MBC - 307 - Session 1

8/8/2019 MBC - 307 - Session 1

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MBC ± 307 :

BANKING & INSURANCE MANAGEMENT

Session 1

Introduction to Insurance:

± Definition and Basic Concepts

± Evolution of Insurance Business

± An Overview of the Insurance sector

8/8/2019 MBC - 307 - Session 1


2

The Concept of Risk

Integral to the concept of Insurance

Defined as the possibility of adverse resultsflowing from any occurrence.

Uncertainty gives rise to risk.

There should be at least two possibleoutcomes of which, one is Undesirable.

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3

Insurance

Insurance is a cooperative device to spread the loss

caused by a particular risk over a number of persons

who are exposed to it.

Insurance is a legal contract that transfers risk froman insured to an insurer in exchange for a premium.

People exposed to the similar risks come together and pool

funds to protect each individual against that risk.

Thus risk is spread out.

Insurance can not reduce the probability of risk.

It only spreads the financial loss.

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4

Insurance: functional definitions

Insurance is the collective bearing of risk.(William Beveridge)

Insurance is a plan by which a large number of

people associate themselves and transfer, to

the shoulders of all, risks attached to

individuals. (D H Magee)

Insurance is a source of distribution of loss of

few persons into many persons. (Rock Fell)

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5

Insurance: legal definitions

Insurance is a contract in which a sum of money is paid by the

assured in consideration of the insurer¶s incurring the risk of

paying a large sum assured upon a given contingency.

(Chief Justice Tindal)

An insurance transaction involves the following -

Insurer: Party agreeing to pay for the losses of the insured.

Insured: The party who insures his risk with the insurer.

Premium: The consideration payable to the insurer by the

insured.

Policy: The contract between the insurer and the insured

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6

How Insurance Works

Example :

In a particular city there are 1000 houses each

costing, say, Rs.1,00,000. Every year, there is a

probability that 4 houses are destroyed by fire,

resulting in a total loss of Rs. 4,00,000.

If all of the 1000 house owners join a common pool

of fire insurance, amount payable by each houseowner is Rs.400. (ignoring expenses / profit of the

insurer)

8/8/2019 MBC - 307 - Session 1


8/8/2019 MBC - 307 - Session 1


Evolution of

Life Insurance Business

ENGLAND

± Evolved in England in the 16th century

± First Life Policy: William Gybbons (18.06.1653), as

per recorded evidence

± 1st Registered Life office in England: Hand in Hand

Society (1696)

INDIA

± Oriental Life Assurance (Calcutta: 1818)

± Bombay Mutual Life assurance (Bombay: 1871)

8/8/2019 MBC - 307 - Session 1


Evolution of

Marine Business

Oldest form of insurance

Existed in the early days of marine trading to protect

against risks due to natural hazards, sea piracy,

capture by the enemy country and so on

Marine policies in the modern form started in Europe

during 14th century

In the 19th century, Lloyd's and the Institute of London

Underwriters developed between them standardized

clauses for the use of marine insurance, and these

have been maintained since.

8/8/2019 MBC - 307 - Session 1


Evolution of

Fire Business

Originated in Germany during 16th century

Got momentum in England after the Great Fire-1666

± Continued for 5 days

± 13200(85%) houses and 87 churches destroyed

± 1.5 miles x 0.5 mile area reduced to ashes

± Property worth 1 billion Sterling were destroyed

With colonial expansion of England, it spread allover the world

In India, it took off with Triton Insurance, Calcutta

(1850)

8/8/2019 MBC - 307 - Session 1


The History of

Insurance Business in India

Pre-Independence Scenario

± 1912: The Indian Life Assurance Companies Act -

the first statutory measure to regulate life insurance

business

± 1928: Indian Insurance Companies Act - enacted to

enable the Government to collect statistical

information about both life and non-life business

± 1938: Insurance Act, 1938 - enacted by

consolidating the earlier legislations with a view to

protect the interest of insuring public

8/8/2019 MBC - 307 - Session 1


The History of


Nationalisation Era

± In spite of mushrooming insurance companies, the

per capita insurance in India was only Rs.8 (as

against Rs.2000 in US and Rs.600 in UK)

± Lack of public faith due to malpractices and

liquidation of many insurance companies

± 1956: Nationalisation of life insurance business with

the enactment of LIC Act. LIC of India formed to take

over the business of about 250 companies

± 1972: The General Insurance Business

(Nationalisation) Act, 1972 nationalised the general

insurance business with effect from 1st Jan 1973

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The History of


Ready to Open Up (1999)

± Govt. and the public were not satisfied with the

growth of the insurance sector (only 20% of the

insurable population were covered)

± Monopoly resulted in lack of sensitivity to the

policyholders

± GOI commits at GATT (the earlier avataar of WTO)

to open up insurance sector to local and global

operators

± Malhotra Committee appointed to look into the

reforms in insurance sector

8/8/2019 MBC - 307 - Session 1


Introduction to Insurance:


Post-IRDA era

± Insurance Regulatory and Development Authority (IRDA)

formed by IRDA Act 1999

± Based in Hyderabad, this regulatory body is presently

headed by Mr. Hari Narayana ± No. of insures (still increasing):

Life ± 22, Non-life ± 21, Reinsurer ± 1

± Life Insurers have approx. 11,700 branches of which about

8,400 branches are set-up by private companies

± The capital deployed - Rs. 232bn by life insurancecompanies (66% jump from Rs139bn in 2007)

± Total assets of life insurance companies have grown to

Rs.8,568 bn as on December 31, 2008.

8/8/2019 MBC - 307 - Session 1


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