Essential Functions of a Financial Intermediary - Insurance

8/3/2019 Essential Functions of a Financial Intermediary - Insurance

1/27

ESSENTIAL FUNCTIONS

OF

A FINANCIAL INTERMEDIARY

INSURANCE

2005AnandAvaknavar2007AshishBaghel

2027SandeepKBiswal


2/27

What is in store

Origin and history

Global scenario

Indian context Essential functions

Indian insurance market

Case studies


3/27

What is Insurance?

Insurance is a contract in which a sum of

money is paid to the assured asconsideration of insurers incurring the risk

of paying a large sum upon a givencontingency

- Justice Tindal


4/27

Category

Insurance

Life General

Auto Health

Business Fire


5/27

Life Insurance

Life insurance is a written contractbetween the insured and the insurer, thatprovides for the payment of the insuredsum on the date of the maturity of thecontract or on the unfortunate death of the

insured, whichever occurs earlier.


6/27

General Insurance

General insurance or non-life insurancepolicies, including automobile andhomeowners policies, provide paymentsdepending on the loss from a particularfinancial event. General insurance typically

comprises any insurance that is notdetermined to be life insurance.


7/27

Health Insurance

Just like one looks to safeguard oneswealth, these policies ensure guarding theinsurer's health against any calamities that

may cause long term harm to ones life andeven hamper ones earning ability for alifetime. Some examples of this type of

policy are mediclaim policy, personalaccident, group accident, traffic accident,etc.


8/27

Business Insurance

Risks of loss of profits/business, goods, plant andmachinery are most profound in case of business.

Under this head they cover the most widely usedpolicies that cover a business from any loss of theabove kind. Some of these policies are burglaryinsurance, shopkeepers insurance, key-man

insurance, marine insurance, public liabilityinsurance, workmen compensation insurance, airtransit insurance, fidelity guarantee insurance etc.


9/27

Automobile Insurance

Auto Policy is required to be taken to coverthe risks that arise to the owner, vehicle

and third party. This includes theCompulsory Vehicle Policy (In India, by theMotor Vehicles Act, every car owner is

required to covered against Act risks) andthe Comprehensive Vehicle Policy.


10/27

Fire Insurance

This policy is required to be taken

to prevent any loss of profits /property from incidental fire. Eg:fire insurance and fireconsequential loss policy.


11/27

The beginning and thereafter

1688, Lloyds coffee house, London

1753, birth of first insurance company

1759, the Presbyterian synodofPhiladelphia sponsored the first life

insurance corporation

1840, insurance took off in a big way, afterthe infamous New York fire


12/27

Global insurance industry

Asset under management in the globalinsurance sector is more than $19 trillion and itsclose to 12% of global financial assets

Insurance premium volume is 7% of global GDP Life insurance accounts for 58.2% of total

premium

Europe is the worlds largest market forinsurance


13/27

5/2/201213

Phase Period Industry

Phase Ia. Life Insurance

b. General Insurance

1818 to 1956

(about 138 yrs)

1850 to 1972

(about 122 yrs)

Many (245) private sector companies only,

competitive market.

Many (107) private sector companies only,

competitive market.

Phase II

a.Life Insurance

b.General Insurance

1956 to 2000

(about 44 yrs)

1972 to 2000

(about 28 yrs)

Nationalization, public sector or State

monopoly, only one company.

Nationalization, public sector monopoly, only

one company with its four subsidiaries.

Phase III

Life Insurance and

General Insurance

After 2000

Opened to the entry of private domestic and

foreign companies, mixed sector of public and

private sector units, oligopoly of public sector

companies (14 life insurance and 12 general

insurance companies)

Insurance in India - History


14/27

Overview

Total asset under management is around $334bn

Total premium collection stood at $28.24 bn

Over all growth rate is around 16%

Close to 24.6% of expenses by GoI is funded byLIC

Industry penetration rate is about 20% in lifesegment

Insurance density stood at around $70


15/27

Major players


16/27

Six essential functions

Transfer of resources across time andspace

Allocation of risk

Economics of pooling

Payment system

Informational role of asset prices Managerial incentives and decision

making


17/27

Collection ofpremium upfront

Deposits

Customer

(Surplus unit)

Calculating risk Hold cash in hand Make investment

Decisions

Insurer Secured

Investments Loan and

DevelopmentSector

Financial Markets

(Deficit unit)

Transfer of resources across time and space


18/27

Allocation of risk

Diversification is the main tool

Reinsurance

Hedging Insurance linked securities

Asset-Liability management

Regulatory requirements


19/27

Economics of pooling

Law of Large Numbers


20/27

Payment System


21/27

Providing information on asset prices

Terms and conditions of the policy

Investment Return calculation on term tomaturity policies

Risk and probability description tocustomers

Tax benefits


22/27

Dealing with incentive problems

Misusing confidential information andcolluding with fraudsters

In india 29% fraud are in collusion withagents and 24% are due to fakedocuments

insurance\intermediaries\agents

Fake claims (cashless transactions)

Introduction of non regulated products


23/27

Too big to fail


24/27

Case Study 1


25/27

Case Study 2


26/27

THANK YOU


27/27

??

Essential Functions of a Financial Intermediary - Insurance

Documents

Transcript of Essential Functions of a Financial Intermediary - Insurance