Brief history of insurance sector

The insurance sector in India has completed all the facets of competition –from being an
open competitive market to being nationalized and then getting back to the form of a
liberalized market once again. The history of the insurance sector in India reveals that it
has witnessed complete dynamism for the past two centuries approximately.

With the establishment of the Oriental Life Insurance Company in Kolkata, the business
of Indian life insurance started in the year 1818.

Important milestones in the Indian life insurance business

 1907: The Indian Mercantile Insurance Ltd. was set up which was the
first company of its type to transact all general insurance business.

 1912: The Indian Life Assurance Companies Act came into force for
regulating the life insurance business.

 1928: The Indian Insurance Companies Act was enacted for enabling
the government to collect statistical information on both life and non-life
insurance businesses.

 1938: The earlier legislation consolidated the Insurance Act with the
aim of safeguarding the interests of the insuring public.

 1956: 245 Indian and foreign insurers and provident societies were
taken over by the central government and they got nationalized. LIC was
formed by an Act of Parliament, viz. LIC Act, 1956. It started off with a capital
of Rs. 5 crore and that too from the Government of India.

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  1957: General Insurance Council, an arm of the Insurance Association
of India, framed a code of conduct for guaranteeing fair conduct and sound
business patterns.

 1968: The Insurance Act improved for regulating investments and set
minimal solvency levels and the Tariff Advisory Committee was set up.

 1972: The General Insurance Business (Nationalization) Act, 1972

nationalized the general insurance business in India. It was with effect from
1st January 1973.

The history of general insurance business in India can be traced back to Triton
Insurance Company Ltd. (the first general insurance company) which was formed in the
year 1850 in Kolkata by the British.

107 insurers integrated and grouped into four companies viz. the National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance
Company Ltd. and the United India Insurance Company Ltd. GIC was incorporated as a
company.

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Concept of Insurance

On the one hand, human life is subject to various risks—risk of death or disability due to
natural or accidental causes. Humans are also prone to diseases, the treatment of
which may involve huge expenditure. On the other hand, property owned by man is
exposed to various hazards, natural and man-made.

When human life is lost or a person is disabled permanently or temporarily, there is a

loss of income to the household. The family is put to hardship. Sometimes survival itself
is at stake for the dependants.

When it comes to property, loss or damage to property results in either whole or partial
loss in income to the person or entity.

Risk has the element of unpredictability. Death/disability or loss/damage could occur at

anytime. Losses can be mitigated through insurance. Insurance is a commodity which
offers protection against various contingencies.

Insurance products available for life and non-life are many. In non-life, apart form
personal covers such as accident covers and health insurance, there are products
covering liabilities under a particular law and or common law. The various products are
designed to cater to different needs of an individual or industry such as fire insurance
policy on multi-storeyed building, householder’s policy.

An insurance contract promises to make good to the insured a certain sum in

consideration for a payment in the form of premium from the insured.

Human life cannot be valued. Hence the sum assured ( or the amount guaranteed to be
paid in the event of a loss ) is by way of a ‘benefit’ in the case of life insurance. Life
insurance products provide a definite amount of money to the dependants of the insured
in case the life insured dies during his active income earning period or becomes

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disabled on account of an accident causing reduction/complete loss in his income
earnings. An individual can also protect his old age when he ceases to earn and has no
other means of income by purchasing an annuity product.

A Personal Accident cover is also for protection. In the event of death or disability,
permanent or temporary, of the insured, it provides for compensation which is either the
whole or a percentage of the Capital Sum Insured depending on the kind of loss.

In the case of Health Insurance, the policy seeks to cover expenses towards of
treatment of diseases and or injury upto the Sum Insured opted for by the insured.

In respect of insurance relating to property, there are many products available. Property
may be covered against fire and perils of nature including flood, earthquake etc.
Machinery may be insured for breakdown. Goods in transit can be insured under a
marine cargo insurance cover. Insurance covers are also available for ships and other
vessels. A motor insurance policy covers third party damage as well as damage to the
vehicle.

Insurance of property is based on the principle of indemnity. The idea is to bring the
insured to the same financial position as he /she was before the loss occurred. It
safeguards the investment in the property. Where there is no insurance, losses can mar
a project or an industry. General Insurance offers stability to the economy and to the
society.

Insurance offers security and so peace of mind to the individual. The concept of
insurance is that the losses of a few are made good by contribution from many. It is
based on the law of large numbers. It stemmed from the need of man to find a solution
for mitigation of losses. It also reflects the nature of man to find a solution collectively.

As per regulations, insurers have to give the various features of the products at the
point of sale. The insured should also go through the various terms and conditions of
the products and understand what they have bought and met their insurance needs.
They ought to understand the claim procedures so that they know what to do in the
event of a loss.

Insurance provides compensation to a person for an anticipated loss to his life, business
or an asset. Insurance is broadly classified into two parts covering different types of
risks:

1.Long-term (Life Insurance)

2. General Insurance (Non-life Insurance)

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Long-term Insurance
Long term insurance is so called because it is meant for a long-term period which may
stretch to several years or whole life-time of the insured. Long-term insurance covers all
life insurance policies. Insurance against risk to one's life is covered under ordinary life
assurance. Ordinary life assurance can be further clasified into following types:

Types of Ordinary Life Meaning

Assurance

1. Whole Life Assurance In whole life assurance, insurance company collects

premium from the insured for whole life or till the time
of his retirement and pays claim to the family of the
insured only after his death.

2. Endowment Assurance In case of endowment assurance, the term of policy

is defined for a specified period say 15, 20, 25 or 30
years. The insurance company pays the claim to the
family of assured in an event of his death within the
policy's term or in an event of the assured surviving
the policy's term.

3. Assurances for Children i). Child's Deferred Assurance: Under this policy,
claim by insurance company is paid on the option
date which is calculated to coincide with the child's
eighteenth or twenty first birthday. In case the parent
survives till option date, policy may either be
continued or payment may be claimed on the same
date. However, if the parent dies before the option
date, the policy remains continued until the option
date without any need for payment of premiums. If
the child dies before the option date, the parent
receives back all premiums paid to the insurance
company.

ii). School fee policy: School fee policy can be

availed by effecting an endowment policy, on the life

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 of the parent with the sum assured, payable in
instalments over the schooling period.

4. Term Assurance The basic feature of term assurance plans is that

they provide death risk-cover. Term assurance
policies are only for a limited time, claim for which is
paid to the family of the assured only when he dies.
In case the assured survives the term of policy, no
claim is paid to the assured.

5. Annuities Annuities are just opposite to life insurance. A

person entering into an annuity contract agrees to
pay a specified sum of capital (lump sum or by
instalments) to the insurer. The insurer in return
promises to pay the insured a series of payments
untill insured's death. Generally, life annuity is opted
by a person having surplus wealth and wants to use
this money after his retirement.

There are two types of annuities, namely:

Immediate Annuity: In an immediate annuity, the
insured pays a lump sum amount (known as
purchase price) and in return the insurer promises to
pay him in instalments a specified sum on a
monthly/quarterly/half-yearly/yearly basis. Deferred
Annuity: A deferred anuuity can be purchased by
paying a single premium or by way of instalments.
The insured starts receiving annuity payment after a
lapse of a selected period (also known as Deferment
period).

6. Money Back Policy Money back policy is a policy opted by people who
want periodical payments. A money back policy is
generally issued for a particular period, and the sum
assured is paid through periodical payments to the
insured, spread over this time period. In case of
death of the insured within the term of the policy, full

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 sum assured along with bonus accruing on it is
payable by hte insurance company to the nominee of
the deceased.

General Insurance
Also known as non-life insurance, general insurance is normally meant for a short-term
period of twelve months or less. Recently, longer-term insurance agreements have
made an entry into the business of general insurance but their term does not exceed
five years. General insurance can be classified as follows:

Fire Insurance Fire insurance provides protection against damage to property

caused by accidents due to fire, lightening or explosion,
whereby the explosion is caused by boilers not being used for
industrial purposes. Fire insurance also includes damage
caused due to other perils like strom tempest or flood; burst
pipes; earthquake; aircraft; riot, civil commotion; malicious
damage; explosion; impact.

Marine Insurance Marine insurance basically covers three risk areas, namely, hull,
cargo and freight. The risks which these areas are exposed to
are collectively known as "Perils of the Sea". These perils
include theft, fire, collision etc.

Marine Cargo: Marine cargo policy provides protection to the

goods loaded on a ship against all perils between the departure
and arrival warehouse. Therefore, marine cargo covers carriage
of goods by sea as well as transportation of goods by land.

Marine Hull: Marine hull policy provides protection against

damage to ship caused due to the perils of the sea. Marine hull
policy covers three-fourth of the liability of the hull owner
(shipowner) against loss due to collisions at sea. The remaining
1/4th of the liability is looked after by associations formed by
shipowners for the purpose (P and I clubs).

Miscellaneous As per the Insurance Act, all types of general insurance other
than fire and marine insurance are covered under miscellaneous

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 insurance. Some of the examples of general insurance are
motor insurance, theft insurance, health insurance,

personal accident insurance, money insurance, engineering

insurance etc.

Indian Insurance: Sector Reform

The formation of the Malhotra Committee in 1993 initiated reforms in the Indian
insurance sector. The aim of the Malhotra Committee was to assess the functionality of
the Indian insurance sector. This committee was also in charge of recommending the
future path of insurance in India.

The Malhotra Committee attempted to improve various aspects of the insurance sector,
making them more appropriate and effective for the Indian market.

The recommendations of the committee put stress on offering operational autonomy to

the insurance service providers and also suggested forming an independent regulatory
body.

The Insurance Regulatory and Development Authority Act of 1999 brought about
several crucial policy changes in the insurance sector of India. It led to the formation of
the Insurance Regulatory and Development Authority (IRDA) in 2000.

The goals of the IRDA are to safeguard the interests of insurance policyholders, as well
as to initiate different policy measures to help sustain growth in the Indian insurance
sector.

The Authority has notified 27 Regulations on various issues which include Registration
of 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. Applications were invited by the Authority with
effect from 15th August, 2000 for issue of the Certificate of Registration to both life and
non-life insurers. The Authority has its Head Quarter at Hyderabad. Detailed information
on IRDA is available at their web-site www.irdaindia.org

In 1993, Malhotra Committee headed by former Finance Secretary and RBI Governor
R.N. Malhotra was formed to evaluate the Indian insurance industry and recommend its
future direction.

The Malhotra 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

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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…"

In 1994, the committee submitted the report and some of the key recommendations
included:

1) Structure

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

• Government should take over the holdings of GIC and its subsidiaries so that
these subsidiaries can act as independent corporations.
• All the insurance companies should be given greater freedom to operate.

2) Competition

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

to enter the industry.
• No 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 operate in
each state.

3) Regulatory Body

• The Insurance Act should be changed.

• An Insurance Regulatory body should be set up.
• Controller of Insurance (Currently a part from the Finance Ministry) should be
made independent.

4) 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).

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5) 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.
• Computerisation of operations and updating of technology to be carried out in the
insurance industry The committee emphasized that in order to improve the
customer services and increase the coverage of the insurance industry should be
opened up to competition.

But at the same time, the committee felt the need to exercise caution as any failure on
the part of new players could ruin the public confidence in the industry. Hence, it was
decided to allow competition in a limited way by stipulating the minimum capital
requirement of Rs.100 crores. The committee felt the need to provide greater autonomy
to insurance companies in order to improve their performance and enable them to act
as independent companies with economic motives. For this purpose, it had proposed
setting up an independent regulatory body.

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Types of insurance

Any risk that can be quantified can potentially be insured. Specific kinds of risk that may
give rise to claims are known as "perils". An insurance policy will set out in detail which
perils are covered by the policy and which are not. Below are (non-exhaustive) lists of
the many different types of insurance that exist. A single policy may cover risks in one
or more of the categories set out below. For example, auto insurance would typically
cover both property risk (covering the risk of theft or damage to the car) and liability risk
(covering legal claims from causing an accident). A homeowner's insurance policy in the
U.S. typically includes property insurance covering damage to the home and the
owner's belongings, liability insurance covering certain legal claims against the owner,
and even a small amount of coverage for medical expenses of guests who are injured
on the owner's property.

Business insurance can be any kind of insurance that protects businesses against risks.
Some principal subtypes of business insurance are (a) the various kinds of professional
liability insurance, also called professional indemnity insurance, which are discussed
below under that name; and (b) the business owner's policy (BOP), which bundles into
one policy many of the kinds of coverage that a business owner needs, in a way
analogous to how homeowners insurance bundles the coverages that a homeowner
needs.

Auto insurance
Vehicle insurance
Auto insurance protects you against financial loss if you have an accident. It is a
contract between you and the insurance company. You agree to pay the premium and
the insurance company agrees to pay your losses as defined in your policy. Auto
insurance provides property, liability and medical coverage:

1. Property coverage pays for damage to or theft of your car.

2. Liability coverage pays for your legal responsibility to others for bodily
injury or property damage.
3. Medical coverage pays for the cost of treating injuries, rehabilitation and
sometimes lost wages and funeral expenses.

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An auto insurance policy comprises six kinds of coverage. Most countries require you to
buy some, but not all, of these coverages. If you're financing a car, your lender may also
have requirements. Most auto policies are for six months to a year.

In the United States, your insurance company should notify you by mail when it’s time to
renew the policy and to pay your premium.

Home insurance
Main article: Home insurance

Home insurance provides compensation for damage or destruction of a home from

disasters. In some geographical areas, the standard insurances exclude certain types of
disasters, such as flood and earthquakes, that require additional coverage.
Maintenance-related problems are the homeowners' responsibility. The policy may
include inventory, or this can be bought as a separate policy, especially for people who
rent housing. In some countries, insurers offer a package which may include liability and
legal responsibility for injuries and property damage caused by members of the
household, including pets.

Health
Main articles: Health insurance and Dental insurance

Health insurance policies by the National Health Service in the United Kingdom (NHS)
or other publicly-funded health programs will cover the cost of medical treatments.
Dental insurance, like medical insurance, is coverage for individuals to protect them
against dental costs. In the U.S., dental insurance is often part of an employer's benefits
package, along with health insurance.
Accident, Sickness and Unemployment Insurance

 Disability insurance policies provide financial support in the event the

policyholder is unable to work because of disabling illness or injury. It provides
monthly support to help pay such obligations as mortgages and credit cards.
 Disability overhead insurance allows business owners to cover the overhead
expenses of their business while they are unable to work.

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  Total permanent disability insurance provides benefits when a person is
permanently disabled and can no longer work in their profession, often taken as an
adjunct to life insurance.
 Workers' compensation insurance replaces all or part of a worker's wages lost
and accompanying medical expenses incurred because of a job-related injury.

Casualty
Casualty insurance insures against accidents, not necessarily tied to any specific
property.
Main article: Casualty insurance

 Crime insurance is a form of casualty insurance that covers the policyholder

against losses arising from the criminal acts of third parties. For example, a
company can obtain crime insurance to cover losses arising
from theft or embezzlement.
 Political risk insurance is a form of casualty insurance that can be taken out by
businesses with operations in countries in which there is a risk that revolution or
other politicalconditions will result in a loss.

Life
Main article: Life insurance

Life insurance provides a monetary benefit to a decedent's family or other designated

beneficiary, and may specifically provide for income to an insured person's
family, burial, funeral and other final expenses. Life insurance policies often allow the
option of having the proceeds paid to the beneficiary either in a lump sum cash payment
or an annuity.

Annuities provide a stream of payments and are generally classified as insurance

because they are issued by insurance companies and regulated as insurance and
require the same kinds of actuarial and investment management expertise that life
insurance requires. Annuities and pensions that pay a benefit for life are sometimes
regarded as insurance against the possibility that a retiree will outlive his or her financial

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resources. In that sense, they are the complement of life insurance and, from an
underwriting perspective, are the mirror image of life insurance.

Certain life insurance contracts accumulate cash values, which may be taken by the
insured if the policy is surrendered or which may be borrowed against. Some policies,
such as annuities and endowment policies, are financial instruments to accumulate
or liquidate wealth when it is needed.

In many countries, such as the U.S. and the UK, the tax law provides that the interest
on this cash value is not taxable under certain circumstances. This leads to widespread
use of life insurance as a tax-efficient method of saving as well as protection in the
event of early death.

In U.S., the tax on interest income on life insurance policies and annuities is generally
deferred. However, in some cases the benefit derived from tax deferral may be offset by
a low return. This depends upon the insuring company, the type of policy and other
variables (mortality, market return, etc.). Moreover, other income tax saving vehicles
(e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.

Property
Main article: Property insurance

Property insurance provides protection against risks to property, such as

fire, theft or weather damage. This includes specialized forms of insurance such as fire
insurance, flood insurance, earthquake insurance, home insurance, inland marine
insurance or boiler insurance.

 Automobile insurance, known in the UK as motor insurance, is probably the most

common form of insurance and may cover both legal liabilityclaims against
the driver and loss of or damage to the insured's vehicle itself. Throughout
the United States an auto insurance policy is required to legally operate a motor
vehicle on public roads. In some jurisdictions, bodily injury compensation for
automobile accident victims has been changed to a no-fault system, which reduces
or eliminates the ability to sue for compensation but provides automatic eligibility for
benefits. Credit card companies insure against damage on rented cars.
 Driving School Insurance provides cover for any authorized driver whilst
undergoing tuition, cover also unlike other motor policies provides cover for

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 instructor liability where both the pupil and driving instructor are equally liable in
the event of a claim.
 Aviation insurance insures against hull, spares, deductibles, hull wear and liability
risks.
 Boiler insurance (also known as boiler and machinery insurance or equipment
breakdown insurance) insures against accidental physical damage to equipment or
machinery.
 Builder's risk insurance insures against the risk of physical loss or damage to
property during construction. Builder's risk insurance is typically written on an "all
risk" basis covering damage due to any cause (including the negligence of the
insured) not otherwise expressly excluded. Builder's risk insurance is coverage that
protects a person's or organization's insurable interest in materials, fixtures and/or
equipment being used in the construction or renovation of a building or structure
should those items sustain physical loss or damage from a covered cause.[18]
 Crop insurance "Farmers use crop insurance to reduce or manage various risks
associated with growing crops. Such risks include crop loss or damage caused by
weather, hail, drought, frost damage, insects, or disease, for instance."[19]
 Earthquake insurance is a form of property insurance that pays the policyholder
in the event of an earthquake that causes damage to the property. Most
ordinary homeowners insurancepolicies do not cover earthquake damage. Most
earthquake insurance policies feature a high deductible. Rates depend on location
and the probability of an earthquake, as well as theconstruction of the home.
 A fidelity bond is a form of casualty insurance that covers policyholders for losses
that they incur as a result of fraudulent acts by specified individuals. It usually
insures a business for losses caused by the dishonest acts of its employees.
 Flood insurance protects against property loss due to flooding. Many insurers in
the U.S. do not provide flood insurance in some portions of the country. In response
to this, the federal government created the National Flood Insurance Program which
serves as the insurer of last resort.
 Home insurance or homeowners' insurance: See "Property insurance".
 Landlord insurance is specifically designed for people who own properties which
they rent out. Most house insurance cover in the UK will not be valid if the property is
rented out therefore landlords must take out this specialist form of home insurance.

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  Marine insurance and marine cargo insurance cover the loss or damage of ships
at sea or on inland waterways, and of cargo in transit, regardless of the method of
transit. When the owner of the cargo and the carrier are separate corporations,
marine cargo insurance typically compensates the owner of cargo for losses
sustained from fire, shipwreck, etc., but excludes losses that can be recovered from
the carrier or the carrier's insurance. Many marine insurance underwriters will
include "time element" coverage in such policies, which extends the indemnity to
cover loss of profit and other business expenses attributable to the delay caused by
a covered loss.
 Surety bond insurance is a three party insurance guaranteeing the performance
of the principal.
 Terrorism insurance provides protection against any loss or damage caused
by terrorist activities.
 Volcano insurance is an insurance that covers volcano damage in Hawaii.
 Windstorm insurance is an insurance covering the damage that can be caused
by hurricanes and tropical cyclones.

Liability
Main article: Liability insurance

Liability insurance is a very broad superset that covers legal claims against the insured.
Many types of insurance include an aspect of liability coverage. For example, a
homeowner's insurance policy will normally include liability coverage which protects the
insured in the event of a claim brought by someone who slips and falls on the property;
automobile insurance also includes an aspect of liability insurance that indemnifies
against the harm that a crashing car can cause to others' lives, health, or property. The
protection offered by a liability insurance policy is twofold: a legal defense in the event
of a lawsuit commenced against the policyholder and indemnification (payment on
behalf of the insured) with respect to a settlement or court verdict. Liability policies
typically cover only the negligence of the insured, and will not apply to results of wilful or
intentional acts by the insured.

 Public liability insurance covers a business against claims should its operations
injure a member of the public or damage their property in some way.

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  Directors and officers liability insurance protects an organization (usually a
corporation) from costs associated with litigation resulting from mistakes made by
directors and officers for which they are liable. In the industry, it is usually called
"D&O" for short.
 Environmental liability insurance protects the insured from bodily injury, property
damage and cleanup costs as a result of the dispersal, release or escape of
pollutants.
 Errors and omissions insurance: See "Professional liability insurance" under
"Liability insurance".
 Prize indemnity insurance protects the insured from giving away a large prize at
a specific event. Examples would include offering prizes to contestants who can
make a half-court shot at a basketball game, or a hole-in-one at a golf tournament.
 Professional liability insurance, also called professional indemnity insurance,
protects insured professionals such as architectural corporation and medical practice
against potential negligence claims made by their patients/clients. Professional
liability insurance may take on different names depending on the profession. For
example, professional liability insurance in reference to the medical profession may
be called malpractice insurance. Notaries public may take out errors and omissions
insurance (E&O). Other potential E&O policyholders include, for example, real estate
brokers, Insurance agents, home inspectors, appraisers, and website developers.

Credit
Main article: Credit insurance

Credit insurance repays some or all of a loan when certain things happen to the
borrower such as unemployment, disability, or death.

 Mortgage insurance insures the lender against default by the borrower. Mortgage
insurance is a form of credit insurance, although the name credit insurance more
often is used to refer to policies that cover other kinds of debt.
 Many credit cards offer payment protection plans which are a form of credit
insurance.

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Other types

 Collateral protection insurance or CPI, insures property (primarily vehicles) held

as collateral for loans made by lending institutions.
 Defense Base Act Workers' compensation or DBA Insurance provides coverage
for civilian workers hired by the government to perform contracts outside the U.S.
and Canada. DBA is required for all U.S. citizens, U.S. residents, U.S. Green Card
holders, and all employees or subcontractors hired on overseas government
contracts. Depending on the country, Foreign Nationals must also be covered under
DBA. This coverage typically includes expenses related to medical treatment and
loss of wages, as well as disability and death benefits.
 Expatriate insurance provides individuals and organizations operating outside of
their home country with protection for automobiles, property, health, liability and
business pursuits.
 Financial loss insurance or Business Interruption Insurance protects individuals
and companies against various financial risks. For example, a business might
purchase coverage to protect it from loss of sales if a fire in a factory prevented it
from carrying out its business for a time. Insurance might also cover the failure of
a creditor to pay money it owes to the insured. This type of insurance is frequently
referred to as "business interruption insurance." Fidelity bonds and surety bonds are
included in this category, although these products provide a benefit to a third party
(the "obligee") in the event the insured party (usually referred to as the "obligor") fails
to perform its obligations under a contract with the obligee.
 Kidnap and ransom insurance
 Legal Expenses Insurance covers policyholders against the potential costs of
legal action against an institution or an individual.
 Locked funds insurance is a little-known hybrid insurance policy jointly issued by
governments and banks. It is used to protect public funds from tamper by
unauthorized parties. In special cases, a government may authorize its use in
protecting semi-private funds which are liable to tamper. The terms of this type of
insurance are usually very strict. Therefore it is used only in extreme cases where
maximum security of funds is required.
 Media Insurance is designed to cover professionals that engage in film, video
and TV production.

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  Nuclear incident insurance covers damages resulting from an incident involving
radioactive materials and is generally arranged at the national level. See the Nuclear
exclusion clause and for the United States the Price-Anderson Nuclear Industries
Indemnity Act)
 Pet insurance insures pets against accidents and illnesses - some companies
cover routine/wellness care and burial, as well.
 Pollution Insurance which consists of first-party coverage for contamination of
insured property either by external or on-site sources. Coverage for liability to third
parties arising from contamination of air, water, or land due to the sudden and
accidental release of hazardous materials from the insured site. The policy usually
covers the costs of cleanup and may include coverage for releases from
underground storage tanks. Intentional acts are specifically excluded.
 Purchase insurance is aimed at providing protection on the products people
purchase. Purchase insurance can cover individual purchase protection, warranties,
guarantees, care plans and even mobile phone insurance. Such insurance is
normally very limited in the scope of problems that are covered by the policy.
 Title insurance provides a guarantee that title to real property is vested in the
purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually
issued in conjunction with a search of the public records performed at the time of
a real estate transaction.
 Travel insurance is an insurance cover taken by those who travel abroad, which
covers certain losses such as medical expenses, loss of personal belongings, travel
delay, personal liabilities, etc.

Insurance financing vehicles

 Fraternal insurance is provided on a cooperative basis by fraternal benefit

societies or other social organizations.[20]
 No-fault insurance is a type of insurance policy (typically automobile insurance)
where insureds are indemnified by their own insurer regardless of fault in the
incident.
 Protected Self-Insurance is an alternative risk financing mechanism in which an
organization retains the mathematically calculated cost of risk within the organization

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and transfers the catastrophic risk with specific and aggregate limits to an insurer so
the maximum total cost of the program is known. A properly designed and
underwritten Protected Self-Insurance Program reduces and stabilizes the cost of
insurance and provides valuable risk management information.
 Retrospectively Rated Insurance is a method of establishing a premium on large
commercial accounts. The final premium is based on the insured's actual loss
experience during the policy term, sometimes subject to a minimum and maximum
premium, with the final premium determined by a formula. Under this plan, the
current year's premium is based partially (or wholly) on the current year's losses,
although the premium adjustments may take months or years beyond the current
year's expiration date. The rating formula is guaranteed in the insurance contract.
Formula: retrospective premium = converted loss + basic premium × tax multiplier.
Numerous variations of this formula have been developed and are in use.
 Formal self insurance is the deliberate decision to pay for otherwise insurable
losses out of one's own money. This can be done on a formal basis by establishing a
separate fund into which funds are deposited on a periodic basis, or by simply
forgoing the purchase of available insurance and paying out-of-pocket. Self
insurance is usually used to pay for high-frequency, low-severity losses. Such
losses, if covered by conventional insurance, mean having to pay a premium that
includes loadings for the company's general expenses, cost of putting the policy on
the books, acquisition expenses, premium taxes, and contingencies. While this is
true for all insurance, for small, frequent losses the transaction costs may exceed
the benefit of volatility reduction that insurance otherwise affords.
 Reinsurance is a type of insurance purchased by insurance companies or self-
insured employers to protect against unexpected losses. Financial reinsurance is a
form of reinsurance that is primarily used for capital management rather than to
transfer insurance risk.
 Social insurance can be many things to many people in many countries. But a
summary of its essence is that it is a collection of insurance coverages (including
components of life insurance, disability income insurance, unemployment insurance,
health insurance, and others), plus retirement savings, that requires participation by
all citizens. By forcing everyone in society to be a policyholder and pay premiums, it
ensures that everyone can become a claimant when or if he/she needs to. Along the
way this inevitably becomes related to other concepts such as the justice system

20
 and the welfare state. This is a large, complicated topic that engenders tremendous
debate, which can be further studied in the following articles (and others):
 National Insurance
 Social safety net
 Social security
 Social Security debate (United States)
 Social Security (United States)
 Social welfare provision
 Stop-loss insurance provides protection against catastrophic or unpredictable
losses. It is purchased by organizations who do not want to assume 100% of the
liability for losses arising from the plans. Under a stop-loss policy, the insurance
company becomes liable for losses that exceed certain limits called deductibles.

Closed community self-insurance

Some communities prefer to create virtual insurance amongst themselves by other
means than contractual risk transfer, which assigns explicit numerical values to risk. A
number ofreligious groups, including the Amish and some Muslim groups, depend on
support provided by their communities when disasters strike. The risk presented by any
given person is assumed collectively by the community who all bear the cost of
rebuilding lost property and supporting people whose needs are suddenly greater after
a loss of some kind. In supportive communities where others can be trusted to follow
community leaders, this tacit form of insurance can work. In this manner the community
can even out the extreme differences in insurability that exist among its members.
Some further justification is also provided by invoking the moral hazard of explicit
insurance contracts.

In the United Kingdom, The Crown (which, for practical purposes, meant the Civil
service) did not insure property such as government buildings. If a government building
was damaged, the cost of repair would be met from public funds because, in the long
run, this was cheaper than paying insurance premiums. Since many UK government
buildings have been sold to property companies, and rented back, this arrangement is
now less common and may have disappeared altogether.
Insurers' business model

21
Underwriting and investing
The business model can be reduced to a simple equation: Profit = earned premium +
investment income - incurred loss - underwriting expenses

Insurers make money in two ways:

1. Through underwriting, the process by which insurers select the risks to

insure and decide how much in premiums to charge for accepting those risks;
2. By investing the premiums they collect from insured parties.

The most complicated aspect of the insurance business is the underwriting of policies.
Using a wide assortment of data, insurers predict the likelihood that a claim will be
made against their policies and price products accordingly. To this end, insurers
use actuarial science to quantify the risks they are willing to assume and the premium
they will charge to assume them. Data is analyzed to fairly accurately project the rate of
future claims based on a given risk. Actuarial science uses statistics and probability to
analyze the risks associated with the range of perils covered, and these scientific
principles are used to determine an insurer's overall exposure. Upon termination of a
given policy, the amount of premium collected and the investment gains thereon minus
the amount paid out in claims is the insurer's underwriting profit on that policy. Of
course, from the insurer's perspective, some policies are "winners" (i.e., the insurer
pays out less in claims and expenses than it receives in premiums and investment
income) and some are "losers" (i.e., the insurer pays out more in claims and expenses
than it receives in premiums and investment income); insurance companies essentially
use actuarial science to attempt to underwrite enough "winning" policies to pay out on
the "losers" while still maintaining profitability.

An insurer's underwriting performance is measured in its combined ratio[8] which is the

ratio of losses and expenses to premiums. A combined ratio of less than 100 percent
indicates underwriting profitability, while anything over 100 indicates an underwriting
loss. A company with a combined ratio over 100% may nevertheless remain profitable
due to investment earnings.

Insurance companies earn investment profits on “float”. “Float” or available reserve is

the amount of money, at hand at any given moment, that an insurer has collected in

22
insurance premiums but has not paid out in claims. Insurers start investing insurance
premiums as soon as they are collected and continue to earn interest or other income
on them until claims are paid out. The Association of British Insurers (gathering 400
insurance companies and 94% of UK insurance services) has almost 20% of the
investments in the London Stock Exchange.[9]

In the United States, the underwriting loss of property and casualty

insurance companies was $142.3 billion in the five years ending 2003. But overall profit
for the same period was $68.4 billion, as the result of float. Some insurance industry
insiders, most notably Hank Greenberg, do not believe that it is forever possible to
sustain a profit from float without an underwriting profit as well, but this opinion is not
universally held.

Naturally, the “float” method is difficult to carry out in an economically depressed

period. Bear markets do cause insurers to shift away from investments and to toughen
up their underwriting standards. So a poor economy generally means high insurance
premiums. This tendency to swing between profitable and unprofitable periods over time
is commonly known as the "underwriting" or insurance cycle.[10]

Property and casualty insurers currently make the most money from their auto
insurance line of business. Generally better statistics are available on auto losses and
underwriting on this line of business has benefited greatly from advances in computing.
Additionally, property losses in the United States, due to unpredictable natural
catastrophes, have exacerbated this trend.

Claims
Claims and loss handling is the materialized utility of insurance; it is the actual "product"
paid for, though one hopes it will never need to be used. Claims may be filed by
insureds directly with the insurer or through brokers or agents. The insurer may require
that the claim be filed on its own proprietary forms, or may accept claims on a standard
industry form such as those produced by ACORD.

Insurance company claims departments employ a large number of claims

adjusters supported by a staff of records management and data entry clerks. Incoming
claims are classified based on severity and are assigned to adjusters whose settlement
authority varies with their knowledge and experience. The adjuster undertakes a

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thorough investigation of each claim, usually in close cooperation with the insured,
determines if coverage is available under the terms of the insurance contract, and if so,
the reasonable monetary value of the claim, and authorizes payment. Adjusting liability
insurance claims is particularly difficult because there is a third party involved, the
plaintiff, who is under no contractual obligation to cooperate with the insurer and may in
fact regard the insurer as a deep pocket. The adjuster must obtain legal counsel for the
insured (either inside "house" counsel or outside "panel" counsel), monitor litigation that
may take years to complete, and appear in person or over the telephone with settlement
authority at a mandatory settlement conference when requested by the judge.

If a claims adjuster suspects underinsurance, the condition of average may come into
play to limit the insurance company's exposure.

In managing the claims handling function, insurers seek to balance the elements of
customer satisfaction, administrative handling expenses, and claims overpayment
leakages. As part of this balancing act, fraudulent insurance practices are a major
business risk that must be managed and overcome. Disputes between insurers and
insureds over the validity of claims or claims handling practices occasionally escalate
into litigation; see insurance bad faith.

INSURANCE BUSINEES:

• Insurance business is divided into four classes :

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1) Life Insurance

2) Fire Insurance

3) Marine Insurance and

4) Miscellaneous Insurance.

• Life Insurers transact life insurance business; General Insurers transact the rest.
• No composites are permitted as per law.

LEGISLATION (as on 1.4.2000):

• Insurance is a federal subject in India. The primary legislation that deals with
insurance business in India is:
• Insurance Act, 1938, and Insurance Regulatory & Development Authority Act,
1999.

INSURANCE PRODUCTS (as on 1.4.2000) (for latest information get in touch

with the current insurers – website information of insurers is provided at the web
page for insurers ):

Life Insurance:

• Popular Products: Endowment Assurance (Participating), and Money Back

(Participating). More than 80% of the life insurance business is from these
products.

General Insurance:

• Fire and Miscellaneous insurance businesses are predominant. Motor Vehicle

insurance is compulsory.
• Tariff Advisory Committee (TAC) lays down tariff rates for some of the general
insurance products (please visit website of GIC for details )
• 2001

New products have been launched by life insurers. These include linked-
products. For details, please visit the websites of life insurers.

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 INFORMATION

• About the insurance industry, the following documents may be helpful:

• Malhotra Committee Report (The Report of the Committee on Reforms in the
Insurance Sector);
• IRDA's First Annual Report - 2001

CUSTOMER PROTECTION:

Insurance Industry has Ombudsmen in 12 cities. Each Ombudsman is

empowered to redress customer grievances in respect of insurance contracts on
personal lines where the insured amount is less than Rs. 20 lakhs, in accordance
with the Ombudsman Scheme. Addresses can be obtained from the offices of
LIC and other insurers.

Nationalization

In 1955, parliamentarian Feroze Gandhi raised the matter of insurance fraud by owner's
of private insurance companies. In the ensuing investigations, one of India's wealthiest
businessmen, Ram Kishan Dalmia, owner of the Times of India newspaper, was sent to
prison for two months. Eventually, the Parliament of India passed the Life Insurance of
India Act on 1956-06-19, and the Life Insurance Corporation of India was created on
1956-09-01, by consolidating the life insurance business of 245 private life insurers and

26
other entities offering life insurance services. Nationalization of the life insurance
business in India was a result of the Industrial Policy Resolution of 1956, which had
created a policy framework for extending state control over at least seventeen sectors of
the economy, including the life insurance. The company began operations with 5 zonal
offices, 33 divisional offices and 212 branch offices.

Objectives of nationalisation of insurance:

• Spread Life Insurance widely and in particular to the rural areas and to the
socially and economically backward classes with a view to reaching all insurable
persons in the country and providing them adequate financial cover against
death at a reasonable cost.
• Maximize mobilization of people's savings by making insurance-linked savings
adequately attractive.
• Bear in mind, in the investment of funds, the primary obligation to its
policyholders, whose money it holds in trust, without losing sight of the interest of
the community as a whole; the funds to be deployed to the best advantage of the
investors as well as the community as a whole, keeping in view national priorities
and obligations of attractive return.
• Conduct business with utmost economy and with the full realization that the
moneys belong to the policyholders.
• Act as trustees of the insured public in their individual and collective capacities.
• Meet the various life insurance needs of the community that would arise in the
changing social and economic environment.
• Involve all people working in the Corporation to the best of their capability in
furthering the interests of the insured public by providing efficient service with
courtesy.
• Promote amongst all agents and employees of the Corporation a sense of
participation, pride and job satisfaction through discharge of their duties with
dedication towards achievement of Corporate Objective.

double insurance

Situation in which the same risk is insured by two overlapping but independent
insurance policies. It is lawful to obtain double insurance, and the insured can make
claim to both insurers in the event of a loss because both are liable under their
respective polices. The insured, however, cannot profit (recover more than the loss
suffered) from this arrangement because the insurers are law bound only to share the
actual loss in the same proportion they share the total premium. Also called dual
insurance.

Deposit Insurance System

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 Deposit insurance is a system established to protect depositors within a certain
coverage amount against the loss of their deposits placed in a financial institution, in the
unlikely events that a financial institution fail. Announcing the coverage limit that
depositors will be paid back by the deposit insurance agency will help lessen the
panic which may lead to systemic run.
The source of fund for compensation mainly comes from premiums collected from
financial institutions which are members of deposit insurance system.

Concept of Establishing the Deposit Insurance Agency

The main concept of establishing a deposit insurance agency is to protect small

and unsophisticated depositors who are the majority in financial institution system.
These depositors do not have large amount of money in financial institutions but need
access to financial services. The system is designed to enable them to receive their
deposits back directly from the deposit insurance agency in stead of waiting until the
liquidation process is finalized.
Another advantage of deposit insurance is to enhance financial stability through
1) preventing depositors from rushing to withdraw money when a financial institution is
in difficulty which may lead to systemic run, and 2) encouraging depositors whose
deposits are not fully covered to monitor financial institutions' performance.
The coverage limit is set considering the state of economy and the amount of
deposits that small depositors have in financial institutions. In the case of Thailand, 98%
of the depositors have less than 1 million baht in their accounts.

Deposit insurance, as we know it today, was introduced in India in 1962. India was the
second country in the world to introduce such a scheme - the first being the United
States in 1933. Banking crises and bank failures in the 19th as well as the early 20th
Century (1913-14) had, from time to time, underscored the need for depositor protection
in India. After the setting up of the Reserve Bank of India, the issue came to the fore in
1938 when the Travancore National and Quilon Bank, the largest bank in the
Travancore region, failed. As a result, interim measures relating to banking legislation
and reform were instituted in the early 1940s. The banking crisis in Bengal between
1946 and 1948, once again revived the issue of deposit insurance. It was, however, felt
that the measures be held in abeyance till the Banking Companies Act, 1949 came into
force and comprehensive arrangements were made for the supervision and inspection
of banks by the Reserve Bank.

It was in 1960 that the failure of Laxmi Bank and the subsequent failure of the Palai
Central Bank catalyzed the introduction of deposit insurance in India. The Deposit
Insurance Corporation (DIC) Bill was introduced in the Parliament on August 21, 1961
and received the assent of the President on December 7, 1961. The Deposit Insurance
Corporation commenced functioning on January 1, 1962 .

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The Deposit Insurance Scheme was initially extended to functioning commercial banks.
Deposit insurance was seen as a measure of protection to depositors, particularly small
depositors, from the risk of loss of their savings arising from bank failures. The purpose
was to avoid panic and to promote greater stability and growth of the banking system -
what in today’s argot are termed financial stability concerns. In the 1960s, it was also
felt that an additional the purpose of the scheme was to increase the confidence of the
depositors in the banking system and facilitate the mobilisation of deposits to catalyst
growth and development.

When the DIC commenced operations in the early 1960s, 287 banks registered with it
as insured banks. By the end of 1967, this number was reduced to 100, largely as a
result of the Reserve Bank of India’s policy of the reconstruction and amalgamation of
small and financially weak banks so as to make the banking sector more viable. In
1968, the Deposit Insurance Corporation Act was amended to extend deposit insurance
to 'eligible co-operative banks'. The process of extention to cooperative banks, however
took a while it was necessary for state governments to amend their cooperative laws.
The amended laws would enable the Reserve Bank to order the Registrar of Co-
operative Societies of a State to wind up a co-operative bank or to supersede its
Committee of Management and to require the Registrar not to take any action for
winding up, amalgamation or reconstruction of a co-operative bank without prior
sanction in writing from the Reserve Bank of India. Enfolding the cooperative banks had
implications for the DIC - in 1968 there were over 1000 cooperative banks as against
the 83 commercial banks that were in its fold. As a result, the DIC had to expand its
operations very considerably.

The 1960s and 1970s were a period of institution building. 1971 witnessed the
establishment of another institution, the Credit Guarantee Corporation of India Ltd.
(CGCI). While Deposit Insurance had been introduced in India out of concerns to
protect depositors, ensure financial stability, instill confidence in the banking system and
help mobilise deposits, the establishment of the Credit Guarantee Corporation was
essentially in the realm of affirmative action to ensure that the credit needs of the
hitherto neglected sectors and weaker sections were met. The essential concern was to
persuade banks to make available credit to not so creditworthy clients.

In 1978, the DIC and the CGCI were merged to form the Deposit Insurance and Credit
Guarantee Corporation (DICGC). Consequently, the title of Deposit Insurance Act, 1961
was changed to the Deposit Insurance and Credit Guarantee Corporation Act, 1961.
The merger was with a view to integrating the functions of deposit insurance and credit
guarantee prompted in no small measure by the financial needs of the erstwhile CGCI.

After the merger, the focus of the DICGC had shifted onto credit guarantees. This owed
in part to the fact that most large banks were nationalised. With the financial sector
reforms undertaken in the 1990s, credit guarantees have been gradually phased out
and the focus of the Corporation is veering back to its core function of Deposit

29
Insurance with the objective of averting panics, reducing systemic risk, and ensuring
financial stability.

Why Do We Need Deposit Insurance?

Deposit insurance provides three important benefits to the economy:

1. It assures small depositors that their deposits are safe, and that their deposits will be
immediately available to them if their bank fails.

2. It maintains public confidence in the banking system, thus fostering economic

stability. Without the confidence of the public, banks could not lend money, but would
have to keep depositors' money on hand in cash at all times.

3. It supports the banking structure. Deposit insurance makes it possible for the United
States to have a system of both large and small banks; if there were no deposit
insurance, the banking industry would probably be concentrated in the hands of a very
few enormous banks.

An argument against deposit insurance is that it reduces "depositor discipline," which is

the depositors' means of policing bank activity. This is true. If depositor discipline alone
governed the banking system, however, we would see a significant increase in bank
runs, losses to small savers and economic instability, particularly in credit markets. The
difficulty in maintaining a successful deposit insurance system lies in maintaining a role
for depositor discipline without threatening the overall stability of the banking system.

Insurance Policy
Mortgage Insurance

The mortgage insurance is a special type of insurance policy and is gaining huge
popularity in the Indian mortgage industry. The mortgage insurance is a special type of
insurance policy that guarantees repayment of a mortgage loan in the event of death or
disability of the person who borrowed the mortgage. The tenure of payment of such
mortgage insurance is usually of 12 months and in some cases it goes higher up.
Furthermore, the lender can also protect his loaned capital through these special type of
insurance instrument.In today's world the meaning of the term mortgage is better

30
understood only when we see that the maximum number of peoples purchase their
homes with a mortgage.

The term mortgages which has flourished the world's housing market is simply meant as
a process by which the individual and the business can purchase the residential and the
commercial property without paying the total value. Mortgage is defined as a loan to an
individual or a businessman for purchasing a real estate. In this case the real estate
also acts as a collateral for the loan.

Meaning of Mortgage Insurance :-

Simply insurance that protects the lender if in any case the homebuyer does not make
their respective mortgage payments is called as mortgage insurance. It can be defined
as a financial guaranty that protects the lenders against the loss. In any case if the
borrower is found to be defaulted and the lender takes the title of the property then the
mortgage insurer reduces the loss to the lender. More over in case of mortgage
insurance, the insurer haves some risk by lending money.

This type of specialized mortgage life insurance products are of two types:-
 Private Mortgage Insurance
 Mortgage Insurance Premium

Private Mortgage Insurance :–

Private Mortgage Insurance are mortgage life insurance products that protects the
borrower from the lender in the event of default which generally, covers a substantial
portion of the capital borrowed. They are insurance products of private insurance
companies.

Mortgage Insurance Premium :-

Mortgage Insurance Premium are mortgage life insurance products that also protects
the lender in the event of non-payment due to some unfortunate event. These life
insurance products are generally government insurance products.

Who needs mortgage insurance?

Mortgage insurance is not required by law but often is required by the money lender
who is offering the mortgage. This is especially true if they are offering a mortgage to
someone who has had a patchy employment record or is in a high risk group such as a
pensioner. Regardless of your status, mortgage insurance is usually required when the
loan amount is greater than 80% of the value of the property.Also known as mortgage
payment protection, mortgage insurance is suggested for anyone who has a standard
style mortgage as it replaces your payments if you are unable to meet your mortgage
due to injury or long term illness. More innovative mortgages offer payment breaks for
long periods of time and may make mortgage insurance unnecessary.
Our key services in this include :-

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  Marketing and selling
 Originations
 Risk and underwriting
 Approval and issuance
 Loan administration
 Collections
 Finance and accounting

Money Back Policy

Unlike ordinary endowment insurance plans where the survival benefits are payable
only at the end of the endowment period, money back policies provide for periodic
payments of partial survival benefits during the term of the policy, of course so long as
the policy holder is alive.An important feature of this type of policies is that in the event
of death at any time within the policy term, the death claim comprises full sum assured
without deducting any of the survival benefit amounts, which may have already been
paid as money-back components. Similarly, the bonus is also calculated on the full sum
assured. plan is an excellent plan with good return on reinvestment, best suited for
businessmen and professionals. Money is available at regular intervals in future to meet
the specific expenses such as children's education or marriage. At the same time, the
policy provides insurance protection for the family as well as old age provision.

Salient Features :-
 A policy where lump sum amounts are paid to the life assured at periodic
intervals on survival.
 In case of death of the life assured within the term, the total sum insured is paid to
the nominee, irrespective of earlier survival benefits.
 Bonus is payable under this scheme.
 Premiums are to be paid regularly to get survival benefits.
 Premiums cease at death or on expiry of term whichever is earlier.
 This plan can be availed of for terms 20 or 25 years .

Who should buy this plan?

Such plans are particular popular with individuals for whom income at regular intervals
is a necessity in addition to an insurance cover. The minimum age is 12 years to be
eligible for a Money-Back Policy.

32
How is it beneficial to me?
Under money back policies premiums can be paid as per the insurance company’s
policy. These could be quarterly, half yearly or annually. The premiums for these
policies are payable for the selected term of years, or till death if it occurs earlier.By
buying such policies one can receive income at regular intervals other than the risk
cover it provides. Also a good amount of bonus on the full sum assured is quite a good
bargain.

Travel Insurance

Travel insurance covers any travel related losses incurred during one’s domestic or
international travels. Any good travel insurance plan should cover medical expenses,
expenses regarding travel delays, emergency returns, protection from theft of cash or
other personal belongings and compensation for any baggage delay.Travel insurance is
insurance that is intended to cover medical expenses and financial (such as money
invested in nonrefundable pre-payments) and other losses incurred while traveling,
either within one's own country, or internationally. Temporary travel insurance can
usually be arranged at the time of the booking of a trip to cover exactly the duration of
that trip, or a more extensive, continuous insurance can be purchased from travel
insurance companies, travel agents or directly from travel suppliers such as cruiselines
or tour operators.

The most common risks that are covered by travel insurance are :-
 Medical expenses
 Emergency evacuation/repatriation
 Overseas funeral expenses
 Accidental death, injury or disablement benefit
 Cancellation
 Curtailment
 Delayed departure
 Loss, theft or damage to personal possessions and money
 Delayed baggage
 Legal assistance
 Personal liability and rental car damage excess
Travel Insurance: Coverage

33
Some of the common risks that should be covered under any good travel
insurance policy are as follows:
Travel cancellations, delayed departures, losses, theft or damage of personal
possessions, medical expenses, emergency return or repatriation, accidental death,
rental car damage or any sort of legal assistance related to traveling. Different
companies may provide different coverage facilities under their own insurance and the
exact policies will vary.

Travel Insurance: Other Types

There are other types of travel insurance which expressly cover things like high risk
sports, traveling to high-risk countries and protection against terrorism, chronic diseases
and more.

Travel Insurance: Special coverage

One can also find travel insurance which insures all of the prepaid, non-refundable trip
costs which may include airfare, hotels bookings, tour costs or whatever else may have
been paid for upfront or pre-booked.

Travel Insurance: International Medical Insurance

Another type of travel insurance is under an international medical insurance scheme,
which falls under two categories. The first is medical travel insurance that provides
emergency medical coverage while away from home. The second is international major
medical insurance which covers both emergency and non-emergency incidents.

Health Insurance

What is a health insurance policy?

A health insurance policy is a contract between an insurer and an individual or a group,
in which the insurer agrees to provide specified health insurance at an agreed-upon
price the premium. Depending on the policy, the premium may be payable either in a
lump sum or in instalments. Health insurance usually provides either direct payment or
reimbursements for expenses associated with illnesses and injuries. The cost and range
of protection provided by the health insurance will depend on the insurance provider
and the particular policy purchased. These days, most companies give the benefit of
health insurance to the employees. However, in case your employer does not offer a
health insurance plan, it is advisable to opt for a health insurance scheme.
Health insurance is insurance that pays for medical expenses. It is sometimes used
more broadly to include insurance covering disability or long-term nursing or custodial
care needs. It may be provided through a government-sponsored social insurance
program, or from private insurance companies. It may be purchased on a group basis or
purchased by individual consumers. In each case, the covered groups or individuals pay
premiums or taxes to help protect themselves from high or unexpected healthcare
expenses.
What does it cover?

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In anticipation of unexpected events that create the need for medical goods and
services, the health insurance does not cover certain ailments. It does not cover
ailments in the first year after the policy is taken. It covers hospitalisation charges for:
 Heart attacks
 Strokes
 Prolonged illnesses
 Loss of limb, eye, or other parts of the body due to accident
 Injuries
 Maternity expenses
 Medicines

Health Insurance Right For You?

Everyone has a choice to either purchase health insurance or not. Choosing not to
purchase an health insurance plan, such as the one Pratt provides, can cause you to
pay a substantial amount of medical bills with your own money. Children are very
susceptible to illness, having doctor visits every few months and on average receiving
medications for illness up to twice a year. Why put you or your family at risk of not being
covered in a time of need. Your family and children's health is a top priority and
providing you with low cost heath insurance is ours. By choosing Pratt Insurance you
will be making the right choice and not worrying about large medical bills later on down
the road. So when you're ready for health insurance that you can't argue about, sign up.
Being a top credited low cost health insurance provider is what Pratt's main objective is.
Knowing we are doing everything we can for our clients is what has put us on top of the
industry in past years.

Why do you need health insurance?

Health insurance has become a necessity in today’s world considering the rise in the
cost of medical care and treatment and the huge population of the country. The
escalating cost of medical treatment today is beyond the reach of the common man.
Even if an individual is healthy and has never had any major problem, it is not possible
to predict what may happen in the future. There is a growing public awareness for better
health care and desire to have better health care from private medical providers. In case
of a medical emergency, cost of hospital room, doctor’s fees, medicines and related
health services all add up to a huge sum. In such times, health insurance provides the
much needed financial relief.

What you need to know?

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You should understand the policy, and become familiar with common health insurance
provisions, including limitations, exclusions, and riders. It is very important to know what
your policy covers and what you have to pay yourself. Health Insurance policies
generally cover boarding, nursing and diagnostic expenses, which include room rent
charged at the hospital or nursing home, fees of the surgeon, anesthetist, doctor, etc.
Some policies even offer fixed cash amount for each day you stay at any hospital for
treatment. If you have a persistent health problem and then decide to take insurance, it
might not be covered. Expenses on hospitalization, incurred in the first 30 days after
taking a policy are also not entitled, except in case of an injury from accident. Treatment
of certain diseases is not covered during the first year of your policy. The list of diseases
may vary form one health policy to another.

Who can avail this facility?

Health insurance can be availed by people aged between five and seventy five (The
upper and lower age limits may vary slightly depending on the policy). The health
insurance scheme could either be a personal scheme or a group scheme sponsored by
your employer.

Life Insurance Plans

Endowment Plan

whole life, an endowment life insurance policy is designed primarily to provide a living
benefit. Thus, it is more of an investment than a whole life policy. Endowment life
insurance pays the face value of the policy either at the time of death of the policyholder
or at the time of maturity of the policy. The policy is a method of accumulating capital for
a specific purpose and protecting this savings program against the saver's premature
death. Many investors use endowment life insurance to fund anticipated financial needs,
such as college education or retirement. Premium for an endowment life policy is much
higher than that of a whole life policy.

Endowment policy covers risk for a specified period, at the end of which the sum
assured is paid back to the policyholder, along with the bonus accumulated during the
term of the policy. An endowment life insurance policy is designed primarily to provide a
living benefit and only secondarily to provide life insurance protection. Therefore, it is
more of an investment than a whole life policy.Endowment life insurance pays the face

36
value of the policy either at the insured's death or at a certain age or after a number of
years of premium payment. Endowment policy is an instrument of accumulating capital
for a specific purpose and protecting this savings program against the saver's
premature death.Premium on endowment policies is payable for the full term of the
endowment policy unless, the insurer dies earlier. When compared to whole life policies,
the premium rates for endowment policies are higher and the bonus rates lower. But
one of the major attractions of endowment policies is that they provide a return on
premium payments, when the policy comes to an end. The endowment received at the
maturity of the policy can be used for buying an annuity policy to generate a monthly
pension for the whole life.

Features :-
 Moderate Premiums
 High bonus
 High liquidity
 Savings oriented.
Endowment insurance are policies that cover the risk for a specified period and at the
end the sum assured is paid back to the policyholder along with all the bonus
accumulated during the term of the policy. The Endowment insurance policies work in
two ways, one they provide life insurance cover and on the other hand as a vehicle for
saving. They are more expensive than Term policies and Whole life policies. Normally
the bonus in calculated on the sum insured but the only draw back is that the bonuses
are not compounded. Endowment insurance plans are best for people who do not have
a saving and an investing habit on a regular basis. Endowment Insurance Plans can be
bought for a shorter duration period.

Endowment Plan Benefits

 Survival Benefits :-
Payment of full Sum Assured plus bonus plus final additional bonus.
 Death Benefits :-
Payment of full Sum Assured plus accrued bonus.
 Suitable for :-
Being an endowment assurance policy, this plan is apt for people of all ages and
social groups who wish to protect their families from a financial setback that may
occur owing to their demise. The amount assured if not paid by reason of his death
earlier will payable at the end of the endowment term where it can be invested in an
annuity provision for the rest of the policyholder's life or in any other way he may
think most suitable at that time.

Whole Life Plan

37
What is whole life insurance?

A whole life insurance policy covers you for your entire life, not just for a specific period
such as term insurance. Your death benefit and premium in most cases will remain the
same. Whole life insurance also builds cash value, which is a return on a portion of your
premiums that the insurance company invests. Your cash value is tax-deferred until you
withdraw it and you can borrow against it.As the name suggests, whole life insurance is
for the whole life and not just for a specified period, as in term insurance. As there is no
fixed end date for the policy, only the death benefit exists and is paid to the named
beneficiary. The policyholder is not entitled to any money during his or her own lifetime..
You can opt for whole life policies after the age of 45 either for the purpose of leaving
behind an estate for one's heirs or for covering the possibility of premature stoppage of
pension income in the case of relatively early death after retirement.

Features :-

This plan is mainly devised to create an estate for the heirs of the policyholder as the
plan basically provides for payment of sum assured plus bonuses on the death of the
policyholder. However, considering the increased longevity of the Indian population, the
Corporation has amended the above provision, thereby providing for payment of sum
assured plus bonuses in the form of maturity claim on completion of age 80 years or on
expiry of term of 40 years from date of commencement of the policy whichever is
later.The premiums under the policy are payable up to age 80 years of the policyholder
or for a term of 35 years whichever is later.If the payment of premium ceases after 3
years, a paid-up policy for such reduced sum assured will be automatically secured
provided the reduced sum assured exclusive of any attached bonus is not less than
Rs.250/-. Such reduced paid-up policy is not entitled to participate in the bonus declared
thereafter but the bonuses already declared on the policy will remain attach, provided
the policy is converted in to a paid-up policy after the premiums are paid for 5 years.

A whole life policy for an investment?

The rate of return on a whole life insurance policy is very low compared to other
investments, even with the tax savings factored in. Most investment professionals would
agree that life insurance should not be used solely as an investment tool and you
should judge your policy choices on the protection and not the rate of return. But, if you
are in need of life insurance, the tax benefits and cash value is an added bonus when
purchasing protection for your loved ones.

Whole Life: Benefit

38
Money-back Life Insurance Plan :-
The money-back plan provides life insurance cover for a specific period. During the term
of the policy, the insured receives tax-free, fixed proportions of the sum assured at
regular intervals. On maturity i.e. on surviving the entire term of the policy, the insured
receives the balance portion of the sum assured, if any, plus the bonus/participating
profit/ guaranteed addition for the term of the policy, if any, or the value of the
investments.In the event of death of the insured during the term of the policy, the
nominee still receives the entire sum assured , plus the bonus/participating
profit/guaranteed addition, if any.The premium for money back policies is higher in
comparison to endowment and term plans. If one purchases money back plans with
guaranteed addition, the premium is even higher. Some companies offer an option in
choosing the premium paying term.Money back policies are advisable if the insured
wants a product that provides both insurance cover and savings. Many people prefer to
buy such policies to utilize the tax-free sum of money receivable to go on a holiday, re-
furnish their homes or even re-invest the same amount.

Term Plan

Term life insurance policy covers risk only during the selected term period. If the
policyholder survives the term, the risk cover comes to an end. Term life policies are
primarily designed to meet the needs of those people who are initially unable to pay the
larger premium required for a whole life or an endowment assurance policy.

No surrender, loan or paid-up values are granted under term life policies because
reserves are not accumulated. If the premium is not paid within the grace period, the
policy lapses without acquiring any paid-up value. A lapsed policy can be revived during
the lifetime of the life assured but before the expiry of the period of two years from the
due date of the first unpaid premium on the usual terms. Accident and / or Disability
benefits are not granted on policies under the Term plan.
Term life policies are the cheapest form of insurance. Premiums in a term policy pay for
the insurance and no part of the premium in a term life insurance policy is used for
investment purposes. Term life policies are the cheapest form of insurance. Premiums
in a term policy pay for the insurance and no part of the premium in a term life insurance
policy is used for investment purposes. The length of a term life insurance policy varies
from 5 to 30 years.

Many people prefer term insurance to provide their families with the security cover, and
then use the additional funds they would have paid into an endowment or other life
insurance policy to make investments of their own choosing. Term life policies are
suitable for those who need to provide financial security to their family but are unable to
pay the larger premium required for a Whole Life or Endowment policy.

A term life insurance policy is very different as compared to a regular life insurance

39
policy as it is for a specific period of time. After the term gets over such type of
insurance can either be cancelled or renewed. The cancellation and renewal decision
depends totally on the policyholder and he may do so depending on his circumstances.

Who offers term life insurance?

Most insurance companies today offer term life insurance policies, but many agents
would be reluctant to provide this policy. This is because generally the risk involved is
more and the agent will not get much commission by selling a term life insurance as
compared to what he will get on selling a regular life insurance policy.
Types of Term Insurance :-
 Straight Term: The insurance premiums and benefits remain constant throughout
the term of the policy.
Renewable Term: Can be renewed every time the coverage period lapses,
irrespective of the status of the person’s health. In this policy, one can opt for annual
renewable term, wherein the policy is taken for a year and is renewed annually for a
total term ranging from 10 to 30 years.
 Level Term: Ensures a fixed premium until the end of the policy period, which can
range from five years to 30 years.
Decreasing Term: The amount for which you are insured falls over the course of the
term of the policy. The premium, however, remains constant. This term policy is used
when one needs to protect mortgage or income.
 Convertible Term: Can be converted from a term policy into a permanent one.
Adjustable Premium: Allows insurance companies to offer lower premiums using less
conservative estimates of mortality and administrative and interest costs.

Pension Plan

A pension plan or an annuity is an investment that is made either in a single lump sum
payment or through installments paid over a certain number of years, in return for a
specific sum that is received every year, every half-year or every month, either for life or
for a fixed number of years.Annuities differ from all the other forms of life insurance in
that an annuity does not provide any life insurance cover but, instead, offers a
guaranteed income either for life or a certain period.Typically annuities are bought to
generate income during one's retired life, which is why they are also called pension
plans. By buying an annuity or a pension plan the annuitant receives guaranteed
income throughout his life. He also receives lump sum benefits for the annuitant's estate
in addition to the payments during the annuitant's lifetime.Pension plans are perfect
investment instrument for a person who after retiring from service has received a large
sum as superannuation benefit. He can invest the proceeds in a pension plan as it is

40
safest way of secured income for the rest of his life. One can pay for a pension plan
either through an annuity or through installments that are annual in most cases.

Types of Pension Plans

Life Annuity :-
Guarantees you a specified amount of income for your life. After death, the amount
invested is refunded to your nominee.
Guaranteed Period Annuity :-
Provides specified income for your lifetime and guarantees that your nominee will
receive payments for a certain minimum number of years, even if you should die
earlier. In case you live longer than the specified minimum number of years, you are
entitled to recieve annuity payments for your lifetime.
Annuity Certain :-
Under this plan, the stipulated annuity is paid for a fixed number of years. The annuity
payments stop at the end of that period, irrespective of how much longer you may live.
Deferred Annuities :-
The premiums paid into such plans may be deducted from one’s taxable income at the
time of payment. In addition, the interest earned on the annuities is not taxed
immediately. But the proceeds of the annuity will be taxable when they are paid to you.
Endowment insurance are policies that cover the risk for a specified period and at the
end the sum assured is paid back to the policyholder along with all the bonus
accumulated during the term of the policy. The Endowment insurance policies work in
two ways, one they provide life insurance cover and on the other hand as a vehicle for
saving. They are more expensive than Term policies and Whole life policies. Normally
the bonus in calculated on the sum insured but the only draw back is that the bonuses
are not compounded. Endowment insurance plans are best for people who do not have
a saving and an investing habit on a regular basis. Endowment Insurance Plans can be
bought for a shorter duration period.

Key Benefits:--
 Dream Life Pension enhances your retirement kitty by providing special addition,
starting from the end of 10th policy year
 Change your planned retirement age any time during the policy term
 Obtain tax benefits as per the prevailing tax laws on the premiums paid and the
benefits received under the policy.

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Insurance Policy Administration

Policy administration
Customers used to receiving instant gratification on the Internet are apt to be frustrated
by the insurance industry's often sluggish approach to product development,
underwriting, and policy administration.The continued erosion of barriers between
financial institutions, and the considerable overlap in the data they collect, support the
idea that financial institutions should expand their core systems to address, in real time,
more types and methods of transactions. A bank uses many of the same components to
build a home loan application that an insurance company uses to build a homeowners
policy. For example, flexible platforms - such as those based on the Windows Server
System - would enable a bank to populate a homeowners policy with data from a
mortgage application. In this way, the bank could offer the homebuyer insurance at the
same time the mortgage is approved.
Software providers and system integrators who use technology to build solutions that
enable insurance transactions, including selling, underwriting, and policy processing.
This group of providers and solutions creates an Insurance Value Chain for the industry.

Policy Administration Systems :-

Policy Administration Systems solutions in :-

 Policy Issuance
 Billing
 Dividend Calculation
 Endorsement
 Renewal

Basic features :-
 Pure internet-based
 Quick implementation and requires minimal formal training to operate
 User-friendly menu driven design allows effortless capture of new Business data
 An user can put together data in any format into the system and store it
 Faxing, Emailing and printing forms, documents from within the system is
possible
 To-do-list allows users to preserve their diary entries and task allocation
 Multi-lingual support

Life Insurance Policy Administration Services :-

42
  Remittances including online processing
 Change of Payment Methodology
 Riders and special benefits
 New Business Coverage / Waiver / Reduction
 Premium lapses, renewals and reinstatements
 Surrender of policy processing
 Nomination services
 W2/Section 35 reports
 First notice of loss
 Updating of Policy holder Details
 Change of Beneficiary
 Disbursement Against Life Policy

MAJOR POLICY CHANGES

Insurance sector has been opened up for competition from Indian private insurance
companies with the enactment of Insurance Regulatory and Development Authority Act,
1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and
Development Authority (IRDA) was established on 19th April 2000 to protect the
interests of holder of insurance policy and to regulate, promote and ensure orderly
growth of the insurance industry. IRDA Act 1999 paved the way for the entry of private
players into the insurance market which was hitherto the exclusive privilege of public
sector insurance companies/ corporations. 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
Rs.100 crores.
• The minimum paid up equity capital for carrying on reinsurance business has
been prescribed as Rs.200 crores.

The Authority has notified 27 Regulations on various issues which include Registration
of 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. Applications were invited by the Authority with

43
effect from 15th August, 2000 for issue of the Certificate of Registration to both life and
non-life insurers. The Authority has its Head Quarter at Hyderabad.

Protection of the interest of policy holders:

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

provide for: 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 so that they are in a
position to meet their obligations towards policyholders 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 the
policyholders in connection with services provided by them under the insurance
contract.

44
Bancassurance - a term coined by combining the two words bank and
insurance (in French) - connotes distribution of insurance products through banking
channels. Bancassurance encompasses terms such as ‘Allfinanz’ (in German),
‘Integrated

Financial Services’ and ‘Assurebanking’. This concept gained currency in the growing
global insurance industry and its search for new channels of distribution. Banks, with
their geographical spread and penetration in terms of customer reach of all segments,
have emerged as viable sources for the distribution of insurance products. Presently,
there.s more activity here than anywhere else. And every one wants to jump onto the
bandwagon for a piece of the action cake.

The insurance industry has finally woken up from its long slumber to an altogether new
awakening. It is the rise of a new dawn that has brought with it opportunities galore.
From innumerable insurers, to affordable and quality covers for the consumer, from
increase in distribution channels to incorporating information technology measures, from
net selling to bringing about increased transparency - its all there. The ubiquitous agent
is no more the only distribution channel today for insurance products. Increase in
distribution channels has among others also seen the concept of Bancassurance taking
roots in India, and it is emerging to be a viable solution to mass selling of insurance
products.

Bancassurance is a long-standing dream of offering a seamless service of banking, life

& non-life products. India, being the one of the most populous country in the world with
a huge potential for insurance companies, has an envious chain of bank branches as
the lifeline of its financial system. Banks with over 65,000 branches & 65% of household
investments are the backbone of the Indian financial market. In India, there are 75

45
branches per million inhabitants. Clearly, that’s something insurance companies - both
private and state-owned -would find nearly impossible to achieve on their own.
Considering it as a channel for insurance gives insurance an unlimited exposure to
Indian consumers. Banks have expertise on the financial needs, saving patterns and life
stages of the customers they serve. Banks also have much lower distribution costs than
insurance companies and thus are the fastest emerging distribution channel. For
insurers, tying up with banks provides

extensive geographical spread and countrywide customer access; it is the logical route
for insurers to take.

However, the evolution of bancassurance as a concept and its practical implementation

in various parts of the world, have thrown up a number of opportunities and challenges.
Aspects such as the most suited model for a given country with its economic, social and
cultural ramifications interacting on each other, legislative hurdles, and the mindset of
persons involved in this activity, have dominated the study and literature on
bancassurance.

The motives behind bancassurance also vary. For banks it is a means of product

diversification and a source of additional fee income. Insurance companies see

bancassurance as a tool for increasing their market penetration and premium turnover.
The customer seesbancassurance as a bonanza in terms of reduced price, high quality
product and delivery at doorsteps. Actually, everybody can be a winner here.

Will it work in India? That can only be answered in the future; the initial action does
show that many banks seem to believe that bancassurance will be a big success here.
Some foreign and Indian banks -- Stanchart-Grindlays, ABN-Amro, Citibank, HSBC,
Bank of Baroda (BoB) and State Bank of India (SBI) -- are hoping to replicate the
French success of this insurance-cum-banking model.

Reasons for growing phenomena of Bancassurance

The opening up of the insurance industry to private sector participation in December

1999 has led to the entry of 20 new players, with 12 in the life insurance sector and
eight in the non-life insurance sector. Almost without exception these companies are
seeking to utilize multiple distribution channels such as traditional agency,
bancassurance, brokers and direct marketing. Bancassurance is seen by many to be a
significant or even the primary channel (the latter being the case for at least SBI Life). In
other Asian markets we have seen bancassurance make significant headway in recent

46
times. For example, bancassurance accounted for 24% of new life insurance sales
by .weighted. premium income* in Singapore in 2002. This is a significant increase on
the equivalent 2001 statistic of 15% and is as a result of growth in significant bank-
centric bancassurance operations. In Hong Kong the figure for 2002 is expected to be at
the 20% level for the same basic reasons.

• Life insurance premium represents 55% of the world insurance premium, and as
the life insurance is basically a saving market. So it is one of the methods to
increase deposits of banks.
• In non-life insurance business banks are looking to provide additional flow of
revenues from the same customers through the same channel of distribution and
with the same people.
• Insurers have been turning in ever-greater numbers to alternative modes of
distribution because of the high costs they have paid for agent services. These
costs became too much of a burden for many insurers compared to the returns
they generated.
• Insurers operate through bancassurance own and control relationships with
customers. Insurers found that direct relationships with customers gave them
greater control of their business at a lower cost. Insurers who operate through
the agency relationship are hardly having any control on their relationship with
their clients.
• The ratio of expenses to premiums, an important efficiency factor, it is noticed
very well that expenses ratio in insurance activities through bancassurance is
extremely low. This is because the bank and the insurance company is benefiting
from the same distribution channels and people.
• It is believed that the prospects for increased consolidation between banking and
insurance is more likely dominated and derived by the marketing innovations that
are likely to follow from financial service modernization. Such innovations would
include cross selling of banking, insurance, and brokerage products and
services; the increased use of the Internet by consumers; and a melding of
insurance and banking corporate cultures.
• One of the most important reason of considering Bancassurance by Banks is
increased return on assets (ROA). One of the best ways to increase ROA,
assuming a constant asset base, is through fee income. Banks that build fee
income can cover more of their operating expenses, and one way to build fee
income is through the sale of insurance products. Banks that effectively cross-
sell financial products can leverage their distribution and processing capabilities
for profitable operating expense ratios.
• By leveraging their strengths and finding ways to overcome their weaknesses,
banks could change the face of insurance distribution. Sale of personal line
insurance products through banks meets an important set of consumer needs.
Most large retail banks engender a great deal of trust in broad segments of
consumers, which they can leverage in selling them personal line insurance

47
 products. In addition, a bank.s branch network allows the face-to-face contact
that is so important in the sale of personal insurance.
• Another advantage banks have over traditional insurance distributors is the lower
cost per sales lead made possible by their sizable, loyal customer base. Banks
also enjoy significant brand awareness within their geographic regions, again
providing for a lower per-lead cost when advertising through print, radio and/or
television. Banks that make the most of these advantages are able to penetrate
their customer base and markets for above-average market share.
• Other bank strengths are their marketing and processing capabilities. Banks
have extensive experience in marketing to both existing customers (for retention
and cross selling) and non-customers (for acquisition and awareness). They also
have access to multiple communications channels, such as statement inserts,
direct mail, ATMs, telemarketing, etc. Banks’ proficiency in using technology has
resulted in improvements in transaction processing and customer service.

By successfully mining their customer databases, leveraging their reputation and

distribution systems. (branch, phone, and mail) to make appointments, and

utilizing ’sales techniques. and products tailored to the middle market, European

banks have more than doubled the conversion rates of insurance leads into sales

and have increased sales productivity to a ratio which is more than enough to

make bancassurance a highly profitable proposition.

• Insurers have much to gain from marketing through banks. Personal-lines

carriers have found it difficult to grow using traditional agency systems because
price competition has driven down margins and increased the compensation
demands of successful agents. Over the last decade, life agents have sold fewer
and larger policies to a more upscale client base. Middle-income consumers,
who comprise the bulk of bank customers, get little attention from most life
agents. By capitalizing on bank relationships, insurers will recapture much of this
under served market.
• Most insurers that have tried to penetrate middle-income markets through
alternative channels such as direct mail have not done well. Clearly, a change in
approach is necessary. As with any initiative, success requires a clear
• understanding of what must be done, how it will be done and by whom. The
place to begin is to segment the strengths that the bank and insurer bring to the
business opportunity.

48
Why Bancassurance in India?

The management of the new Indian operations are conscious of the need to grow
quickly to reduce painful start-up expense overruns. Banks with their huge networks and
large customer bases give insurers an opportunity to do this efficiently.

Regulations requiring certain proportions of sales to the rural and social sectors give an
added impetus to the drive for bancassurance. Selling through traditional methods to
these sectors can be inefficient and expensive. Tying up with a bank with an appropriate
customer base can give an insurer relatively cheap access to such sectors. This is still
an issue for insurers despite the recent widening of the definition of the rural sector (so
that it now accords with the census definition).

In India, as elsewhere, banks are seeing margins decline sharply in their core lending

business. Consequently, banks are looking at other avenues, including the sale of
insurance products, to augment their income. The sale of insurance products can earn
banks very significant commissions (particularly for regular premium products). In
addition, one of the major strategic gains from implementing bancassurance
successfully is the development of a sales culture within the bank. This can be used by
the bank to promote traditional banking products and other financial services as well.
Bancassurance is not simply about selling insurance but about changing the mindset of
a bank.

In addition to acting as distributors, several banks have recognised the potential of

insurance in India and have taken equity stakes in insurance companies. This is
perhaps the precursor of a trend we have seen in the United Kingdom and elsewhere
where banks started off as distributors of insurance but then moved to a manufacturing
role with fully owned insurance subsidiaries.

Bancassurance in India - A SWOT Analysis

Bancassurance as a means of distribution of insurance products is already in force.

Banks are selling Personal Accident and Baggage Insurance directly to their Credit
Card members as a value addition to their products. Banks also participate in the
distribution of mortgage linked insurance products like fire, motor or cattle insurance to
their customers. Banks can straightaway leverage their existing capabilities in terms of
database and face-toface contact to market insurance products to generate some
income for themselves, which hitherto was not thought of. Huge capital investment will
be required to create infrastructure particularly in IT and telecommunications, a call

49
center will have to be created, top professionals of both industries will have to be hired,
an R & D cell will need to be created to generate new ideas and products. It is therefore
essential to have a SWOT analysis done in the context of bancassurance experiment in
India.

Strengths

In a country of 1 Billion people, sky is the limit for personal lines insurance products.
There is a vast untapped potential waiting to be mined particularly for life insurance
products. There are more than 900 Million lives waiting to be given a life cover (total
number of individual life policies sold in 1998-99 was just 91.73 Million). There are
about 200 Million households waiting to be approached for a householder’s insurance
policy. Millions of people travelling in and out of India can be tapped for Overseas

Mediclaim and Travel Insurance policies. After discounting the population below poverty
line the middle market segment is the second largest in the world after China. The
insurance companies worldwide are eyeing on this, why not we pre-empt this move by
doing it ourselves?

Our other strength lies in a huge pool of skilled professionals whether it is banks or
insurance companies who may be easily relocated for any bancassurance venture. LIC
and GIC both have a good range of personal line products already lined up, therefore R
& D efforts to create new products will be minimal in the beginning. Additionally, GIC
with 4200 operating offices and LIC with 2048 branch offices are almost already
omnipresent, which is so essential for the development of any bancassurance project.

Weaknesses

The IT culture is unfortunately missing completely in all of the future collaborators i.e.
banks, GIC & LIC. A late awakening seems to have dawned upon but it is a case of too
late and too little. Elementary IT requirement like networking (LAN) is not in place even
in the headquarters of these institutions, when the need today is of Wide Area Network
(WAN) and Vast Area Network (VAN). Internet connection is not available even to the
managers of operating offices. The middle class population that we are eyeing at is
today overburdened, first by inflationary pressures on their pockets and then by the tax
net. Where is the money left to think of insurance? Fortunately, LIC schemes get IT
exemptions but personal line products from GIC

50
(mediclaim already has this benefit) like householder, travel, etc. also need to be given
tax exemption to further the cause of insurance and to increase domestic revenue for
the country. Another drawback is the inflexibility of the products i.e. it cannot be tailor
made to the requirements of the customer. For a bancassurance venture to succeed, it
is extremely essential to have in-built flexibility so as to make the product attractive to
the customer.

Opportunities

Banks’ database is enormous even though the goodwill may not be the same as in case
of their European counterparts. This database has to be dissected variously and various
homogeneous groups are to be churned out in order to position the bancassurance
products. With a good IT infrastructure, this can really do wonders.

Other developing economies like Malaysia, Thailand and Singapore have already taken
a leap in this direction and they are not doing badly. There is already an atmosphere
created in the country for liberalization and there appears to be a political consensus
also on the subject. Therefore, RBI or IRDA should have no hesitation in allowing the
marriage of the two to take place. This can take the form of merger or acquisition or
setting up a joint venture or creating a subsidiary by either party or just the working
collaboration between banks and insurance companies.

Threats

Success of a bancassurance venture requires change in approach, thinking and work

culture on the part of everybody involved. Our work force at every level are so well
entrenched in their classical way of working that there is a definite threat of resistance to
any change that bancassurance may set in. Any relocation to a new company or
subsidiary or change from one work to a different kind of work will be resented with
vehemence. Another possible threat may come from non-response from the target
customers. This happened in USA in 1980s after the enactment of Garn - St Germaine
Act. A rush of joint ventures took place between banks and insurance companies and all
these failed due to the non-response from the target customers. US banks have now
again (since late 1990s) turned their attention to insurance mainly life insurance. The
investors in the capital may turn their face off in case the rate of return on capital falls
short of the existing rate of return on capital. Since banks and insurance companies
have major portion of their income coming from the investments, the return from

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bancassurance must at least match those returns. Also if the unholy alliances are
allowed to take place there will be fierce competition in the market resulting in lower
prices and the bancassurance venture may never break-even.

Regulatory issues

The development of bancassurance in India has been slowed down by certain

regulatory barriers, which have only recently been cleared with the passage of the
Insurance (Amendment) Act, 2002. Prior to this, all the directors of a company wishing
to take up corporate agency (such as a bank) were technically required to undertake
100 hours of agency training and pass an examination. This was clearly an impractical
requirement and had held up the implementation of bancassurance in the country. As
the current legislation places the training and examination requirements upon a
designated person (.the corporate insurance executive.) within the corporate agency,
this barrier has effectively been removed. Other regulatory changes of note in this area
are the recently published Insurance Regulatory and Development Authority (IRDA)
regulations relating to the licensing of corporate agents. This specifies the institutions
that can become corporate agents and sets out the training and examination
requirements for the individuals who will be selling on behalf of the corporate agent, the
so-called .specified persons. .Specified persons. have to satisfy the same training and
examination requirements as insurance agents. A noticeable exception is that for those
possessing the Certified Associateship of Indian Institute of Bankers (CAIIB) only 50
hours of training (rather than 100 hours) will be required. This also applies to certified
accountants and actuaries. It is hoped that this aspect of the regulations will lead to well
educated, professional bank officers carrying out the financial advisory process.
Although expected, a restrictive feature of the bancassurance regulations is that they
appear to constrain the corporate agent to receiving only commission; profit-sharing
arrangements would seem to be ruled out. We feel that this, if applied in practice, is
unfortunate as profitsharing

agreements, which are increasingly common internationally, serve to align the

interests of the bank and the insurance company. Also, as products sold through bank
channels can be highly profitable, such agreements may be financially advantageous
for banks. In the longer term a profit-sharing agreement can help a bank move from
being a distributor to a manufacturer of insurance products thus leading to greater
integration in the financial services marketplace.

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Given the open-mindedness and responsiveness of the IRDA to regulations in general,
we hope that it will not be too long before profit-sharing agreements are permitted
between insurers and corporate agents.

Summary

Where legislation has allowed, bancassurance has mostly been a phenomenal success
and, although slow to gain pace, is now taking off across Asia, especially now that
banks are starting to become more diverse financial institutions, and the concept of
universal banking is being accepted. In India, the signs of initial success are already
there despite the fact that it is a completely new phenomenon. The factors and
principles of why it is a success elsewhere exist in India, and there is no doubt that
banks are set to become a significant distributor of insurance related products and
services in the years to come.

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Reinsurance

Reinsurance is a means by which an insurance company can protect itself with other
insurance companies against the risk of losses. Individuals and corporations obtain
insurance policies to provide protection for various risks (hurricanes, earthquakes,
lawsuits, collisions, sickness and death, etc.). Reinsurers, in turn, provide insurance to
insurance companies.

Functions of reinsurance: There are many reasons why an insurance company would
choose to reinsure as part of its responsibility to manage a portfolio of risks for the
benefit of its policyholders and investors.

Risk transfer:The main use of any insurer that might practice reinsurance is to allow
the company to assume greater individual risks than its size would otherwise
allow, and to protect a company against losses. Reinsurance allows an insurance
company to offer higher limits of protection to a policyholder than its own assets
would allow. For example, if the principal insurance company can write only $10
million in limits on any given policy, it can reinsure (or cede) the amount of the
limits in excess of $10 million.

Reinsurance’s highly refined uses in recent years include applications where

reinsurance was used as part of a carefully planned hedge strategy.

Income smoothing: Reinsurance can help to make an insurance company’s results

more predictable by absorbing larger losses and reducing the amount of capital needed
to provide coverage.

Surplus relief:An insurance company's writings are limited by its balance sheet (this
test is known as the solvency margin). When that limit is reached, an insurer can do one
of the following: stop writing new business, increase its capital, or buy "surplus relief"
reinsurance. Buying reinsurance is usually done on a quota share basis and is an
efficient way of not having to turn clients away or raise additional capital.

Arbitrage:The insurance company may be motivated by arbitrage in purchasing

reinsurance coverage at a lower rate than what they charge the insured for the
underlying risk, which can be in the area of risk associated with any form of the asset
that is being issued or loaned against. It can be a car, a mortgage, an insurance
(personal, fire, business, etc.) and alike.

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Reinsurer's Expertise:The insurance company may want to avail of the expertise of a
reinsurer in regard to a specific (specialised) risk or want to avail of their rating
ability in odd risks.

Creating a manageable and profitable portfolio of insured risks: By choosing a

particular type of reinsurance method, the insurance company may be able to
create a more balanced and homogenous portfolio of insured risks. This would
lend greater predictability to the portfolio results on net basis (after reinsurance)
and would be reflected in income smoothing. While income smoothing is one of
the objectives of reinsurance arrangements, the mechanism is by way of
balancing the portfolio.

Managing cost of capital for an insurance company:By getting a suitable

reinsurance, the insurance company may be able to substitute "capital needed"
as per the requirements of the regulator for premium written. It could happen that
the writing of insurance business requires x amount of capital with y% of cost of
capital and reinsurance cost is less than x*y%. Thus more unpredictable or less
frequent the likelihood of an insured loss, more profitable it can be for an
insurance company to seek reinsurance.

Types of reinsurance

Proportional:Proportional reinsurance (the types of which are quota share & surplus
reinsurance) involves one or more reinsurers taking a stated percent share of
each policy that an insurer produces ("writes"). This means that the reinsurer will
receive that stated percentage of premiums and will pay that percentage of
losses. In addition, the reinsurer will allow a "ceding commission" to the insurer
to compensate the insurer for the costs of writing and administering the business
(agents' commissions, modeling, paperwork, etc.).

The insurer may seek such coverage for several reasons. First, the insurer may not
have sufficient capital to prudently retain all of the exposure that it is capable of
producing. For example, it may only be able to offer 1 million in coverage, but by
purchasing proportional reinsurance it might double or triple that limit. Premiums and
losses are then shared on a pro rata basis.

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Non-proportional:Non-proportional reinsurance only responds if the loss suffered by
the insurer exceeds a certain amount, which is called the "retention" or "priority."
An example of this form of reinsurance is where the insurer is prepared to accept
a loss of 1 million for any loss which may occur and they purchase a layer of
reinsurance of 4 million in excess of 1 million. If a loss of 3 million occurs, the
insurer pays the 3 million to the insured, and then recovers 2 million from its
reinsurer(s). In this example, the reinsured will retain any loss exceeding 5 million
unless they have purchased a further excess layer (second layer) of say 10
million excess of 5 million.

List of Insurance companies in India

LIFE INSURERS Websites

Public Sector
Life Insurance Corporation of India www.licindia.com
Private Sector
Allianz Bajaj Life Insurance Company Limited www.allianzbajaj.co.in
Birla Sun-Life Insurance Company Limited www.birlasunlife.com
HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com
ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com
ING Vysya Life Insurance Company Limited www.ingvysayalife.com
Max New York Life Insurance Co. Limited www.maxnewyorklife.com
MetLife Insurance Company Limited www.metlife.com
Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com
SBI Life Insurance Company Limited www.sbilife.co.in
TATA AIG Life Insurance Company Limited www.tata-aig.com
AMP Sanmar Assurance Company Limited www.ampsanmar.com
Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com

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GENERAL INSURERS
Public Sector
National Insurance Company Limited www.nationalinsuranceindia.com
New India Assurance Company Limited www.niacl.com
Oriental Insurance Company Limited www.orientalinsurance.nic.in
United India Insurance Company Limited www.uiic.co.in
Private Sector
Bajaj Allianz General Insurance Co. Limited www.bajajallianz.co.in
ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com
IFFCO-Tokio General Insurance Co. Ltd. www.itgi.co.in
Reliance General Insurance Co. Limited www.ril.com
Royal Sundaram Alliance Insurance Co. Ltd. www.royalsun.com
TATA AIG General Insurance Co. Limited www.tata-aig.com
Cholamandalam General Insurance Co. Ltd. www.cholainsurance.com
Export Credit Guarantee Corporation www.ecgcindia.com
HDFC Chubb General Insurance Co. Ltd.

REINSURER
General Insurance Corporation of India www.gicindia.com

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