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Insurance IndustryInsurance Industry
Purnendu Shakunt
Ravi Bhartia
Shilpa Nayak
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Insurance SectorInsurance Sector
Introduction and Overview
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Insurance IntroductionInsurance Introduction
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What is Insurance?What is Insurance?
y Commercial mechanism for transferring riskand spreading loss
y
Economic Concept of Insurance:1. Insurer offers policy to cover specifiedrisks
2. Insurer collects policy premiums from
customers3. Insurer invests premiums
4. Insurer pays money to insured customersin the event of losses covered by policy.
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What is InsuranceWhat is Insurance
y Theoretically, everybody comes out ahead(so long as losses do not exceed returns
of invested premiums; and all parties
honor their contractual obligations).
y Theoretically, the insurance industry
bridges private interests and public good.
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Why do we need insurance?Why do we need insurance?
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Why do we need insurance?Why do we need insurance?
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Insurance LawInsurance Law
Sources of Insurance Obligations
y Policy/Insurance Agreement
y Common Law (contract theories; tort
theories)y Statutes
y Regulations
The law of insurance is multi-layered. The prudentresearcher will consider each of the layerswhen approaching a research problem.
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The History of InsuranceThe History of Insurance
y 3000 B.C.E. Mesopotamian merchantsassess risk surcharges in transactions
with caravan operators and traders to
protect their capital.
y 1750 B.C.E. Code of Hammurabi
formalizes concepts of bottomry andrespondentia (protection against loss of
hull and cargo, respectively) the
underpinnings of maritime insurance. 9
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Contd.Contd.
y Mid-18th Century Many insurance companiesare more likely than banks to have substantialcash reserves. Insurance companies function aslending institutions.
y Mid-18th Century Insurance underwriting isprosperous industry in America. Lloyds ofLondon also draws a significant share ofColonial Americas underwriting business(capitalization).
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Contd.Contd. -- LloydsLloyds of Londonof London
y Today, Lloyds ofLondon is aninsurance icon
y Not an insurancecompany, but anexclusive insurancemarket
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ClassesClasses of Insuranceof Insurance
A. Life insurance
B. General insurance
General insurance is further classified:-
1.Fire insurance
2.Marine insurance
3.Miscellaneous insurance
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Miscellaneous Insurances:Miscellaneous Insurances:--
1.Motor insurance
2.Mediclaim insurance
3.Householders insurance4.Shopkeepers insurance
5.Engineering insurances
etc.
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1.Insurable interest1.Insurable interest-- Means financial interestMeans financial interest
2.Utmost good faith2.Utmost good faith-- Greater duties ofGreater duties of faith onfaith on proposer &proposer &insurerinsurer
3.Indemnity3.Indemnity--Actual compensation ofActual compensation of loss; notloss; not applicable in lifeapplicable in lifepoliciespolicies
4.Subrogation4.Subrogation--Transfer of rights of insured toTransfer of rights of insured to
insurer. Not applicable in life policies.insurer. Not applicable in life policies.
5.Contribution5.Contribution--Sharing of loss by all insurers. NotSharing of loss by all insurers. Not
applicable in life policies.applicable in life policies.
Fundamental Principles of Insurance
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Market IntermediariesMarket Intermediaries
Who procure the insurance business:
y Agents
y Corporate agentsy Insurance brokers
y Banks (Banc assurance)
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Basic Life Insurance PoliciesBasic Life Insurance Policies
Term assurance policyy Provides death cover only
during policy periody Premium is low
y No refund of premium
y Sum assured paid on death
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Whole Life PolicyWhole Life Policy
Death cover only
Period is not specified
Premium is low & paid during lifetime
o refund of premium
Sum assured paid on death
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Endowment Assurance PlanEndowment Assurance Plan
Covers death & survival
Benefits
Sum assured paid on death or on
maturity of policy
Period of policy at the option ofproposer
Most common plan
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Money Back PolicyMoney Back Policy
y Available for different periods
y Covers death & survival benefits
y Lump sum paid periodically
y Full sum assured paid on death
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Unit Linked Insurance PoliciesUnit Linked Insurance Policies(ULIP)(ULIP)
y Each premium split into units and risk
premium for life cover
y Units are priced as per currentmarket value
y Sum assured & current value of units paid
on death
as per policy conditiony Current value of units paid on maturity
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Annuity (Annuity (Pension) PlansPension) Plans
y These are pension plans
y Immediate annuity or deferred annuity
starts at specified age periodicallyy Single premium paid for immediate
annuity
y
Premium in installments paidfor deferred annuity
y Life cover simultaneously
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Important aspects of Life InsuranceImportant aspects of Life Insurance
PoliciesPolicies
y Policies available with bonus or without bonus
y Death due to accidents can be covered for
additional S.A.y Policies available exclusively for women &
children
y Additional cover for major diseases available
y Guaranteed bonus policies available
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Important aspects of Life InsuranceImportant aspects of Life Insurance
PoliciesPolicies
y Policies available for limited period
premium payment & risk for longer policy
period
y Premium can be paid in monthly,
quarterly, half yearly, yearly installments
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Important aspects of Life InsuranceImportant aspects of Life Insurance
PoliciesPolicies
y Loans are available on policies
y Lapsed policies can be revived
y Policy can be surrendered after threeyears
y Nomination & assignment can be done
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Growth of Insurance BusinessGrowth of Insurance Business
y Life Insurance Premium from Rs.400 croresin 1956 to Rs.221791 crores in 2008-09
with 10.15 % growth over 2007-08
y General Insurance Premium from Rs.200
crores in 1972 to Rs.38182 crores in 2009-
10 with 16.55 % growth over 2008-09
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Economic GrowthEconomic GrowthGDP 8.7 % in 2007GDP 8.7 % in 2007--0808
Sector Growth % of GDP
Agriculture 2.6 17.5
Industry 8.9 26.8
Services 10.7 55.7
(Fin.& 11.7 14.7
Insurance)
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GROWTH POTENTIALGROWTH POTENTIAL
y At present insurance penetration in India
is quite low 2.26% of GDP.
y In Korea the penetration stands at 6.77%,
y In Singapore 6.38%.
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Emerging TrendsEmerging Trends
y Detariffing in General Insurance from1.1.2007 leading to greater price war &
new products in future
y Banks entering insurance market through
joint ventures with foreign finance majors
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Emerging TrendsEmerging Trends
Increasing Role of
y Insurance Brokers
y Banc assurancey Corporate Agency
y IT intervention & uses
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Emerging TrendsEmerging Trends
Greater Job Opportunities:
y For thousands of Insurance
Managers, IT Professionals
y For lacs of Insurance Advisors
y For Insurance Professionals
y For Risk Managers
y For Underwritersy For claim Settlements
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Emerging TrendsEmerging Trends
Increasing No. of Insurance companies &
Intermediaries
Increasing Awareness about Insurance
Growth in GDP
Increasing No. of Middle Class
Vast No. of uninsured population
Untapped potential for General Insurance
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Emerging TrendsEmerging Trends
y Increasing awareness about HealthInsurance
y Increasing awareness about Personal Line
Insurance like House, Shop, PersonalAccident
y Market flooded with new insurance
products
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Changing Customer ExpectationsChanging Customer Expectations -- LIFELIFE
Role of IRDA
Educate public on regulatory safeguards,investment guidelines and plough backof profits
(several people had expressed concern aboutsecurity of their money, credibility of privateinsurance companys investment of funds inforeign markets and repatriation of profits toforeign countries)
Inform public on Social and Rural obligations ofprivate players (several people believed that onlyLIC was responsible for insuring the poor)
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Changing Trends in Savings PatternChanging Trends in Savings Pattern
Pre Liberalization Post Liberalization
Saving Instruments % of Respondents
Insurance 23
Bank Deposit 28
PPF 19
NSC 12
Shares 7
Post office 7
Bonds 0
Gold 4_
TOTAL 100
Saving Instruments % of Respondents
Insurance 33
Bank Deposit 44
PPF 8
NSC 0
Shares 3
Post office 3
Bonds 9
Gold 0_
TOTAL 100
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PerformancePerformance
Contribution of Life Insurance Sector in
the Indian Economy
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STRUCTURE OF INSURANCESTRUCTURE OF INSURANCE
INDUSTRYINDUSTRY
Historical Perspective
Prior to 1956: 242 companies operating
1956 2001: Nationalisation
(LIC Monopoly player; Governmentcontrol)
2001 : Opened up sector 37
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Present Structure of Insurance IndustryPresent Structure of Insurance Industry
LIC Fully owned by Government
Postal Life Insurance
Private Players
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CONTRIBUTIONCONTRIBUTIONTOTO INDIANINDIAN ECONOMYECONOMY
y Life Insurance is the only sector which
garners long term savings
y Spread of financial services in rural areas
and amongst socially less privileged
y Long term funds for infrastructure
y Strong positive correlation between
development of capital markets andinsurance /pension sector
y Employment generation
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AggregationAggregation ofof LongLongTermTerm SavingsSavings
Industry is growing @ 19 p.a.
Life Insurance funds account for 15% ofhousehold savings.
The industry has the potential to increasethe share to 20%.
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Spread offinancial services in rural areasSpread offinancial services in rural areas
and amongst socially underprivilegedand amongst socially underprivileged
IRDA Regulations provide certain minimum
business to be done
(i) in rural areas(ii) in the socially weaker sections
Life Insurance offices are spread over nearly
1400 centres. Presence of representative in every tehsil
deeper penetration in rural areas.
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Development ofCapital Markets/EconomicDevelopment ofCapital Markets/Economic
GrowthGrowth
Helps inculcate a sense of security byprotecting earning of people in case of
untimely death.
Benefits to Policy Holders
2002 2003 20,800 cr
2003 2004 24,200 cr
2004 2005 28,700 cr
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EMPLOYMENT GENERATIONEMPLOYMENT GENERATION
Life insurance industry provides increased employmentopportunities.
Employees in insurance sector as on 31st March, 2005 is
around 2 lakhs.
Many agents depend on insurance for their livelihood No.
of agents on 31st March 2004 15.59 lakhs
Brokers, corporate agents, training establishments provideextra employment opportunities.
Many of th
ese openings are in rural sectors 43
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ConductConduct
Indian insurance industryMajor players of general insurance
market
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