play inworksite marketing to ensure cost benefits. Banks and financial institutions have beensuccessfully marketing credit cards and other financial products using this channel. If not anidentical model a similar approach can be used for selling insurance.

InternetThough India is joining the fast growing breed of net users, using net for transactions has not yetcaught up. Though a few banks provide online banking, the usage is still a small fragment. Theinsecurity associated with transactions over the net is still an inhibiting factor. At present most ofthe insurance companies have product information and/or illustrative tools on the web.We do not see the web evolving into a means for direct selling of insurance in the currentscenario. In the Indian market, where insurance is sold after considerable persuasion even afterface-to-face selling, the selling over the net, which must be initiated by the client, would takesome more time. While the technology capability is there, improvements in bandwidth andinfrastructure are needed. Also needed are simpler products where auto-underwriting is feasible.Automobile insurance, one of the segments of insurance purchased "off the shelf" in India,would be the ideal segment to start with. On the life side, term assurance for standard lives withsimplified underwriting is a possibility. These channels by themselves will not be able toovercome the mindset of the people, but rather can only be enablers for the human channels.

Invisible InsurerIn this model, the insurance company or its representative is not the entit marketing the products.The insurance cover is sold by an automobile /credit card company as an add-on productleveraging the brand of the retailer. The risk is carried by the insurance company, whichunderwrites it. . Products like creditor insurance, automobile insurance, and credit card relatedinsurance could be distributed using this channel. This model can be adopted in all marketsegments for the lines of business mentioned. It is already prevalent in some areas like creditcard insurance and crop insurance for agricultural loans. The new players are also attempting thismodel. The venture of Maruti 9 into insurance by setting up two subsidiaries MIDS and MIB tosell automobile insurance is a case in point. These firms will largely arrange insurance cover for


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Maruti's captive customer base. MIDS has been registered as a corporate agent with an exclusivearrangement with Bajaj Allianz General Insurance, while MIBL has linked up with state-ownedNational Insurance Company Limited.What makes these arrangements attractive is the low distribution cost and captive customer base.However, repeat business or renewal of business cannot be assured. In the life segment, group

creditor insurance may be the most suitable product for this channel.

List of Life Insurance CompaniesIndian insurance companiesplay a key role in India's financial sector. With India's populationbecoming more affluent and globalized, insurance is growing rapidly. This increasing market is

creating considerable competition among Indian insurancecompanies in an industry that 20years ago was relatively small.To date, India's Insurance Regulatory and Development Authority (IRDA), has grantedregistration to 12 private life insurance companies and nine general insurance companies.Counting the existing public sector insurance companies, there are currently 13 Indianinsurance companies in the life side and 13 Indian insurance companies operating in generalinsurance.Apart from Life Insurance Corporation, the public sector life insurer, there are 22 other privatesector life insurers, most of them joint ventures between Indian groups and global insurancegiants.

Life insurance companies are given below:

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

Max New York Life Insurance Co. Limited www.maxnewyorklife.com

MetLife Insurance Company Limited www.metlife.com


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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.comDabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com

GENERAL INSURERS

Public Sector

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

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

Foreign Direct Investment (FDI)Policy in Insurance Sector

The FDI limit in the insurance sector has been capped at 26% for the foreign marketeers but the

government is thinking to increase it to 49% and a bill of this offer is pending at the Rajya


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Sabha. The LIC is still the major company in the life insurance sector but with such an

emergence of the private companies, providing a range of moneymaking policies and investment

chances for people from all walks of life the situation is fast changing. The Unit Linked

Investment Plans (ULIP) offering life cover as well as scope for savings and investment deserves

extra acknowledgement in this issue. Furthermore, with minimum lock-in period of three years

such plans are subjected to avoid miss usage of important tax benefits.

Indian life insurance industry overviewAll life insurance companies in India have to comply with the strict regulations laid out byInsurance Regulatory and Development Authority of India (IRDA). Therefore there is no risk ingoing in for private insurance players. In terms of being rated for financial strength likeinternational players, only ICICI Prudential is rated by Fitch India at National Insurer FinancialStrength Rating of AAA(Ind) with stable outlook indicating the highest claims paying abilityrating.

Life Insurance Corporation of India (LIC), the state owned behemoth, remains by far the largest player in the market. Among the private sector players, ICICI Prudential Life Insurance(JVbetween ICICI Bank and Prudential PLC) is the largest followed by Bajaj Allianz Life InsuranceCompany Limited (JV between Bajaj Group and Allianz). The private companies are coming outwith better products which are more beneficial to the customer. Among such products are theULIPs or the Unit Linked Investment Plans which offer both life cover as well as scope forsavings or investment options as the customer desires.Further, these type of plans are subject to aminimum lock-in period of three years to prevent misuse of the significant tax benefits offered tosuch plans under the Income Tax Act. Hence, comparison of such products with mutual fundswould be erroneous.

Commission / intermediation fees

The maximum commission limits as per statutory provisions are:Agency commission for retail life insurance business: 7- 50% for 1st year premium if the premium paying term is more than 20 years 7- 10% for 1st year premium if the premium paying term is more than 15 years 7- 10% for 1st year premium if the premium paying term is less than 10 years 7% - yr 2 and 3rd year and 3.5% - thereafter for all premium paying terms.

In case ofMutual fund related - Unit linked policies it varies between 1.5% to 6% on

the premium paid.

1. Agency commission for retail pension policies2. 7.5% for 1st year premium and 2.5% thereafter3. Maximum broker commission - 30%

4. Referral fees to banks Max 55% for regular premium and 10% for single premium. Howeverin any case this fee cannot be more than the agency commission as filed under the product.5. However, the above commission may be further subject to the product wise limits specified byIRDA while approving the product.


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Indian Insurance PoliciesAccording to present time following policies are provided in India market-

Insurance Policy India provides the clients with the details required for the coverages in the policy, date of commencement of the policy and their adopting organizations. It plays a

important role in the Indian insurance sector.

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

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


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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

Some of the well known Insurance Policy India are:

Social Security Group Scheme a scheme covering the age group of 18-60 years and an

insurance of Rs.5000 for natural death and of Rs.25000 on due to accidental death.

Shiksha Sahyog Yojana a scheme providing an educational scholarship of Rs.300 per quarter

per child is given for a period of four years.

Jan Arogya Bima Policy a scheme for the adults upto the age of 45 years is Rs. 70 and for

children it is Rs. 50. The limit coverage is fixed at Rs.5000 per annum.

Mediclaim Insurance Policy a scheme covering the age group from 5-80 years with a tax

benefit of up to Rs 10,000.

Jana Shree Bima Yojana this is a coverage of Rs 2,000 on natural death and Rs 50,000 for

accidental death. The premium amount is fixed at Rs. 200 for single member.

Videsh Yatra Mitra Policy a scheme covering medical expenses during the period of overseas

travel.

Bhagya Shree Child Welfare Bima Yojana a scheme covering one girl child in a family upto

the age of 18 whose parents age does not exceed 60 years, with a premium of Rs.15 per annum.

Raj Rajeshwari Mahila Kalyan Yojana a scheme providing protection to woman in the age

group of 10 to 75 years with an insurance of Rs. 25,000 and premium Rs.15 per annum.

Ashray Bima Yojana a scheme covering workers in case of loss of jobs.


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Personal Accident Insurance Scheme for Kissan Credit Card a scheme covering all the KCC

holders up to an age of 70 years. Insurance coverage includes 50,000 for accidental death and

25,000 for partial disability.

Industry structure

Currently, a US$41 billion industry, India is the world's fifth largest life insurance market and

growing at a rapid pace of 32-34% annually as perLife Insurance Councilstudies.

Currently, in India only two million people (0.2 % of the total population of 1 billion) arecovered under Mediclaim, whereas in developed nations like USA about 75 % of the totalpopulation are covered under some insurance scheme. With more and more private companies inthe sector, the situation may change soon.

Specialisation

ECGC, ESIC and AIC provide insurance services for niche markets. So, their scope is limited by

legislation but enjoy special powers.

Acts

The insurance sector went through a full circle of phases from being unregulated to completelyregulated and then currently being partly deregulated. It is governed by a number of acts.

The Insurance Act of 1938 was the first legislation governing all forms of insurance to providestrict state control over insurance business.

Life insurance in India was completely nationalized on January 19, 1956, through the LifeInsurance Corporation Act. All 245 insurance companies operating then in the country weremerged into one entity, the Life Insurance Corporation of India.

The General Insurance Business Act of 1972 was enacted to nationalise the about 100 generalinsurance companies then and subsequently merging them into four companies. All the


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companies were amalgamated into National Insurance, New India Assurance, Oriental Insuranceand United India Insurance, which were headquartered in each of the four metropolitan cities.

Until 1999, there were not any private insurance companies in India. The government thenintroduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-

regulating the insurance sector and allowing private companies. Furthermore, foreign investmentwas also allowed and capped at 26% holding in the Indian insurance companies.

In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architectsand Company Secretaries.

A minimum capital of US$20 million is required by legislation to set up an insurance business.

Data CollectionI have collected the data from the internet from the various articles, from the IRDA websiteetc.

I have collected the data from the internet from the various articles, from the IRDA website etc.

IRDA may allow Insurance Companies to invest in Venture FundsThe IRDA's green signal to Insurance companies for investments in venture capital funds would provide a boost in growth pertaining to the infrastructure segment. The Insurance companieswould be allowed to invest about 5% of the total investment that it can undertake, in the venturecapital funds pertaining to infrastructure based projects. The total aggregate of the assets under

the life insurance companies is Rs 699,375 crores. This move would allow the constant directflow of long-term savings pertaining to the infrastructure development. The proposed alterationsin the regulations pertaining to investments of the insurance companies would be settled by theInsurance Regulatory and Development Authority of India (IRDA), at the next board meeting onthe 25th of March. Several other alterations would also be done with the investment norms. Theother important norm is the expansion of the sanctioned investments category, which would alsoinclude the mortgaged securities and theinitial public offerings unlike previously when these twowere not included.The proposal would be submitted to the Insurance Regulatory and Development Authority ofIndia (IRDA) board for approval. The final draft would be published in the Gazette of the centralGovernment at the end of March 2008. This has been informed by the senior officials of the

IRDA. The alterations would help in developing the instruments of investment and provideflexibility for insurers. The alterations would provide more margins pertaining to the investmentsin certificates of deposit issued by the banks and term deposits. At present the insurancecompanies may invest about 10% of its investment funds to a particular sector. As per thebanking sector is concerned, up to 10% of the investment can be done in the bonds and equityshares issued by banks, 2 % on the fixed deposits and certificates of the banks. In the newalterations the fixed deposits and the certificates of the banks would considered as a separatecategory and grouped as money market instruments.This would help in expanding the flow of


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investments from the insurance sector into the banking sector. The RBI would come out with theregulations for the banks to invest in equity derivatives and later the insurance sector would alsohave these regulations. The Insurance Regulatory and Development Authority of India hasconstituted a working group in the year 2006 to probethe existing investment regulations and provide review on the present statutory advices and the trends of investments for insurance

companies. In 2007 the body had submitted its suggestions. Indian Insurance sector touted to record a 18% growth

According to K N Bhandari, the Secretary General of General Insurance Council, India's generalinsurance sector is slated to grow at a 18% rate in 2008. The comparable figure for 2007 was13%. As per Mr. Bhandari, the present market value of the Indian general insurance sector is Rs30,000-crore.The current penetration level of the Indian insurance sector is 0.65 %. The Indian urban sector isa significant contributor to the general insurance market. In comparison, contribution from ruralIndia is small. Efforts are afoot to capture the dormant rural market via strategies like awarenessgeneration, institutional marketing and e-marketing.

Pranav mukherjee calls for simple packages in the Indian Insurancesector

Prarav Mukherjee, the Indian Finance Minister, has called for the insurance companies in Indiato make simple products for the Indian masses. It is expected that the products will then possessa high penetration power particularly in rural India. According to him , a simple product willgain more reception. It would be easier for the general populace to comprehend the product.Some Industry analysts hold the view that, the Indian insurance companies are highly dependenton insurance agents for ensuring product penetration in rural areas.

Investment Strategies from LIC, IndiaLife Insurance Corporation (LIC) is India's biggest domestic institutional investor. It is also thelargest life insurance company in India. The company has outlined a new investment strategy.LIC envisages to augment its equity investment by one third in 2008. However the company may

allocate more funds for the debt market, particularly if the stock market volatility exists.LIC plans to buy equities worth Rs 450 billion for the year 2008-09. The comparable figure for2007-08 was Rs 340 billion. Thomas Mathew, LIC Managing Director expects the 14 volatilityin the stock markets to continue till October-November. As per Mr Mathew, at present the debtmarket is an attractive and relatively safe investment option. The prime objective of the companyis to ensure the safety of the resources invested by the company's shareholders. LIC is slated to buy up bonds worth Rs1.15 trillion in the current fiscal year. LIC expects to earn a grossinvestment income ranging from Rs 400 billion to Rs 450 billion in the current year, dependingupon the prevalent market conditions. It may be noted that, LIC manages total assets wortharound US$175 billion.

Young breed of pensioners in Indian insurance marketThe Indian insurance market is being increasingly characterized by the presence of 'youngpensioners', as per an article in the 'Times of India'. Young pensioners are typically under 40individuals who are purchasing retirement plans. The growing Indian economy has created anupwardly mobile ,affluent young generation, who believe in going for a planned retirement.As per data from IRDA, 28% of the premiums collected by the Indian Insurance companiesare from retirement plans.

Brokers battle out House Promoters, in Indian insurance market


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Brokers in the Indian insurance market are fearing a price war from a new type of operatingentity in the Indian insurance market. These are promoter houses, which are owed by differentinsurance companies.IRDA has allowed insurance companies to establish own broking operations. This permissionhas been granted from April, 2008. Presently there exist 275 insurance brokers in India.

Insurance brokers are not generally affiliated to any particular insurer. Non-affiliated insurance brokers have asked IRDA to set up a regulatory system to diffuse any possible market crisisarising from a fierce 'price war' or 'rate discounting'.

Indian Banks Plan To Foray Into Insurance SectorMany Indian banks are planning to enter the insurance sector due to the huge growth that isestimated to take place in this sector. Indian banks Plan to Foray into the insurance sector bysetting up their own insurance companies. The Indian insurance sector collected a premium ofabout Rs. 75,000 crores in the segments of non- life and life insurance, during the first nine 15months of 2007- 2008. Further, the business of insurance in the country is expected to increasedue to the growth in the categories of semi- urban and rural insurance and is expected to beworth about US$ 60 billion by 2010.

According to the Insurance Regulatory and Development Authority (IRDA), the private insurershad collected premium income from new business of about Rs. 18,980 crores, in 2007. Themajor Indian Banks that are planning to enter the Insurance sector of the country are UnionBank, Federal Bank, Allahabad Bank, Bank of India, Karnataka Bank, Indian Overseas Bank andBank of Maharashtra. Further, there are a number of banks that are planning to set up their owncompanies for insurance such as Bank of Baroda, Punjab National Bank, and Dena Bank. UnionBank, is one of the banks that is planning to enter the insurance sector of the country and it'shead office is located at Mumbai. Allahabad Bank was set up on 24th April, 1865 and it has beenproviding a wide range of services to its customers. It is also planning to foray into insurancesector of India. Bank of India, is another Indian bank that is planning to enter the insurancesector of the country and it was set up on September 7th, 1906. Bank of Maharashtra started its

business on 8th February, 1936 and it has more than 1200 branches spread all over the country. Itis also planning to foray into the insurance sector of India. Indian Overseas Bank was set up on10th February, 1937 with the objectives of specializing in overseas banking and in the businessof foreign exchange. It is another Indian bank that is planning to enter the insurance sector of thecountry. The Indian banks are planning to enter the insurance sector on their own, withoutpartnering with insurance companies due to several reasons. One important reason is that theywould get better dividends than the commission they would get by entering into partnershipswith other insurance majors. Moreover this would help them to diversify from the regularbanking activity that they are involved in. The insurance companies have been affected with theplanning of Indian banks to foray into the insurance sector of the country. This is due to the factthat the insurance companies are now unable to find banks with whom they can enter

intopartnerships for the distribution of their products.


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Regulatory FrameworkAs in the case of all financial institutions, insurance is an activity that needs to be regulated. Thisis so because the smooth functioning of business depends on the trust and confidence reposed bythe customers in the solvency of the financial institutions. Insurance products are of little value tocustomers, if they cannot trust the company to keep its promise. The regulat ory framework inrelation to the insurance companies seeks to take care of three major concerns (a) protection ofconsumers interest, (b) to ensure the financial soundness of the insurance industry, and (c) tohelp the healthy growth of the insurance market. So long as insurance remained the monopoly ofthe Government, the need for an independent regulatory authority was not felt. However, withthe acceptance of the idea that there can be private insurance entities, the need for a regulatoryauthority becomes paramount. With the passing of the Insurance Development and RegulatoryAct in 2000, the insurance regulatory authority has become a statutory authority. Protectingconsumer interest involves proper disclosure, keeping prices affordable, some mandatoryproducts and standardization. Most importantly, it has to make sure that consumers get paid byinsurers. From the consumers point of view, the most important function of the regulatoryauthority will be to ensure quick settlement of claims without unnecessary litigation. Withrespect to solvency and financial health, regulations will have to be introduced to ensure thatinsurance companies follow appropriate prudential norms such as solvency margins. Large fundsare under the custody of the insurers and they get invested to produce additional returns. Themanagement of these funds is important to the insurer, the insured and the economy. Entry intothe insurance industry must also be regulated with suitable capital adequacy norms. The thirdrole should be one of development. The insurance industry in India has a large potential and theframework of regulation must enable the industry to tap this vast potential.IRDA over the last decade has brought into force a number of regulations which are wellconceived. They have received wide spread appreciation. The recent decision of IRDA to moveto a free tariff regime for several general insurance products is welcome. The prescription oftariff is contrary to market principles and insurance products need to be priced based on marketforces. The reform of the insurance sector is part of the overall economic reform process that isunderway. The basic philosophy underlying the new economic policy is to improve theproductivity and efficiency of the system. This is sought to be achieved partly by creating a morecompetitive environment. The growth of the real economy depends upon the efficiencyof thefinancial sector. A greater element of competition is being injected into the financial system aswell.All regulators need to keep in mind that there is a fine distinction between regulations andcontrols. Regulations lay down norms while controls have a propensity to micromanage

institutions. Regulators must take care to ensure that regulations do not slide into controls. Theinsurance industry in our country underwent a big change in 2000 when private participants wereallowed into the industry along with a streamlined regulatory and supervisory regime. There areat present 14 private life insurance companies along with LIC and 12 entities in non-life sector.There is evidence to show that competition has done good to insurance industry. The rate ofgrowth of the industry in the post liberalization period has been faster. It has also developed interms of product innovation and the use of alternative distribution channels.


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AnalysisAn insurance contract provides risk coverage to the insuree. A purchaser of insurance pays afixed premium in exchange for a promise of compensation in the event of some specified loss.Insurance is bought because it gives peace of mind to the holders. This comfort level is importantin personal and business life. Though the primary purpose of insurance is to provide risk

coverage, when the contract period extends over a long time, as in the case of life insurance,premium payments comprise of two components one for buying risk coverage and the othertowards savings. This bundling together of risk coverage and savings is peculiarto life insuranceand is more common in developing countries like India. In the industrially advanced countries,this is not necessarily so and short duration life insurance contracts without a savings componentare equally popular. In the developing economies because of the savings component and the longnature of the contract, life insurance has become an important instrument of mobilising long-term funds. The savings component puts the life insurance in direct competition with otherfinancial institutions and savings instruments.The total investment portfolio of the insurers in India as at the end of March, 2005 was Rs.465,864 crore. The total premium collected by the insurers both life and non-life in 2004-05 was

Rs.100,335 crore. The major contribution came from life insurance. The insurance penetrationi.e., premia as percentage of GDP was 3.17 per cent in 2004. While this ratio is steadilyincreasing, it is far below the world average of 8.06 per cent. This shows the vast potential thatexists. With largest number of life insurance policies in force in the world, Insurance happens tobe a mega opportunity in India. Its a business growing at the rate of 15-20 per cent annually andpresently is of the order of Rs 450 billion. Together with banking services, it adds about 7 percent to the countrys GDP. Gross premium collection is nearly 2 per cent of GDP and fundsavailable with LIC for investments are 8 per cent of GDP.Yet, nearly 80 per cent of Indian population is without life insurance cover while healthinsurance and non-life insurance continues to be below international standards. And this part ofthe population is also subject to weak social security and pension systems with hardly any old

age income security. This itself is an indicator that growth potential for the insurance sector isimmense. A well-developed and evolved insurance sector is needed for economic developmentas it provides long term funds for infrastructure development and at the same time strengthensthe risk taking ability. It is estimated that over the next ten years India would require investmentsof the order of one trillion US dollar. The Insurance sector, to some extent, can enableinvestments in infrastructure development to sustain economic growth of the country.Insurance is a federal subject in India. There are two legislations that govern the sector- TheInsurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a fullcircle from being an open competitive market to nationalisation and back to a liberalized marketagain. Tracing the developments in the Indian insurance sector reveals the 360 degree turnwitnessed over a period of almost two centuries.


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Future of Indian Insurance Market

As per the report of 'Booming Insurance Market in India' (2008-2011), concentration ofinsurance markets in many developed countries of the world has made the Indian insurancemarket more magnetic in terms of international insurance players. Furthermore, the report says

Home insurance sector is likely to achieve a 100% growth since home insurance aremade compulsory for housing loan approvals by the financial institutions.In the coming three years Health insurance sector is all set to become the second largestbusiness after motor insurance.During the period of 2008-09 to 2010-11 the non life insurance premium is likely to havea growth of 25%.

Conclusion

Insurance and economic growth, mutually influence each other. As the economy grows, theliving standards of people increase. As a consequence, the demand for life insurance increases.As the assets of people and of business enterprises increase in the growth process, the demandfor general insurance also increases. In fact, as the economy widens the demand for new types ofinsurance products emerges. Insurance is no longer confined to product markets; they also coverservice industries. It is equally true that growth itself is facilitated by insurance. A well-developed insurance sector promotes economic growth by encouraging risk-taking. Risk isinherent in all economic activities. Without some kind of cover against risk, some of theseactivities will not be carried out at all. Also insurance and more particularly life insurance is amobilizer of long term savings and life insurance companies are thus able to supportinfrastructure projects which require long term funds. There is thus a mutually beneficial

interaction between insurance and economic growth. The low income level of the vast majorityof population has been one of the factors inhibiting a faster growthof insurance in India. To someextent this is also compounded by certain attitudes to life.The economy has moved on to a highergrowth path. The average rate of growth of the economy in the last three years was 8.1 per cent.This strong growth will bring about significant changes in the insurance industry.At this point, it is important to note that not all activities can be insured. If that were possible, itwould completely negate entrepreneurship. The real management challenges are uninsurablerisks. In the case of insurable risks, risk is avoided at a cost. The insurance sector has a vast


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potential not only because incomes are increasing and assets are expanding but also because thevolatility in the system is increasing. In a sense, we are living in a more risky world. Trade isbecoming increasingly global. Technologies are changing and getting replaced at a faster rate. Inthis more uncertain world, for which enough evidence is available in the recent period, insurancewill have an important role to play in reducing the risk burden individuals and businesses have to

bear. In the emerging scenario, the insurance industry must pay attention toa) Product innovation,b) Appropriate pricing, andc) Speedy settlement of claims.

The approach to insurance must be in tune with the changing times. The mission of theinsurance sector in India should be to extend the insurance coverage over a larger section of thepopulation and a wider segment of activities. The three guiding principles of the industry mustbe:

To charge premium no higher than what is warranted by strict actuarialconsiderations,

To invest the funds for obtaining maximum yield for the policy holders consistentwith the safety of capital and

To render efficient and prompt service to policy holders.With imaginative corporate planning and an abiding commitment to improved service, themission of widening the spread of insurance can be achived.

References-http://www.irdaindia.org/http://en.wikipedia.org/wiki/Life_insurance_in_Indiahttp://ask.inwiki.org/Life_insurance_in_Indiahttp://en.wikipedia.org/wiki/Insurance_in_Indiahttp://en.wikipedia.org/wiki/Life_Insurance_Corporation_of_Indiahttp://www.naukrihub.com/india/banking-insurance/scope/http://www.google.co.in/#hl=en&q=scope+of+life+insurance+business+in+india. &meta=&aq=f&oq=scope+of+life+insurance+business+in+india&fp=caf83f9b96

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http://business.mapsofindia.com/india-insurance/life.htmlhttp://business.mapsofindia.com/insurance/http://business.mapsofindia.com/insurance/brief-history-of-insurancesector.

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http://business.mapsofindia.com/insurance/functions-of-insurance.htmlhttp://business.mapsofindia.com/insurance/brief-history-of-insurancesector.

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http://www.indiastat.com/insurance/19/lifeinsurance/156/stats.aspxhttp://www.indiacore.com/insurance.html

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