Insurance Broking Business
Transcript of Insurance Broking Business
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PROJECT REPORT
ON
INSURANCE BROKING BUSINESS
IN FULFILLMENT OF MMS COURSE
SUBMITTED BY:
VAISHALI R. CHAUGHULE
MMS (IV) FINANCE
2002 04
N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND
RESEARCH
MUMBAI
I EXECUTIVE SUMMARY
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The insurance business is complex whether one is a Life
Insurer, a General Insurer, a Re-insurer or an Insurance
Brokerage house. Taking the complexity of the industry
into account one has to invest a great deal in
understanding such business. In insurance and risk
management, the specialist helps in identifying,
evaluating, reducing and managing risk in all the
countries that one does business. Globally Insurance
Brokers play this very vital role.
The Indian insurance market is in transitory phase; the
sector has been opened up to competition with the entryof private insurance companies in late 1999 with majority
of the companies starting operations in 2000. In the last
2 years significant changes have come about in the
Insurance market, the independent regulator namely
Insurance Regulatory and Development Authority (IRDA)
has tried to evolve a level playing field. Quite a few
innovations have been introduced such as Third party
Administrators, Brokers, Corporate Agents and Bank
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assurance etc.
The global practice of using Brokers to act as the
principal distribution arm of the insurance companies is
evolving in fits and starts. Based on the amendment to
the Insurance Act, 1938, which was passed by the
Parliament after a lot of deliberations, over 100 brokers
have been granted licence. The brokers play a very vitalrole in the Insurance industry.
II DEFINITION AND EXPLAINATION ON WHO AN
INSURANCE BROKER IS:
WHO IS AN INSURANCE BROKER?
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With the recent developments a new insurance
intermediary - The INSURANCE BROKER is now visible
on the insurance horizon and is likely to play a very
important role in the future of the insurance business. So
let us understand an insurance broker. The insurance
brokers are such individuals who contribute maximum
share of insurance business. A high standard of
professional skills and conduct is expected of the broker.
The insurance broker can be issued license under section
42-D of the Insurance Act, 1938.
DEFINITION:
The insurance broker acts as an intermediary
between the insurance customer and the insurance
company.
4
BUYER
BROKER
Intense
INSURANCEMARKET
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In the past, most insurance business was conducted
directly between customers and insurance companies.
Today, however, insurance buyers requirements have
become more complex, demanding and varied and this
has led to more important role in the market for the
insurance broker. The most important feature is that the
broker acts on behalf of the insured both at the time of
placing the risk and also during settlement of the claim
whereas an agent acts on behalf of insurer. The broker
works with a number of Insurance Companies and is
much well positioned to obtain a good deal for insured on
favorable terms. The brokers task is to help & identify
the risks to which an insureds business may be exposed.
He analyses the
risk and advices which risks should be insured and
explores the insurance market by canvassing to obtain
the best insurance protection at a most competitive price.
The brokers are to arrange for all the policies and tocomplete all documentation for or on behalf of the
insured. Insurance brokers are specialists in insurance
protection. They are independent, have a deep
knowledge of the market and can provide professional
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objective advice on identification and exposures and
recommend cost effective solution.
WHO CAN BECOME AN INSURANCE BROKER?
Any person may be an individual, a partnership firm or a
company formed and registered under the Companies
Act, 1956 can apply for grant of license to be a broker.
(In case of a company the aggregate holding of equity
shares by a foreign company either by itself or through
its subsidiaries or nominees or persons should be within
the prescribed limits laid down by the Reserve Bank of
India)
FUNCTIONS OF AN INSURANCE BROKER:
Acts as a Link: This is one of the most important
function of an Insurance broker. They are the only link
between the insurance company and the client or theinsured.
Understands Clients requirements Insurance brokers
are trained to understand and be able to match available
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policies in the market to their Clients requirements as
well as to advise them on such policies. Their
independence and detailed insurance knowledge, ensures
that they provide complete and in depth advice on a
whole range of options, from different insurance suppliers
to meet the clients insurance requirements.
Carrying out risk inspection and suggesting risk
improvement/ loss minimization measures: An
insurance broker will have to provide his expertise in
evaluating and analyzing what are the possible risk that
the insured could face. Based on which he should give
professional advice to minimize the same.
Preserve their destiny: All brokers are required to
retain their independence from insurance suppliers in
order to be in a position to act in their clients best
interests.
Free service to Clients: Unlike many other
intermediaries, who receive commission both from the
buyer and the seller, insurance broker only receive
commission from seller. When a client uses the services
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of a broker, the insurance cover purchased is no different
in price to that purchased by a buyer directly from the
insurer. What happens is that costs for distributing the
policy, which are fixed, are shared between the insurer
and the broker.
Offers after sales service: Another client function of
insurance broker is that of claims handling, which in
many cases is also offered without charge. The
professional relationship between broker and insurers
ensures that clients claims are processed efficiently and
expeditiously.
Matching customers needs: An insurance brokers
office is a center offering a variety of insurance policies
from different insurance companies for the clients varied
needs. Having one point of advice on insurance facilities
insurance purchases for the buyer and ensures that
covers are arranged to fit the buyers requirements. Thusthe principal aim of a Broker is to foster a better
understanding between the insured and the insurer. This
aim, coupled with the observance of a professional code
of ethics, will maintain and enhance the publics image of
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insurance brokers as the agents of insurance buyers and
their advisers, a true Friend, Guide and Philosopher.
Thus functions of both Life and General insurance brokers
will inter alia consist of:
a.Relationship with clients
b.Sales practices
c. Duty to disclose information
d.Explanation of the contract
e.Renewal procedures
f. Claims
g.Complaints
h.Documentation
i. Handling clients/insurers money
TYPES OF BROKERS
The application under sub-regulation (1) shall be made
for any one of the following categories, namely:
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(a) Category - I
A. Direct General Insurance Brokermeans a person
who is for the time being registered in respect of
general insurance business but not reinsurance
business.
B. Direct LifeInsurance Brokermeans a person whois for the time being registered in respect of life
insurance business but not reinsurance business.
The functions of both general insurance broker and life
insurance broker will inter alia consist of:
(i) obtaining a detail knowledge of the clients
business and philosophy; maintaining clear records
of the clients business so that this can be
explained to an insurer and other parties;(ii) provision to the client of technical advice and
advice on developments in the insurance market
and the law;
(iii) maintaining a detailed knowledge of available markets;
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(iv) selection and recommendation of an insurer or
group of insurers;
(v) negotiating with insurers on the clients behalf;
(vi) acting promptly on instructions from a client
and providing written acknowledgements and
progress reports;
(vii) collecting and remitting premiums and claims;
(viii) where appropriate and dependent on the
size of both the client and broker, providing
additional services, such as insurance consultancy
services, risk management services and uninsured
loss recoveries;
(ix) assisting in the negotiation of claims;
(x) maintaining precise records of past claims.
Category II
Reinsurance Broker, whose functions will inter aliaconsist of:
(i) obtaining a detailed knowledge of the Insurers
business and philosophy;
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(ii) maintaining clear records of the Insurers business
so that this can be explained to a reinsurer and
other parties
(iii) provision to the Insurer of technical advice and
advice on developments in the International
insurance and reinsurance market;
(iv) maintaining a detailed knowledge of available
markets;
(v) selection and recommendation of a reinsurer or
group of reinsurers;
(vi) negotiating with reinsurer on the insurers behalf;
(vii) acting promptly on instructions from a client and
providing
written acknowledgements and progress
reports;
(viii) collecting and remitting premiums and claims;
(ix) assisting in the negotiation of claims;
(x) maintaining precise records of past claims.
(c) Category - III
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Composite Broker, whose functions consists of both that
of a Direct Insurance Broker and Reinsurance Broker as
stated in (a) and (b) above.
(d) Category - IV
Others Insurance consultant, Risk management
consultant or any other nomenclature description as may
be approved by the Authority.
QUALIFICATION & CONSIDERATION OF
APPLICATION
IRDA shall take into account, for consideration of
grant of the license, for all the matters which are
relevant to the activities relating to Insurance
Broker and in particular that applicant has to
satisfy the following requirements, namely:
(1) the applicant has the necessary infrastructure like
including adequate office
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space, equipment and manpower to effectively
discharge his activities;
(2)the applicant has in his employment a minimum of
two persons who have the experience to conduct the
business of the Insurance Broker.
(3)A person directly or indirectly connected with the
applicant has not been rejected granted license by the
Authority in granting license in the past.
Explanation:- For the purposes of this clause the
expression directly or indirectly connected means
any person being an associate, subsidiary,
interconnected or group company of the applicant in
case of the applicant being a body corporate.
(4) the applicant fulfils the capital adequacy
requirements specifies in
regulation 7;
(5) the applicant, his every partner of the firm, directoror principal
officer
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(i) is not a minor;
(ii) has not been found to be of unsound mind by a
court of competent jurisdiction;
(iii) has not been found guilty of criminal
misappropriation or criminal breach of trust or
cheating or forgery or an abatement of or
attempt to commit any such offence by a court
of competent jurisdiction provided that where at
least five years have elapsed since the
completion of the sentence imposed on
applicant, his partner, director or principal
officer in respect of any such offence, the
authority shall ordinarily declare in respect of
such person that his conviction shall cease to
operate as a qualification under this clause;
(iv) that in the course of any policy of insurance of
the winding up of an Indian Insurance Company
or in the course of an investigation of the affairs
of an insurer it has not been found that he hasbeen guilty of or has knowingly participated in or
connived at any fraud, dishonestly or
misrepresentation against an insurer or an
insured;
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(6) The applicant, a minimum of two
partners/directors in a firm and the principal officer
possesses
(i) a minimum qualification as an Associate of
Insurance Institute of India or its equivalent or
any other professional qualification from an
institution recognized by the government in
finance, law, engineering or business
management; and
(ii) theoretical and practical training for a
specified period to be conducted by National
Academy, Pune on the basis of a syllabus
approved by the Authority.
Provided that in the case of a person carrying on
reinsurance broking and/or insurance
consultancy for a continuous period of ten years
or who has sufficient experience of runninginsurance business with any insurer for ten
years or more before these regulations come
into force and who is required to be licensed
under this regulation, the Authority on
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consideration of the qualifications and
experience of such a person may exempt the
person from the provisions of minimum
qualification of this section. Such persons
however will have to undergo training as
required under sub-regulation 6(ii) above
(7) The applicant, a partner, a director or the principal
officer does not violate the Code of Conduct as
specified in Schedule III.
(8) Grant of license to the applicant is in the interest
of policyholders.
These are very clear guidelines, which clearly spell out
the requirements for an insurance broker. Failing on
which, a person may not be given broker ship.
CAPITAL ADEQUACY REQUIREMENT
(1) The capital adequacy requirement referred
to in sub-regulation (4) of Regulation 6 shall not be
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less than the net worth of the person making the
application for grant of license.
(2) For the purpose of sub-regulation (1), the
net worth shall be as follows, namely:
CATEGORY MINIMUM AMOUNT
Category I A Rs.25 lakhs
Category I B Rs.25 lakhs
Category II Rs.100 lakhs
Category III Rs.125 lakhs
Category IV Rs. 10 lakhs
Explanation:- For the purposes of this regulation net
worth means in the case of an applicant which is a
partnership firm or a body corporate, the value of the
capital contributed to the business of such firm or thepaid up capital of such body corporate plus free reserves
as the case may be at the time of making application.
SOLVENCY REQUIREMENTS
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(1) Every Insurance Broker shall, throughout the
license period, maintain an excess of the value of his
assets over the amount of his liabilities of not less
than the amount specified (hereinafter referred to as
the required solvency margin), in accordance with
each category of license, namely;
Category I A Direct General Insurance Broker/
Category I B Direct Life Insurance Broker
The greater of Rs.50,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of
Rs. 50,000.
Category II Reinsurance Broker
The greater of Rs.200,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of
Rs. 200,000.
Category III Composite Broker
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The greater of Rs.250,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of
Rs. 250,000.
Explanation: - For the purpose of this regulation
asset means those assets which are either in the
form of cash or can reasonably be expected to be
turned into cash within one year from the date of the
balance sheet. Liability means those liabilities,
which are expected to have been paid within one
year from the date of the balance sheet.
(2) If, at any time an Insurance Broker does not
maintain the required solvency margin in accordance
with sub-regulation (1), he shall, in accordance with
the directions issued by the Authority, submit a
financial plan, indicating a plan of action to correct
the deficiency to the Authority within a specified
period not exceeding three months.
(3) An insurance broker who has submitted a plan
under sub-regulation (2) to the Authority shall
propose modifications to the plan if the Authority
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considers it inadequate, and shall give effect to any
plan accepted by the Authority as adequate.
(4) An Insurance broker who does not comply with
the provisions of sub-regulation (3) shall be deemed
to be insolvent and may be wound up by the court
on the application of the Authority.
(5) Every Insurance broker shall furnish to the
Authority under sub-regulation (3) of regulation 19,
a statement certified by an auditor, of the required
solvency margin maintained by the Insurance Broker
in the manner required by sub regulation (1).
PROCEDURE FOR LICENSING
(1) The Authority on being satisfied that the applicant
is eligible shall
grant a license in Form B and send an imitation to
the applicant
mentioning the category for which the Authority has
granted the
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license.
(2) (i) Notwithstanding anything contained in sub-
regulation (1),
where a license has been granted for a category
other than for
what has been applied for, the applicant, may
make an
application to the Authority at any time after the
expiry of one
year from the date of grant of such license.
(ii) The Authority may consider an application made
under clause
(i) and grant a license for other category.
(3) An application made under clause (i) of sub-
regulation (2) shall
be considered in the same manner as anapplication made under
regulation 3.
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(4) On the grant of a license the applicant shall be liable
to pay the
fees for the category for which the license is
granted in
accordance with schedule II:
Provided the amount of fees payable shall be
proportionately
reduced by the amount of fees already paid by the
Insurance
broker for the year in which the licensing is granted
in the higher
category.
(5) A license granted to an insurance broker, in terms of
these
regulations, shall remain valid for a period of three
years from
the date of issue thereof in the manner prescribedtherein.
DIFFERENCE BETWEEN BROKER AND AGENT
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The distinction between insurance agents and brokers is
that an agent represents one or more insurers for the
purpose of writing policies, while a broker represents
consumers to assist them in obtaining coverage from one
of the companies with which that broker deals
To begin with the most fundamental difference between
broker and an agent is that, an agent works for the
Insurance Company and the broker works on behalf of
the Insured.
The broker works with a number of Insurance companies
as a result is much well positioned to obtain a good deal
for the insured on favorable terms. As against this an
agent works with only one company and promotes
products of one company.
Insurance broking is essentially a full time work where, abroker not only acts as an insurance broker but also risk
management and financial planning for the insured. An
agent as compare is nothing but an insurance
intermediary.
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III DUTIES AND RESPONSIBILITIES OF BROKER
CODE OF CONDUCT:
There is a code of conduct that has been chartered which
outlines what are the duties and responsibilities of an
insurance broker. The objective of the code of conduct is
to establish a recognized standard of professional
conduct to which all insurance brokers should, in the
interest of the public and in the performance of their
duties, conform and in doing so they should bear in mind
this objective and the underlying spirit of this code in this
matter of regulation of their professional standards.
The code is not exhaustive or all embracing and while it
shall serve as a guide to insurance brokers and other
persons concerned with their conduct nevertheless the
mention or the lack of mention in it of a particular act oromission shall not be taken as conclusive of any question
of professional conduct. Claims against insurance
brokers for compensation arising from acts or omissions
amounting to negligence are matters for determination
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by the courts. Nevertheless, acts of gross negligence or
repeated acts of negligence may amount to
unprofessional conduct and notwithstanding that the
matter be the subject of legal proceedings, the Authority
may still investigate the conduct of the Insurance
brokers.
The ethical requirements of any Insurance Brokers
should be based upon the following fundamentals
principles by which an Insurance broker should be
governed in the conduct of his professional relations with
others:-
conduct his dealing with clients with the utmost good
faith and integrity at all times;
act with care and diligence;
inform his clients about the extend of the choice of
products they that are being offered;
inform his clients about the product they are buying
and its price;
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ensure that all products or services he is offering are
suitable to the needs of his clients;
deal prudently with assets held on behalf of others;
maintain adequate financial resources to meet his
commitments;
avoid conflicts of interest;
correct errors and handle complaints fairly and
speedily;
preserve and enhance the reputation of the
profession;
comply with rules and regulations in an open,
transparent and co-operative manner
a. RELATIONSHIP WITH CLIENTS
An insurance broker must:
Conduct their dealings with clients with utmost good
faith and integrity at all times;
act with care and diligence;
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ensure that the client understands his relationship
with the broker and on whose behalf the broker is
acting;
treat all information supplied by the prospective
clients as completely confidential to themselves and
to the Insurer(s) to which the business is being
offered;
take appropriate steps to maintain the security of
confidential documents in their possession;
understand the type of client that they are dealing
with and the extent of the clients awareness of risk
and insurance. This knowledge should be taken into
account in their dealings with their client, and
avoid conflicts of interest.
b. SALES PRACTICES
Insurance Broker must:
Confirm that they are members of the Insurance
Broker Association of India (IBAI); as approved by
the Authority.
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Identify who they are and explain as soon as
possible the degree of choice in the products that
they are able to offer;
Ensure that the client understands the type of
service they can offer
Ensure that the policy proposed is suitable to the
needs of the prospective client;
Give advice only on those matters in which they are
knowledgeable and seek or recommend other
specialist advice when necessary;
Not make inaccurate or unfair criticisms of any
insurer or IBAI member;
Explain why a policy or policies are proposed and
provide comparisons in terms of price, cover and/or
service where they are able to offer more than one
choice of product;
Explain the period for which the quotation remains
valid if cover is not effected immediately;
Explain when and how the premium is payable and
how it is to be collected. Where another party is
financing all or art of the premium, full details should
be given to the client including any obligations that
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the client may owe to that party, and explain the
procedures to follow in the event of a complaint.
c. DUTY TO DISCLOSE INFORMATION
Insurance Brokers must:
Ensure that the consequences of non-disclosure and
inaccuracies are pointed out to the prospective
client;
Avoid influencing the prospective client and make it
clear that all the answers or statements given are
the latters own responsibility. The client should
always be asked to check the details of information
given;
Request their clients to make true, fair and complete
disclosure where they believe that the client has not
done so. If further disclosure is not forthcoming
they should consider declining to act further;
Explain to their clients the importance of disclosing
all subsequent changes that might affect the
insurance throughout the duration of the policy; and
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Disclose on behalf of their client all material facts
within their knowledge and give a fair presentation
of the risk.
d. EXPLANATION OF CONTRACT
Insurance Brokers must:
Identify the insurer and insurers. Any changes once
the contract has commenced must be advised
immediately;
Explain all the essential provisions of the cover
afforded by the policy(ies), they are recommending
so that, as far as possible, the prospective client
understands what is being purchased;
Draw attention to any major or unusual restrictions
and exclusions in the policy, explain how the
contract may be cancelled;
Provide the client with prompt written confirmation
that insurance has been affected. If the full working
of the contract is not included with this confirmation,
it should be forwarded as soon as possible;
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Notify changes to the terms and conditions of any
insurance contract and give reasonable notice before
any changes take effect;
Advise their clients of any insurance proposed on
their behalf which will be effected with an insurer
outside India and, if appropriate, of the possible
risks involved; and
Advise their client that any non-insurance product
will not be subject to IBAI and, if appropriate,
implications in terms of consumer redress and
solvency.
e. RENEWAL PROCEDURES
Insurance Brokers must:
Ensure that their clients are aware of the expiry date
of the insurance even if they choose not to offer
further cover to the client,
Ensure that renewal notices contain a warning about
the duty of disclosure including the necessity to
advise changes affecting the policy, which have
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occurred since the policy inception or the last
renewal date;
Ensure that renewal notices contain a warning that
the proposer should keep a record (including copies
of letters) of all information supplied to the insurer
for the purpose of renewal of the contract; and
Ensure that their client always receives the insurers
renewal invitation (unless they have delegated
authority from an Insurer to issue one on their
behalf).
f. CLAIMS
Insurance Brokers must:
Explain to their clients their obligations to notify
claims promptly and to disclose all material facts and
advise subsequent developments as soon as
possible;
Request their clients to make true, fair and complete
disclosure where they believe that the client has not
done so. If further disclose is not forthcoming they
should consider declining to act further for the client;
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Give prompt advise to the client of any requirements
concerning the claim;
Forward any information received from the client
regarding a claim or an incident that may give rise to
a claim without delay, and in any event within three
working days;
Advise the client without delay of the insurers
decision or otherwise of a claim, and on request give
all reasonable assistance to a client in pursuing his
claim.
g. COMPLAINTS
Insurance Brokers must:
Ensure that letters of instruction, policies and
renewal documents contain details of complaints
handling procedures;
Accept complaints either by phone or in writing;
Acknowledge a complaints not later than 14 days
from the receipt of correspondence, advise the
member of staff who will be dealing with the
complaint and the timetable for dealing with it;
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Ensure that response letters inform the complaints of
what they should do if they are unhappy with the
response;
Ensure that they have a procedure so that
complaints are dealt with at a suitably senior level;
Have in place a system for recording and monitoring
complaints.
h. DOCUMENTATION
Insurance Brokers must:
Ensure that any documents issued by them comply
with all statutory or regulatory requirements from
time to time in force;
Send policy documentation without avoidable delay;
Make available, with policy documentation, advice
that the documentation should read carefully and
retained by the client;
Not withhold documentation from their clients
without their consent, unless adequate and
justifiable reasons are disclosed in writing and
without delay to the client. Where documentation is
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withheld, the client must still receive full details of
the insurance contract;
Acknowledge receipt of all money received in
connection with an insurance policy;
Ensure that they reply promptly or use their best
endeavors to obtain a prompt reply to all
correspondence;
Ensure that all written terms and conditions are fair
in substance and set out clearly and in plain
language clients rights and responsibilities; and
Subject to the payment of any monies owed to them,
make available to any new Insurance Broker
instructed by the client all documentation to which
the client is entitled and which is necessary for the
new Insurance Broker to act on behalf of the client.
i. HANDLING CLIENTS/ INSURERS MONEY
Insurance Brokers must:
ensure that the moneys belonging to clients or
insurers are not mixed with their/his own;
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separate accounts are properly maintained in regard
to those amounts and proper information is
periodically made to the client/insurer.
Ensure that these moneys are banked in a proper
manner;
Ensure that moneys belonging to others are kept
with them for a reasonable period only;
Ensure strict compliance of the provisions of
regulation 17 (i.e Segregation of Insurance moneys).
Insurance Money Segregation this is something very
specifically given in the draft bill by IRDA. Subject to the
provision of Section 64 VB of the Insurance Act, 1938
every Insurance Broker must:
1. treat all money (premiums and claims) received
from or on behalf of an Insured as Insurance
money.
2. ensure that Insurance money is held in an
Insurance Bank Account with one or more
approved scheduled banks or with such other
institutions as approved by the Authority.
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3. give written notice to, and receive written
confirmation from, the bank, or other institutions
that he is not entitled to combine the account with
any other account, or to exercise any right of set-
off, charge or lien against money in the account.
4. ensure that all money received from or on behalf
of an Insured is paid into the Insurance Bank
Account and will remain there until it is passed on
to the insurer or to the insured.
5. only remove from the Insurance Bank Account
charges, fees or commission earned and interest
received from any funds comprising the account.
6. take immediate steps to restore the required
positions if at any time he becomes aware of any
deficiency in the required segregated amount.
j. REMUNERATION
Insurance brokers must:
Reveal all fees or charges (not commission) they
propose to charge the client, which will be in addition
to the insurance premium. Score back of
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commission will be considered as a charge for these
purposes;
Recommend the client in writing of the Insurance
premium and any fees or charges separately and the
purpose of any related services;
If requested by a client, disclose the amount of their
commission or other remuneration they receive as a
result of effecting Insurance for that client. This will
include any payment received as a result of securing
on behalf of the client any service additional to the
arrangement of the contract of Insurance; and
Advice their clients prior to effecting the Insurance of
their intention to make any deductions from the
amount of claim collected for a client where this is a
recognized practice for the type of Insurance
concerned.
DOS AND DONTS OF INSURANCE BROKERS
Giving below are some Dos and Donts of what a
professional Brokers with ethics should follow which has
been compiled from the existence practices worldwide.
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This can assist them in establishing a recognized
standard of professional conduct.
The following are the acts, which if not observed by a
licensed insurance broker may constitute unprofessional
conduct:
Business is to be conducted with utmost good faith and
integrity.
The insurance requirements of the client
and interests of the same client must be satisfies
before all other considerations.
Advertising shall not be misleading and extravagant.
The following are some examples for the application of
these principles:
1. advice is to be provided objectively and independently
2. the description insurance broker must only be used
in connection with the business of insurance inaccordance with the requirements of the guidelines of
IRDA, India.
3. Insurance broker must equip himself with the required
product knowledge and the developments in the
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Insurance field which will help the insured to have
most appropriate policy at an economical rate.
4. all work carried out in connection with insurance
broking must be under the supervision of a qualified
and experience insurance broker.
5. the different types of insurance and relative costs
must be explained on request of the client.
6. a sufficient number of insurance companies policies
must be made available by the broker to satisfy the
insurance requirements of the client.
7. the amount of commission paid by the insurer under
any relevant policy of insurance must be disclosed to
the client on request.
8. the broker must use his skill objectively in the best
interests of the client when choosing an insurance
policy
9. written evidence or documentation relating to the
contract of insurance must not be withheld from the
policyholder.10. the name of all insurers with whom a contract of
insurance is placed must be revealed to the client.
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11. the amount to be charged must be disclosed to the
client before any work involving a charged is
concluded.
12. any payment which is received as a result of securing
any service additional to the arrangement of a
contract of insurance on behalf of the client is to be
disclosed
13. there is to be proper regard for the wishes of a policy
holder or client who seeks to terminate any
agreement with the broker.
14. any information acquired by an insurance broker from
his client shall not be misused.
IV WHAT KIND OF BUSINESS SHALL A BROKER BE
DOING?
CLASSIFICATION FROM BUSINESS POINT OF VIEW
From business point insurance can be classified into two
broad categories:
1. Life insurance; and
2. General insurance
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Life insurance contains the element of investment and
protection, while the accidental, sickness or health
insurance contains the element of indemnity only. Also
the contract provides for the payment of periodic
premium periodically to the insurer by the insured for a
long period of time. This is something very unique to
this.
General insurance business refers to fire, marine, and
miscellaneous insurance business whether carried on
singly or in combination with one or more of them but
does not include capital redemption business and annuity
certain business.
CLASSIFICATION FROM RISK POINT OF VIEW
From risk point of view, insurance can be classified intofour categories:
1. Personal insurance
2. Property insurance
3. Liability insurance
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4. Fidelity guarantee insurance
A brief description of each is given below.
Personal insurance
Personal insurance refers the loss to life by accident, or
sickness to individual, which is covered by the policy.
The insurer undertakes to pay the sum insured on the
happening of certain event or on maturity of the period of
insurance. The insurable sum is determined at the time
of affecting the policy and includes life insurance,
accident insurance, and sickness insurance.
Property insurance
Contract of property insurance is a contract of indemnity.
Proof by the assured of loss is an essential element of
property insurance. The policies of insurance against
burglary, home breaking or theft etc. fall under this
category. The assured is required to protect the insuredproperty. After the loss has taken place, the assured
usually required notifying the police as to losses.
Liability insurance
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Liability insurance is the major field of General insurance
whereby the insurer promises to pay the damage of
property or to compensate the losses to a third party.
The amount of compensation is paid directly to third
party. The fields of liability insurance include: workmen
compensation insurance, third party motor insurance,
and professional indemnity insurance. There may be
various reasons for the arising of liability, viz, accident of
a worker at the workplace, defective goods, explosion in
the factory during the process of production and
formation of poisonous gas within the factory due to the
uses of chemicals and other such substances in the
manufacturing process.
Fidelity guarantee insurance
In this type of insurance, the insurer undertakes to
indemnity the assured (employer) in consideration of
certain premium, for losses arising out of fraud, orembezzlement on the part of the employees. This kind of
insurance is frequently adopted as a precautionary
measure in cases where new and untrained employees
are given position of trust and confidence.
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GLOBAL INDUSTRY STATISTICS
This section gives the important and detailed statistics of
the Indian as well as the Global insurance industry:
The global life insurance market stands at $1,521.2
billion while the non-life insurance market is placed
at $922.4 billion. The United States itself accounts for about one-third
of the $2443.6 billion global insurance market and
Japan stands next with a 20.62% share.
India takes the 23rd position with US $9.933 billion
annual premium collections and a meagre 0.41%
share.
Out of one billion people in India, only 35 million
people are covered by insurance.
India's life insurance premium as a percentage of
GDP is just 1.77 per cent.
The income derived by GIC and its subsidiary
companies through investment was Rs.2491.76 crore
and the investible funds generated was Rs.2843
crore in 1999-2000.
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Indian insurance market is set to touch $25 billion by
2010, on the assumption of a 7 per cent real annual
growth in GDP.
Brokers' commissions amounted to 134 million in
2002
Following are some tables which show the business of
Insurance Internationally and Indias ranking in the
world.
Global Insurance Scenario
(Total in 1999:$2,128.7 billion)
(%)
(Total in 2000:$2,244.3 billion)
(%)
North
America
34.5 37.32
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Europe 31.4 31.93
Asia 29.1 26.46
Oceania 1.9 1.59
Latin
America
1.8 1.67
Africa 1.3 1.03
Total premiums by Country, 2000
Country
Premiums
(USD
millions)
Share ofworld
market
(in %)
*Premiums
in % of
GDP
*Premiums
per capita
(in USD)
United
States865327 35.41 8.76 3152.1
Japan 14 504005 20.62 10.92 3973.3United
Kingdom236960 9.7 15.78 3759.2
Germany + 123722 5.06 6.54 1491.4
France + 121910 4.99 9.4 2051.1
Italy 63062 2.58 5.8 1084.3
South
Korea 1458348 2.39 13.05 1234.1
Canada 11 46587 1.91 6.56 1516.8
Spain 37617 1.54 6.73 954.2
Netherlands 36450 1.49 9.87 2290.2
India 14* 9933 0.41 2.32 9.9
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* estimated
11 Life business: net premiums
14 Financial year 01.4.200031.3.2001
+ provisional
V POTENTIAL IN INDIA
INSURANCE SECTOR IN INDIA
India, with a population of 1 Billion offers great potential
and opportunity for the insurance industry. The insurance
business in India is pegged at $ 6.6 Billion whereas
industry leaders feel privatization will increase it to $ 40
Billion within next 3-5 years.
Today hardly 20 per cent of the population in India is
insured and insurance premium (life as well as non-life)
account for just 2 per cent of GDP as against the G-7
average of 9.2 per cent.
The Malhotra Committee estimated that the insurance
penetration in India is to the extent of about 25 % of the
insurable population. The poor reach of insurance in the
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country and the sheer numbers make India a market with
tremendous potential.
The following facts show how under-developed the Indian
insurance business is due to state monopoly and lack of
aggressive marketing of insurance policies:
Per capita insurance premium in India is a mere
US$ 6, one of the lowest in the world. In South
Korea, the corresponding figure is US$1,338, in
USA it is $ 2250 and in UK it is $1589.
Insurance premium in India accounts for a mere 2
per cent of GDP compared to the world average of
7.8 per cent and G-7 average of 9.2 per cent.
As of 1999-2000, LICs Insurance premium Income was
approximately Rs.32000 crores. It is observed that
currently LIC has about 10 crore policies in force, which
contributes a premium of about 6% of the Gross Domestic
Saving of households in India.
By the year 2010, the premium Income is expected to
account for 18% of the GDS, amounting to Rs.512,000
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crore. In the previous fiscal (2002-03), 8.36 lakh policies
were sold by 12 private insurance companies.
All this reports suggest that there is a huge potential
market to be tapped in India.
IRDA GUIDELINES AS OF TODAY
The Insurance Regulatory and Development Authorityhave stipulated the withdrawal of the five per cent
discount offered by the companies to their clients. A
special discount of 5% in lieu of Agency Commission /
Broker's Remuneration is now available for companies with
a paid up capital above Rs. 10 lakhs.
IRDA has now fixed the agency commission and brokers'
remuneration rates, which vary between 5-17.5 per cent
depending on the type of risks covered and the size of the
company. The new rates will be applicable from April one
for a period of one year.
IRDA had made it compulsory for brokers to invest Rs. 50
lakh in order to offer professional services. Brokers also
have to take up professional indemnity policy three-times
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their brokerage income, with a minimum amount of Rs. 50
lakh.
PRIVATE COMPANIES STATUS
The following table summaries current status of various
companies, which have shown keen interest in this
industry.
COMPANY FOREIGN
PARTNER
SECTOR STATUS
Birla Ltd. Sunlife Life
Insurance
Active
Cadila
Pharmaceuticals
- General
Insurance
Planning
Corporation
bank
- Life
Insurance
Planning
Dabur Allstate,
USA
Life
Insurance
Applied for
License
Gujurat Ambuja
Cement
Money Life
Insurance
Life
Insurance
Planning
HDFC Standard
Life
Life
Insurance
License
Received
ICICI Lombard,
Canada
General
Insurance
Joint
Venture
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formed
ICICI Prudential,
UK
Life
Insurance
Active
India Farmer
Fertilizer Co-
operative
Tokio
Marine,
Japan
Non Life
Insurance
In principal
clearance
Kotak Mahindra
Finance
Old Mutual,
South Africa
Life
Insurance
Active
Max India New York
Life
International
Life
Insurance
Active
Punjab National
Bank, Bank of
Baroda
- Life
Insurance
Planning
Punjab National
Bank, Vijaya
Bank, Allahabad
Bank, Bank of
India
- Non Life
Insurance
Planning
Reliance Group - Life
Insurance
License
Received
Reliance Group - Non Life
Insurance
License
Received
Sundaram
Finance
Royal &
Sundaram
Non Life
Insurance
License
Received
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Alliance
PRIVATE COMPANIES PREPAREDNESS OR ATTITUDE
TOWARDS BROKERS:
Of the companies, which have started their operation, all
are ready to accept business brought in by insurance
brokers. For them it shall be another mode of business
generation along with the agents or the insurance
consultants as they call. Internationally also it is the
Brokers who bring the majority of the business for the
insurance companies as against the agents.
VI AREAS FROM WHERE REVENUES CAN BEGENERATED
AMOUNT OF COMMISSION THAT COMPANIES PAY:
It is expected that brokers are going to be treated on the
same lines, as are the agents today, as far as the
commission is concerned. The structure for paying
commission for the insurance policies is given by IRDA
where it has given the upper limits or the maximum
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commission payable. So a company is free to pay
commission as per its wish provided it does not exceed the
upper limits. Brokers' commissions amounted to 134
million in 2002
Avenues for income, for an insurance agent/broker are
one time commission recurring commission and annual
bonuses. One time commission and recurring commission
are paid as percentage of premium and annual bonus is
paid out of the income that is been generated from the
investments.
The limits for the same is given below.
TYPE OF POLICY COMMISSON LIMITSImmediate Annuity 2% of Premium
Deferred Annuity
(Single Premium)
2% of Premium
Deferred Annuity
(regular Premium)
7.5% of the first years
Premium
2% of PremiumAll other cases
(Endowments, Money
back
etc.)
A maximum of 40%
of the first years
Premium
A maximum of 7.5%
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of the 2nd & 3rd years
Premium
A maximum of 5% of
the 4th & 5th years
Premium
Thereafter, 5% of
the renewal Premium
Total commission
payable in the first 5n
years cannot exceed
60% of the annual
premium payable on
the policy.
These are the upper limits but the exact amount of
commission given companies is not available. Being an up
coming industry and a very competitive one the players in
the industry are not ready to spell out openly what is the
commission that they are offering.
However all have to adhere the to IRDA guidelines which
has given the upper levels beyond which the company
cannot give commission to an agent/consultant.
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VII LIABILITIES TOWARDS BOTH THE PARTIES
MEMBERSHIP TO CLAIM SETTLEMENTS
Insurance broker has to be registered broker with the
IRDA. IRDA has made it mandatory for every broker to
appear for a certification exam every three years
irrespective of he or she having cleared it before. Also
every insurance broker shall take out and maintain a
professional indemnity insurance cover throughout the
validity of the period of license granted by the Authority.
The terms and conditions of the insurance cover must
comply with the following requirements.
1) The insurance cover must indemnify, as a minimum,
an insurance broker against:
(i) breach of duty in relation to any aspect of the
brokers business by reason of any negligent act,
error or omission;
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(ii) Libel or slander committed in the course of
business;
(iii) any loss of money or other property for which
the broker is legally liable in consequence of any
financial or fraudulent act or omission;
(iv) legal liability incurred by the broker by reason of
loss of documents and costs and expenses
incurred in replacing or restoring such
documents;
(v) dishonest or fraudulent acts or omissions by
brokers employees or former employees; and
(vi) any financial penalty imposed by the authority
or by any ombudsman scheme to which the
broker belongs.
2) The insurance policy must not contain any terms
to the effect that payments of claims depend upon the
insured having first made payment.
3) The insurance policy must ensure the payment ofall claims made and reported during the period of the
insurance regardless of the time at which the event-
giving rise to the claim may have occurred.
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4) The insurance policy period shall not be more than 12
months form
Inception or the last renewal date (unless approved
by the Authority). The broker will be required to take
insurance policy on a yearly basis for the entire period
of license.
5) Limit of Indemnity to any one claim and in the
aggregate shall be:
Category I A and Category I B 4 times of brokerage and
fees in a year subject to a minimum limit of Rs 60 lakhs.
Category II 4 times of brokerage and fees in a year
subject to a minimum limit of Rs.3 crores.
Category III 4 times of brokerage and fees in a year
subject to a minimum limit of Rs.6 crores.
Category IV 4 times of brokerage and fees in a yearsubject to a minimum limit of Rs.30 lakhs.
6) The uninsured excess in respect of each claim must
not exceed Rs.
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50,000. The excess may be increased above Rs.
50,000 provided that
the solvency margin required in sub-regulation 18 is
maintained.
7) The insurance policy must be taken out with any
licensed insurer in
India who has agreed to :
(i) provide the broker with an annual certificate as
evidence that the cover meets the requirements
of the Authority. The certificate will contain the
name and address, including the license number
of the broker, the policy number, the limit of
indemnity, the excess and the name of the
Insurer; and
(ii) send a duplicate certificate to the Authority at the
time the certificate is issued to the broker; and
(iii) inform the authority by means of
monthly lists, of any case of voidance, non-renewal or cancellation of cover mid-term.
Every insurance broker must:
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(i) inform the authority immediately should any
cover be cancelled or voided or if any policy is not
renewed;
(ii) immediately inform the insurer in writing of any
claim made by or against it;
(iii) immediately advise the insurer of all
circumstances or occurrences that may give rise
to a claim under the policy; and
(iv) advise Authority as soon as an insurer has
intimated that it intends to decline indemnity in
respect of a claim under the policy.
Since a broker acts on behalf of the insured he should
see that even the claim settlements takes place very
easily. At the same time it is very important that the
broker is only an intermediary he can facilitate in claim
procedure but not settle the claim. An insurance
agreement is between the insured and the insuring
company. So in case if there are any complications orthe errors as to settlement of the claims the two parties
involved are only the insured and the insurance
company. The broker has no capital commitment towards
the insured. He purely works on the principle of utmost
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good faith where the insured provide all the information
which are true and fair and at the same time it is the
duty of the company to honor genuine claims.
VIII MISCELLANEOUS
OTHER INTERMEDIARIES IN INSURANCE BUSINESS
Ideally an insurance company would have openings in the
marketing, distribution, actuarial, underwriting, operations
and investing departments. Though some jobs like
investing, marketing and distribution are the same in any
other industry, actuarial and underwriting jobs are
exclusive to the insurance industry.
Actuaries
An actuary is the heart of an insurance business. An
actuary solves a wide range of financial problems in
insurance, investment, financial planning andmanagement through the use of mathematical, statistical
and economic models. An actuary not only fixes the
premium rates for new products, but also revises both
products and prices. Generally, a big insurance firm
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abroad has about 50 actuaries. Even a medium sized firm
has to have half-a-dozen actuaries, one or two qualified
and the rest apprentices.
Underwriters
Both life and non-life segments require professional
underwriters, who assess the risk in the business. In the
life insurance business, an underwriter is expected to filter
the bad or substandard lives, whereas he takes care of
risk management in the general insurance segment.
Surveyors
Surveyors are professionals who assess the loss or
damage. An insurance surveyor must possess a license
issued by the Controller of Insurance under Ministry of
Finance, Govt. of India. Licenses are issued to technically
qualified people who are engineering graduates or diploma
holders in any discipline, Chartered Accountants,
Graduates in Medical Sciences or Associates in Insuranceof the Chartered Insurance Institute of London or
Federation of Insurance Institute of India. A surveyor
after obtaining the license may be empanelled by any or
all of the insurance companies.
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Operations
Its InfoTech everywhere! The new players would require
elaborate database, a network, and in-house packages to
have an edge over their rivals. Database and network
professionals will, therefore, be in great demand. The
industry would also require software programmers to
develop customized off-the-shelf packages.
Investment
Like banks and mutual funds, an insurance firm will also
need investment professionals to manage its assets.
People with experience in banks and mutual funds would
be preferred. Remuneration would be on par with the
financial sector.
Marketing and Distribution
Insurance is a push product and marketing plays a major
role in a companys success. And the key marketing menwould be the traditional agents. But the private insurance
companies would look at a more professional agent who
not only sells insurance products but also acts like a
personal finance consultant to the customers. There
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would be openings for both the experienced and the
novice. Remuneration would be on commission basis.
IT IN THE INSURANCE INDUSTRY
Today the companies are actively pursuing new IT
initiatives, such as, data ware housing, e-commerce and
componentization. The objective is to get clarity around
the products channels and service features for new
entrants investments in information technology is crucial
for success. It takes time to build it systems and the new
firms need to get of the block soon as possible. Core
processes such as finance policy administration investment
management and basic rate system need to be set up
first. The following processes should be set up after the
core processes:
Sales system and publicity
Claim management and loss control
MIS, product design and supply system,
Data ware housing solutions will be helpful to the
insurance industry in:
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Facilitate strategic decision based on the timely
and accurate data.
Functioning as an effective decision support
system and executive information system.
Capture data quickly from disparate databases
and translating into a format easily
understandable to business and system
professionals.
Assist in understanding customer behaviour and
trends
Freeing up internal technical staff.
Worldwide interest in E-commerce and India's
predominant position in information technology and
software development is also likely to be a major factor
in the marketing of insurance products in the immediate
future.
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CONCLUSION
With the opening up of insurance business in the country
Broker in insurance, are going to play a very importantrole in days to come. They are not just going to be
provider of insurance schemes but shall be acting as the
professional financial intermediaries providing risk
management services to the prospective insured.
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Broking in insurance is going to be a big industry as it
has been internationally with insurance brokers evolving
to be the main business generator for the Insurance
Company. With the amount of commission that has been
offered to insurance agents it is expected that the same
or probably more shall be offered to insurance brokers.
Super imposing this to the fact that about only 20 %
insurable population of the country is currently insured
this business holds very good prospect.
This industry also makes a very good business as it
attracts a very less investment and has virtually no
liability that a broker has to take on his name.
To conclude insurance broking shall be a pure financial
service intermediary, which shall put life in all the non-
life activities of the Indians.
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BIBLOGRAPHY
irdaindia.org
irdaonline.org
bimaguru.com
bimaonline.com
bimakoj.com
themanagementor.com
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