MIMR IndianInsSector1 2011

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Insurance Sector In India

S.Krishnamoorthy: [email protected], Cell:9821461488

@Source Data Acknowledgement: RBI & Various Internet Sources
mailto:[email protected]:[email protected]


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Indian Insurance Sector: History & Milestones

1805:The 1st general insurance company the Triton Insurance Company Ltd

formed

1818:The Oriental Life Insurance Company was formed in Kolkata

1907:Indian Mercantile Insurance Limited was the first company to handle all

forms of insurance

1912:Beginning of a new era with the passing of the Life Insurance Act

1928:The Indian Insurance Companies Act* was passed

1938: Consolidated & amended Insurance Act passed to protect the interests of

the insuring public

1956:

245 Indian and foreign insurers and provident societies were nationalized

by the GOI

LIC formed by an Act of Parliament [LIC Act, 1956] with an initial capital

contribution of Rs5 cr from the GOI


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1957:General Insurance Council framed code of conduct for ensuring fair conduct

and sound business practices

1968:The Insurance Act amended to regulate investments and set minimum

solvency margins and establish the Tariff Advisory Committee

1972:The General Insurance Business (Nationalization) Act** nationalized

the general insurance business in India effective 1Jan973

1993:Malhotra Committee was formed to evaluate the Indian insurance industry

and recommend reforms

1999: Insurance Regulatory and Development Authority[IRDA] act was passed by

the Parliament



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2000:

Formation of the Insurance Regulatory and Development Authority (IRDA)Insurance sector liberalized with permission for entry of Private and Foreign

Insurance players

FDI investment up to 26% allowed in Insurance Sector [proposed to be

increased to 49%]

2001: IRDA notified Protection of Policyholders Interest Regulations

2007: Insurance companies came under detariffing regime effective1Jan07



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*The Indian Insurance Companies Act [1928]Empowered the government of India to gather necessary information aboutthe life insurance and non-life insurance organizations operating in India

**The General Insurance Business (Nationalization) ActAmalgamted107 insurers grouped into four companies viz.

National Insurance Company Ltd

New India Assurance Company LtdOriental Insurance Company Ltd

United India Insurance Company Ltd

General Insurance Corporation [GIC] (Indian Reinsurer) incorporated as a

company



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Past: Pre Detariff upto Dec2006 Good customers paid for bad ones and who better managed risks

paid the same premium as their bad counterparts

Cross subsidization of products prevailed

Underwriting skills of the insurers were smothered

No product Innovation

Insurance Industry Scenario


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Post Detariff since Jan2007 Insurance buyers got choiceonly on one P - Price A steady/steep fall in property rates for good risks

Aggressive competitiongood & bad risks alike!

Emergence of new model portfolio underwriting

Future Since Apr2008 Complete freedom to change all product features

Ease of offering customized products

Widening the scope of cover thus making way to offer innovative

products

Insurance Industry Scenario


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Insurance provides indemnity or benefit in the event of an unanticipated

death, accident or loss

Insurance covers both life and property against multitude of risks

Insurance offers variety of risk covers duly customized

Primary Functions:

Providing protection: Insurance provides protective cover against future risk,accidents and uncertainty

Evaluating risk: Insurance determines extent of risk by assessing diverse factors

that give rise to risk which then is the basis of premium fixing

Provide Certainty: Insurance assists in changing uncertainty to certainty

Collective risk bearing: Insurance is an instrument to share the financial loss . It

provides protective cover against economic loss by apportioning the risk with

others

Basic Functions of Insurance


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Secondary functions:

Preventing losses: Insurance drives individuals and business to adoptappropriate loss prevention/ minimization measures like observing safety

instructions, installation of automatic sparkler or alarm systems, etc.

Covering larger risks with small capital: By paying small amount of premium large

portion of risk can be covered thus providing comfort to individuals and business

Helps in large scale economic development: By underwriting risks Insurance

shares the risks with capital market and credit market thereby assisting large

business to be set up



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Other functions:

Promotes savings and investment: Insurance is a necessary savings and

investment avenue and also offers tax shield

Boost to trade: Specialized insurance firms [Ex. ECGC, AIC] and insurance

covers[Ex. Mega policy, Marine Insurance policy] boost risk free local and

international commerce & trade

Source of earning foreign exchange: A country can earn foreign exchange issue

of marine insurance policies, risk re-insurance and insurance advisory, etc

Source of livelihood: Different aspects of Insurance like consultancy , risk

advisory, underwriting, risk survey, actuarial valuation , claim assessment , etcprovide immense livelihood


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In 1993 Malhotra Committee was formed to evaluate the Indian insurance industry

and recommend its future direction.

The 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 and competitive financial system suitable for the

requirements of the economy keeping in mind the structural changes

currently underway and recognizing that insurance is an important part of the

overall financial system where it was necessary to address the need for

similar reforms"

Malhotra Committee on Insurance Sector Reforms [1993]


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Structure

Government stake in the insurance Companies to be brought down to 50%

Government should take over the holdings of GIC and its subsidiaries sothat these subsidiaries can act as independent corporations

All the insurance companies should be given greater freedom to operate

Competition

Private Companies with a minimum paid up capital of Rs.1bn should be

allowed to enter the industryNo 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 domestic companies

Postal Life Insurance should be allowed to operate in the rural market

Only One State Level Life Insurance Company should be allowed to operatein each state

Key Recommendations of Malhotra Committee Report [1994]


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Regulatory Body

The Insurance Act should be changed

An Insurance Regulatory body should be set upController of Insurance (Currently a part from the Finance Ministry) should be

made independent.

Investments

Mandatory Investments of LIC Life Fund in government securities to be

reduced from 75% to 50%.GIC and its subsidiaries are not to hold more than 5% in any company (There

current holdings to be brought down to this level over a period of time).

Customer Service

LIC should pay interest on delays in payments beyond 30 days

Insurance companies must be encouraged to set up unit linked pension plans

Computerization of operations and updating of technology to be carried out in

the insurance industry

Key Recommendations of Malhotra Committee Report [1994]


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IRDA was set up by the parliament in 1999

The mission of IRDA is To protect the interest of the policy holders, to regulate , promote and

ensure orderly growth of the insurance industry and for matters connected

therewith or incidental thereto

The section 4 of IRDA Act' 1999, specify the composition of Authority The Authority is a ten-member team appointed by the GOI consisting of

Chairman

Five whole-time members

Four part-time members

Duties, Powers and Functions

Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of

IRDA

Duty to regulate, promote and ensure orderly growth of the insurance

business and re-insurance business

Insurance Regulatory and Development Authority [IRDA]


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The powers and functions shall include:

Issue to the applicant a certificate of registration, renew, modify, withdraw,suspend or cancel such registration

Protection of the interests of the policy holders in matters concerning assigning

of policy, nomination by policy holders, insurable interest, settlement of insurance

claim, surrender value of policy and other terms and conditions of contracts of

insurance

Specifying requisite qualifications, code of conduct and practical training for

intermediary or insurance intermediaries and agents

Specifying the code of conduct for surveyors and loss assessors

Promoting efficiency in the conduct of insurance business

Promoting and regulating professional organizations connected with the

insurance and re-insurance business

Powers and Functions of IRDA


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Calling for information from, undertaking inspection of, conducting enquiries and

investigations including audit of the insurers, intermediaries, insurance

intermediaries and other organizations connected with the insurance business

Control and regulation of the rates, advantages, terms and conditions that may

be offered by insurers in respect of general insurance business not so controlled

and regulated by the Tariff Advisory Committee under section 64U of the

Insurance Act, 1938 (4 of 1938)

Specifying the form and manner in which books of account shall be maintained

and statement of accounts shall be rendered by insurers and other insurance

intermediaries

Regulating investment of funds by insurance companies

Regulating maintenance of margin of solvency;

Adjudication of disputes between insurers and intermediaries or insurance

intermediaries



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Levying fees and other charges for carrying out the purposes of this Act

Supervising the functioning of the Tariff Advisory Committee

Specifying the percentage of premium income of the insurer to finance

schemes for promoting and regulating professional organizations

Specifying the percentage of life insurance business and general insurance

business to be undertaken by the insurer in the rural or social sector

Exercising such other powers as may be prescribed

IRDA has notified 27 Regulations on various issues which include Registrationof Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance,

Obligation of Insurers to Rural and Social sector, Investment and Accounting

Procedure, Protection of policy holders' interest etc.



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IRDA has till now provided registration to

12 private life insurance companies and9 general insurance companies

If the existing public sector insurance companies are considered then there are

presently 13 insurance companies in the life side and 13 companies functioning in

general insurance business

General Insurance Corporation has been sanctioned as the "Indian reinsurer" for

underwriting only reinsurance business.

Registration of Private Insurance Companies


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IRDA has the responsibility of protecting the interest of insurance policyholders.

Towards achieving this objective, the Authority has taken the following steps:

IRDA has notified Protection of Policyholders Interest Regulations 2001 to providefor policy proposal documents in easily understandable language, claims

procedure in both life and non-life, setting up of grievance redressal machinery,

speedy settlement of claims, and policyholders' servicing

The Regulation also provides for payment of interest by insurers for the delay in

settlement of claim

The insurers are required to maintain solvency margins to meet obligations with

regard to payment of claims

It is obligatory on the part of the insurance companies to disclose clearly the

benefits, terms and conditions under the policy. The advertisements issued by

the insurers should not mislead the insuring public

All insurers are required to set up proper grievance redress machinery in their

head office and at their other offices

The Authority takes up with the insurers any complaint received from thepolicyholders in connection with services provided by them under the insurance

contract

IRDA: Protection of the interest of policy holders


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The solvency ratio of an Insurance company is

The size of its capital relative to premium written

A measure of the risk an insurer faces of claims that it cannot absorb

A basic measure of financial soundness of an insurer

An indicator of how solvent or how prepared an insurer is to meet unforeseen

exigencies

It is the extra capital an insurer must hold

Specified by the Insurance Regulator considering the type/s of business theInsurer does

A simple calculation based on Net assets Net premium written[The amount of premium written as against the total amount insured is

considered a better indicator of the likelihood of claims!!]

Solvency Ratio for Insurance Company


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IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000

specify that both life and general insurance companies must maintain solvency

It require all non-life insurers to follow the regulations and the life insurer is

expected to maintain 150% solvency margin

It requires all insurers to determine & disclose the required solvency margin

[RSM],the available solvency margin [ASM] and the solvency ratio in theprescribed method and format

ASM for life insurers means the excess of value of assets over the value of life

insurance liabilities and other liabilities of policyholders fund and shareholders

funds

ASM for other insurers means the excess value of assets with further

adjustments as prescribed

Solvency Ratio means the ratio of the amount of ASM to the amount of RSM

IRDA Regulation on Solvency Margin of Insurers


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Required Solvency Margin 1 [RSM 1] based on net premiums, and shall be determined

as 20% of the amount which is the higher of the Gross Premiums multiplied by a

Factor A as specified below and the Net Premiums

RSM-2 based on net incurred claims and shall be determined as 30% of the amount

which is the higher of the Gross Net Incurred Claims multiplied by a Factor B as

specified below and the Net Incurred Claims

RSM shall be the higher of the amounts of RSM-1 and RSM-2

IRDA Regulation on Solvency Margin of Insurers

Item No Description (Class

of business)

A B

1 Fire 0 .5 0.5

2 Marine Cargo 0 .7 0.7

3 Marine Hull: 0 .5 0.5

4 Motor 0 .85 0.85

0 .5 0.5

6 Aviation 0 .9 0.9

7 Liability 0 .85 0.85

8 Rural Insurance 0 .5 0.5

9 Others 0 .7 0 .7

10 Health 0 .85 0.85

5 Engineering


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IRDA regulations on InvestmentsIRDA regulations stipulates that without prejudice to Section 27 or 27(b) of the Act,

every insurer carrying on General Insurance Business shall invest and at all times

keep invested his total assets in the following manner

Details of IRDA Regulations on Investments

Type of Investment (%)

Central Government Securities being not less than 20State Government Securities and other Guaranteed Securities including (i) abovebeing not less than

30

Housing and Loans to State Government for Housing and Fire Fighting equipment,being not less than,

5

Investments in Approved Investments as specified in Schedule II.

a )Infrastructure and Social Sector with in the meaning of IRDA regulations notless than 10

b )Others to be governed by Exposure Norms specified in IRDA regulation(Investment in "other than approved investments" can in no case exceed 25% ofthe assets) not exceeding

55


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Major provisions

a.Approved Investmentsb.Investments by way of other than

Approved Investments

To be not less than 75% of the assets of GIC.Notmore than 25% of the assets of GIC.

Investments in shares

a) Shares of any one Banking/ InvestmentCompany.

Not to exceed -i) 10% of assets of the insurerorii)2% of the Subscribed Share Capital andDebentures of the investee company, whichever isless

b) Shares and Debentures of any one companyother than Banking/Investment Company.

Not to exceed -i) 10% of assets of the insureror

ii) 10% of the Subscribed Share Capital andDebentures of the investee company, whichever isless.

Investment in Private Company Not allowedInvestment in Fixed Deposits/ Current Deposits withany one Banking Company

Not to exceed 10% of assets of the insurer.

Investments are made within the regulatory framework of Insurance Act, and IRDA

Regulations and within corporate policy and the funds of the insurer are managed

in-house

Investments and Fund Management in Insurance Company


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Insurance sector has been opened up for competition from Indian private insurance

companies with the enactment of IRDA Act 1999

IRDA Act paved the way for the entry of private players into the insurance market

hitherto dominated by PSUs

Under the new dispensation Indian insurance companies in private sector were

permitted to operate in India with the following conditions:Company is formed and registered under the Companies Act, 1956

The aggregate holdings of equity shares by a foreign company, either by itself or

through its subsidiary companies or its nominees, do not exceed 26%, paid up

equity capital of such Indian insurance company

The company's sole purpose is to carry on life insurance business or general

insurance business or reinsurance business.

The minimum paid up equity capital for life or general insurance business is

Rs100 cr.The minimum paid up equity capital for carrying on reinsurance business has

been prescribed as Rs200 cr.

Major Policy Changes in Insurance Sector


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Personal Insurance:Taken by an Individual [for himself or his relative/s] or for

group of peoples [by a company for its employees] covering perils of death,

accident, health, disability, medical expenses, funeral expenses, pension,annuity etc

Property Insurance:Taken by an Individual/ group of persons/company

covering property like house, vehicle, plant & machinery, inventory, other

property against losses from fire, theft, burglary, earthquake, machinery

breakdown, accident, etc

Liability Insurance:Taken for covering claims arising due to professional

conduct, product/services , acts of directors & officers, environmental liability,

etc

Credit Insurance & Credit Default Swap [CDS]:Taken by theLender/Business as protection in the in the event that the borrower/Sundry

Debtor/Credit Card holder passes away, becomes unemployed, or becomes ill

before the debt is fulfilled.

Catastrophe [CAT] Insurance:For covering for specific disastrous events like

hurricane, flood, earthquake, etc that can cause severe losses to insured

Broad Types of Insurance Cover


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Indian insurance companies offer a comprehensive range of insurance plans

growing in tandem as the economy matures and the wealth of the middle classes

increases and insurance penetration spreads

Some common types of Life/Personal Insurance plans are:

1. Term life policies

2. Endowment policies

3. joint life policies

4. Whole life policies5. Loan cover term assurance policies

6. Unit-linked insurance plans

7. Group insurance policies

8. Pension plans and annuities

9. Mediclaim /Health Plan

10.Travel Insurance11.Kidnap and ransom insurance

12. Income Protection Insurance

13.Directors and Officers Liability Insurance

14.Professional Liability [Indemnity] Insurance

15.Workers [Workmen] Compensation Insurance

16.Key man insurance

Range of Insurance Covers


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Some types of General/Property insurance plans are:

1. Property Insurance [including caused by SRCC]

2. Comprehensive Motor insurance3. Marine Insurance, Aviation Insurance

4. Home insurance

5. Export Credit Insurance

6. Business Insurance, Business Interruption Insurance

7. Crop Insurance, Crop Credit Insurance

8. Nuclear Energy Insurance9. Pollution Insurance

10.Cash in transit Insurance

11.Cash in Safe Insurance

12.Fidelity Guarantee [Risk] Insurance

13. Inland Goods in Transit Insurance

14.Overseas Goods in Transit Insurance15.Stock in Trade/ Stock Throughput Policy

16.Erection All Risk Policy

17.Goods in Storage Policy

18.General Commercial Liability Policy

19.Credit risk insurance

20.Oil & gas deficiency insurance

Range of Insurance Covers


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Insurance companies especially are balance-sheet-driven businesses

Challenges in Balance Sheet [Fund] Management in Insurance Business

Policyholder money we don't have yet include:

Future premiums to be received (premiums receivable)

Money that the reinsurers owe (reinsurance recoverable)Money already paid to reinsurers for future reinsurance policies (prepaid

reinsurance premium)

Money already paid [but not expensed yet] such as agent commissions and

premium taxes, to acquire policies (deferred acquisition cost)

As s e ts [Amt in Rs c ro re ] Ins ure r A Ins ure r B

Inves tments 14,300 3,300

P olicyholder Money We Don't Have

Yet 3,450 530

Other Assets 1,160 230

To tal As s e ts 18,910 4,060

Simplified Balance Sheet


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Policyholder money we have include

Unearned premiums (policyholder money paid for future coverage)

Loss and loss adjustment expense (policyholder money set aside for

already Incurred losses, incurred but not reported losses, and the cost ofsettling claims)

Other policyholder liabilities

Float = Policyholder money we have - Policyholder money we don't have yet

The three main aspect of the balance sheet Float, Debt and shareholder's

equity

Shareholders equity represent the Liquidation value

Liabilitie s & Equity [Amt in Rs

c ro re ] Ins ure r A Ins ure r B

Policyho lder Money We Have 10,000 2,000

Debt 1,300 160

Other Liabilities 1,510 300

Shareholders ' Equity 6,100 1,600

To tal Liabilitie s + Equity 18,910 4,060

Simplified Balance Sheet



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Brief Summary of Other Challenges:

Premium receipts: Variable, uncertain, cyclical, subject to competition, some

portion refundable

Premium payments: Variable, subject to inflation , claims history and other

factors, non-payment could be construed as default with serious consequence

Claims: Could be sudden, very high, untimely, constant

Other expenses: Ever increasing and high in certain cases/periods

Investments: subject to Regulations, portfolio constraints, lack of long term

investment avenues , low returns, high risk, impact of interest rate changes

Debt: Cost could be high, lack of long term sources, stricter covenants andoptions

Equity: Restrictions from regulator, capital market constraints

Solvency requirements: Could impose restrictions on business , lead to higher

risks and costs



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Risk becomes insurable if it has the followingcharacteristics: It must be fortuitousin nature [by chance or accident rather than

design]

It must be a pure risk [only loss is the possible outcome

the loss caused by the risk must be capable of being measuredin terms of money

The risk must not be of an illegalnature

Characteristics of Insurable Risk


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