THE HISTORY OF INDIAN INSURANCE INDUSTRY

The story of insurance is probably as old as the story of mankind. The

same instinct that prompts modern businessmen today to secure themselves against
loss and disaster existedin primitive men also. They too sought to avert the evil
consequences of fire and flood andloss of life and were willing to make some sort of
sacrifice in order to achieve security.Though the concept of insurance is largely a
development of the recent past, particularlyafter the industrial era past few
centuries yet its beginnings date back almost 6000years.

Life Insurance

In 1818 the British established the first insurance company in India
in Calcutta, theOriental Life Insurance Company. First attempts at regulation of
the industry were madewith the introduction of the Indian Life Assurance
Companies Act in 1912. A number of amendment s t o t hi s Act wer e made
unt i l t he I nsur ance Act was dr awn up i n 1938. 11


Noteworthy features in the Act were the power given to the Government
to collectstatistical information about the insured and the high level of protection
the Act gave to the public through regulation and control. When the Act
was changed in 1950, this meant far reaching changes in the industry.
The extra requirements included a statutory requirementof a certain level
of equity capital, a ceiling on share holdings in such companies to
preventdominant control (to protect the public from any
adversarial policies from one single party), stricter control on
investments and, generally, much tighter control. In 1956, themarket
contained 154 Indian and 16 foreign life insurance companies.
Business washeavily concentrated in urban areas and targeted the higher
echelons of society. Unethical practices adopted by some of the players
against the interests of the consumers then ledthe Indian government to
nationalize the industry. In September 1956, nationalization
wascompleted, merging all these companies into the so-called
Life Insurance Corporation(LIC). It was felt that nationalization has
lent the industry fairness, solidity, growth andreach.Insurance may be
described as a social device to ensure protection of economic value
of life and other assets. Under the plan of insurance, a large
number of people associatethemselves by sharing risks attached
to individuals. The risks, which can be insuredagai nst , i ncl ude
fi re, t he peri l s of sea, deat h and acci dent s and burgl ary.
Any ri sk contingent upon these, may be insured against at a premium
commensurate with the risk involved. Thus collective bearing of risk is
insurance.Insurance is a contract whereby, in return for the payment of
premium by the insured, theinsurers pay the financial losses suffered by
the insured as a result of the occurrence of unforeseen events. The term
"risk" is used to describe the possibility of adverse resultsflowing from
any occurrence or the accidental happenings, which produce a monetary
loss.Insurance is a pool in which a large number of people
exposed to a similar risk makecontributions to a common fund out of
which the losses suffered by the unfortunate few,due to accidental
events, are made good. The sharing of risk among large groups of
peopleis the basis of insurance. The losses of an individual are
distributed over a group of individuals.1

Definitions
:
General definition:
In the words of John Magee, Insurance is a plan by themselves which
large number of people associate and transfer to the shoulders of all,
risks that attach to individuals.
Fundamental definition:
In t he words of D. S. Hansel l , Insurance accumul at ed
cont ri but i ons of al l part i es participating in the scheme.
Contractual definition:
In the words of justice Tindall, Insurance is a contract inwhich a sum of
money is paid to the assured as consideration of insurers incurring the risk of
paying a large sum upon a given contingency.
Characteristics of insurance

Sharing of risks

Cooperative device

Evaluation of risk

Payment on happening of a special event

The amount of payment depends on the nature of losses incurred.

The success of insurance business depends on the large number
of people insuredagainst similar risk.

Insurance is a plan, which spreads the risk and losses of few
people among a largenumber of people.13



The insurance is a plan in which the insured transfers his risk on the insurer.

Insurance is a legal contract which is based upon certain principles of
insurance whichincludes utmost good faith, insurable interest, contribution,
indemnity, causes proxima,subrogation, etc.

The scope of insurance is much wider and extensive.
Functions of insurance:

Primary functions:
1.
Provide protection: - Insurance cannot check the happening of the risk, but can
providefor the losses of risk.
2.
Collective bearing of risk: - Insurance is a device to share the financial
losses of fewamong many others.
3.
Assessment of risk: - Insurance determines the probable volume of risk
by evaluatingvarious factors that give rise to risk.
4.
Provide certainty: - Insurance is a device, which helps to change from
uncertainty tocertainty.
Secondary functions:
1.
Prevention of losses: - Insurance cautions businessman and
individuals to adoptsuitable device to prevent unfortunate
consequences of risk by observing safetyinstructions.14


2.
Small capital to cover large risks: - Insurance relives the businessman
from securityinvestment, by paying small amount of insurance against larger
risks and uncertainty.
3.
Contributes towards development of larger industries.
Other Function:
Means of savings and investment:Insurance companies are business houses.
The product they sell is financial protection. Tosucceed and survive,
they must cover their costs, which include payments to cover
thelosses of policyholders, as well as sales and administrative expenses, taxes and
dividends.
Insurance companies have two sources of income
for covering these costs:

Premiums
and

Investment income
.The premiums are collected on a regular basis and invested in
Government Bonds, Gilt,stocks, mutual funds, real estates and other
conservative avenues. However, investmentincome depends on market
conditions, interest rates, economy etc. and varies from year toyear.
Because of t he uncert ai nt y associ at ed wi t h t he i nvest ment
i ncome, i nsurancecompani es must generat e enough i ncome
f rom premi ums t o cover t he bul k of t hei r expenses.
Some of the important milestones in the life insurance business in
Indiaare:
1818:
Oriental Life Insurance Company, the first life insurance company on Indian
soilstarted functioning.15


General Insurers
:
.

ADVANTAGES OF LIFE INSURANCE



1. It is superior to an ordinary saving plan
: - Unlike other saving plans, if affords full protection against risk of
death. In case of death, the full sum assured is made availableunder a life
assurance policy; whereas under saving scheme the total accumulated
savingalone will be available. The later will be considerable less than the
sum assured, if deathoccurs during early years.
2. Easy settlement & protection against creditors: -
The life assured can name person(s)called Nominee to whom the policy money
would be payable in the event of his death. The proceeds of a life policy can
be protected against the claim of the creditors of the lifeassured by
effecting a valid assignment of the policy.
3. Ready marketability & suitability for quick borrowing:
- After an initial period, if the policyholder finds him unable to continue
payment of premiums, he can surrender the policy for a cash sum.
Alternatively, he can tide over a temporary difficulty by taking loanon
t he sol e securi t y of t he pol i cy wi t hout del ay. Furt her, a
l i f e i nsurance pol i cy i s sometimes acceptable as security for a
commercial loan.
4. Tax Relief: -
The Indian Income-Tax allows deduction of certain portion of the
taxableincome, which is diverted to payment of life insurance premiums from the
total income taxliability. When this tax relief is taken into account, it will
be found that the assured is ineffect paying a lower premium for his insurance.
Need for insurance

To provide cash to meet various routine expenses of the family on or
immediatelyafter the death of the income earner of the family.

To preserve the familys accustomed standard of living ever after the
death of the breadwinner.20



To provide continuous flow of funds for the living spouse.

To allocate income funds for the childrens education.

To provide a retirement income throughout old age.

To provide a reliable savings plan for the future.

To suppl ement i ncome when earni ng power i s reduced or
eroded by i l l ness, accident or any handicap.

To furnish surplus earnings for the investors should disaster strike


excellence. While recruiting agents, the branch managers need to prefer
local personsand provide them training and conduct seminars. In addition to the
agents, the front-lines t a f f a l s o ne e ds a n i nt e ns i ve t r a i ni ng
pr ogr a m t o f oc us ma i nl y on be ha vi or a l management. Another
important dimension to the Place Mix is related to the location of the insurance
branches. While locating branches, the branch manager needs to
consider a number of factors, such as smooth accessibility, availability of
infrastructural facilitiesand the management of branch offices and premises.
In addition it is also significant to provide safety measures and also
factors like office furnishing, civic amenities andfacilities, parking
facilities and interior office decoration should be given
proper attention. Thus the place management of insurance branch
offices needs a new vision,distinct approach and an innovative
style. This is essential to make the work placeconducive, attractive
and proactive for the generation of efficiency among
employees.T h e b r a n c h m a n a g e r s
n e e d p r o f e s s i o n a l
e x c e l l e n c e to make place decisions productive.
4. Promotion
:
The insurance services depend on effective promotional measures. In a
country likeIndia, the rate of illiteracy is very high and the rural
economy has dominance in thenational economy. It is essential
to have both personal and impersonal promotionstrategies. In
promoting insurance business, the agents and the rural career agents
playan important role. Due attention should be given in selecting the
promotional tools for agents and rural career agents and even for the
branch managers and front line staff.They al so have t o be gi ven
proper t rai ni ng i n order t o creat e i mpul se
buyi ng. Advertising and Publicity, organization of conferences
and seminars, incentive to policyholders are impersonal
communication. Arranging Kirtans, exhibitions, participation in fairs
and festivals, rural wall paintings and publicity drive through themobile
publicity van units would be effective in creating the impulse buying and
therural prospects would be easily transformed into actual policyholders.

5. People
:
26


Understanding the customer better allows designing appropriate
products. Being aservice industry which involves a high level of people
interaction, it is very important touse this resource efficiently in order to
satisfy customers. Training, development andstrong relationships with
intermediaries are the key areas to be kept under consideration.Training the
employees, use of IT for efficiency, both at the staff and agent level, is oneof the
important areas to look into.
6. Process
:
The process should be customer friendly in insurance industry. The speed and
accuracyof payment i s of great i mport ance. The processi ng
met hod shoul d be easy andconvenient to the customers.
Installment schemes should be streamlined to cater to theever growing
demands of the customers. IT & Data Warehousing will smoothen
the process flow. IT will help in servicing large no. of customers
efficiently and bring downoverheads. Technol ogy can ei t her
compl ement or suppl ement t he channel s of distribution cost
effectively. It can also help to improve customer service levels. The useof data
warehousing management and mining will help to find out the
profitability and potential of various customers product segments.
7. Physical evidence
:
Distribution is a key determinant of success for all insurance companies. Today,
thenationalized insurers have a large reach and presence in India. Building a
distributionnetwork is very expensive and time consuming. If the insurers are
willing to take advantageof India's large population and reach a profitable mass of
customers, then new distributionavenues and alliances will be necessary. Initially
insurance was looked upon as a complex product with a high advice and
service component.Buyers prefer a face-to-face interaction and they place a
high premium on brand namesand reliability. As the awareness increases, the
product becomes simpler and they becomeoff-the-shelf commodity products.
Today, various intermediaries, not necessarily insurancecompanies, are selling
insurance. For example, in UK, retailer like Marks & Spencer sellsinsurance
products. The financial services industries have successfully used remote27


distribution channels such as telephone or internet so as to reach more customers,
avoidintermediaries, bring down overheads and increase profitability. A good
example is UK insurer Direct Line. It relied on telephone sales and low pricing.
Today, it is one of thelargest motor insurance operators.Technology will not
replace a distribution network though it will offer advantages like better
customer service. Finance companies and banks can emerge as an
attractivedistribution channel for insurance in India. In Netherlands, financial
services firms providean entire range of products including bank accounts, motor,
home and life insurance and pensions. In France, half of the life insurance
sales are made through banks. In India also, banks hope to maximize
expensive existing networks by selling a range of products. It
isanticipated that rather than formal ownership arrangements, a loose network of
alliance between insurers and banks will emerge, popularly known as
bank assurance.Another innovative distribution channel that could be used are
the non-financialorganizations. For an example, insurance for consumer items like
fridge and TV can beoffered at the point of sale. This increases the likelihood of
insurance sales. Alliances withmanufacturers or retailers of consumer goods will
be possible and insurance can be one of the various incentives offered.
Various types of life insurance policies:-
28