A PROJECT REPORT ON

Emergence of Insurance Sector In India

[INTERNSHIP PROJECT]

DEPARTMENT OF B.COM

[BACHELORS IN ACCOUNTING &

FINANCE]

Semester VI

(2018-2019)

Submitted by

ROSHAN CHOUDHARY

Vidyalankar school of information and technology

WADALA[E],MUMBAI 400037
DECLARATION

I, Roshan Choudhary, the student of B.Com.- Accounting & Finance Semester VI

(2018 - 2019) hereby declare that I have completed the Project on
“Emergence of Insurance Sector In India”[INTERNSHIP PROJECT] under
guidance of Prof.Sandip Khandekar.

The information submitted is true and original to the best of my knowledge.

Signature of the Student

ROSHAN
CHOUDHARY
ACKNOWLEGEMENT

I would sincerely like to thank University of Mumbai for introducing a subject

in B.Com Accounting and Finance. This has given me an opportunity to gain
knowledge on the insights of the insurance industry. A special thanks to our
esteemed coordinator Prof.Sandip Khandekar for guiding and motivating me
during the project .
This project was highly educational and it was a great learning
experience making this project.
INDEX

SR. NO. TOPIC

1 Executive Summary

2 Introduction

3 Insurance Sector- A review

4 My role in the company

5 Role of Private Players In The Insurance Sector

6 Bottleneck- Government Regulations

7 Why open up the insurance industry?

8 Role of insurance in economic Development

9 Emergence Of insurance

10 Current Scenario Of Insurance Industry

11 Conclusion
EXECUTIVE SUMMARY

Insurance sector in INDIA is booming up but not to level comparative with the
developed economies such as Japan, Singapore etc. Also with the opening of
the insurance sector to the private players have provided stiff competition
resulting into quality products. Also there is a need to restructure the Indian
Government owned “ Life insurance Corporation of India “ so as to maximize
revenue and in turn profits. IRDA regulations and norms for the allocation of
funds need to have a comprehensive look. In the phase of declining interest
rates and rising inflation the funds need to be applied in productive areas so as
to generate high returns.

Also in terms of clients servicing areas such as premium payments, after sales
service, policy dispatch, redressal of grievances has to be amended. In the
current scenario, LIC has to provide flexible products suited to the customers
requirements. Also a proper and systematic risk management strategy needs
to be adopted. After the increase in terrorism and destructive events around the
global world such as September 11 attack on World Trade Centre, US – Taliban
war, US – Iraq war etc.. an alternative to reinsurance such as asset backed
securities is emerging out in the developed economies. Catastrophe bonds is
one of the alternatives for reinsurance. Finally some policies such as pure term
and pension schemes needs to be addressed massively at both the urban and
the rural segment so as to generate high premium income which will help in the
development and growth of the economy

6
INTRODUCTION

Insurance may be described as a social device to reduce or eliminate risk of

loss to life and property. Under the plan of insurance, a large number of people
associate themselves by sharing risks attached to individuals. The risks which
can be insured against include fire, the perils of sea, death and accidents and
burglary. Any risk contingent upon these, may be insured against at a premium
commensurate with the risk involved. Thus collective bearing of risk is
insurance.

DEFINITION :

General definition:

In the words of John Magee, “Insurance is a plan by which large number of

people associate themselves and transfer to the shoulders of all, risks that
attach to individuals.”

Fundamental definition:

In the words of D.S. Hansell, “Insurance may be defined as a social device

providing financial compensation for the effects of misfortune, the payment
being made from the accumulated contributions of all parties participating in the
scheme.”

Contractual definition:

In the words of justice Tindall, “ Insurance is a contract in which a sum of money

is paid to the assured as consideration of insurer’s incurring the risk of paying
a large sum upon a given contingency.”

7
Characteristics of insurance :

Sharing of Risk:

Insurance is a device to share the financial losses which might befall on an

individual or his family on the happening of a specified event. The event may
be death of a bread-winner to the family in the case of life insurance, marine-
perils in marine insurance, fire in fire insurance and other certain events in
general insurance, e.g., theft in burglary insurance, accident in motor insurance,
etc. The loss arising nom these events if insured are shared by all the insured
in the form of premium.

Co-operative Device:

The most important feature of every insurance plan is the co-operation of large
number of persons who, in effect, agree to share the financial loss arising due
to a particular risk which is insured. Such a group of persons may be brought
together voluntarily or through publicity or through solicitation of the agents.

An insurer would be unable to compensate all the losses from his own capital.
So, by insuring or underwriting a large number of persons, he is able to pay the
amount of loss. Like all cooperative devices, there is no compulsion here on
anybody to purchase the insurance policy.

Value of Risk:

The risk is evaluated before insuring to charge the amount of share of an

insured, herein called, consideration or premium. There are several methods of
evaluation of risks. If there is expectation of more loss, higher premium may be
charged. So, the probability of loss is calculated at the time of insurance.

8
Payment at Contingency:

The payment is made at a certain contingency insured. If the contingency

occurs, payment is made. Since the life insurance contract is a contract of
certainty, because the contingency, the death or the expiry of term, will certainly
occur, the payment is certain. In other insurance contracts, the contingency is
the fire or the marine perils etc., may or may not occur. So, if the contingency
occurs, payment is made, otherwise no amount is given to the policy-holder.

Similarly, in certain types of life policies, payment is not certain due to

uncertainty of a particular contingency within a particular period. For example,
in term-insurance then, payment is made only when death of the assured
occurs within the specified term, may be one or two years. Similarly, in Pure
Endowment payment is made only at the survival of the insured at the expiry of
the period.

Amount of Payment:

The amount of payment depends upon the value of loss occurred due to the
particular insured risk provided insurance is there up to that amount. In life
insurance, the purpose is not to make good the financial loss suffered. The
insurer promises to pay a fixed sum on the happening of an event.

If the event or the contingency takes place, the payment does fall due if the
policy is valid and in force at the time of the event, like property insurance, the
dependents will not be required to prove the occurring of loss and the amount
of loss. It is immaterial in life insurance what was the amount of loss at the time
of contingency. But in the property

9
general insurances, the amount of loss as well as the happening of loss, are
required to be proved.

Large Number of Insured Persons

To spread the loss immediately, smoothly and cheaply, large number of

persons should be insured. The co-operation of a small number of persons may
also be insurance but it will be limited to smaller area. The cost of insurance to
each member may be higher. So, it may be unmarketable.

Therefore, to make the insurance cheaper, it is essential to insure large number

of persons or property because the lesser would be cost of insurance and so,
the lower would be premium. In past years, tariff associations or mutual fire
insurance associations were found to share the loss at cheaper rate. In order
to function successfully, the insurance should be joined by a large number of
persons.

Insurance is not a gambling:

The insurance serves indirectly to increase the productivity of the community

by eliminating worry and increasing initiative. The uncertainty is changed into
certainty by insuring property and life because the insurer promises to pay a
definite sum at damage or death.

From a family and business point of view all lives possess an economic value
which may at any time be snuffed out by death, and it is as reasonable to ensure
against the loss of this value as it is to protect oneself against the loss of
property. In the absence of insurance, the property owners could at best
practice only some form of self-insurance, which may not give him absolute
certainty.

10
Similarly, in absence of life insurance, saving requires time; but death may
occur at any time and the property, and family may remain unprotected. Thus,
the family is protected against losses on death and damage with the help of
insurance.

From the company's point of view, the life insurance is essentially non-
speculative; in fact, no other business operates with greater certainties. From
the insured point of view, too, insurance is also the antithesis of gambling.
Nothing is more uncertain than life and life insurance offers the only sure
method of changing that uncertainty into certainty.

Failure of insurance amounts gambling because the uncertainty of loss is

always looming. In fact, the insurance is just the opposite of gambling. In
gambling, by bidding the person exposes himself to risk of losing, in the
insurance; the insured is always opposed to risk, and will suffer loss if he is not
insured.

By getting insured his life and property, he protects himself against the risk of
loss. In fact, if he does not get his property or life insured he is gambling with
his life on property.

Insurance is not Charity:

Charity is given without consideration but insurance is not possible without

premium. It provides security and safety to an individual and to the society
although it is a kind of business because in consideration of premium it
guarantees the payment of loss. It is a profession because it provides adequate
sources at the time of disasters only by charging a nominal premium for the
service.

11
INSURANCE SECTOR – A PREVIEW

HISTORY OF INSURANCE

In India, insurance has a deep-rooted history. Insurance in various forms has

been mentioned in the writings of Manu (Manusmrithi), Yagnavalkya
(Dharmashastra)

and Kautilya(Arthashastra). The fundamental basis of the historical reference

to insurance in these ancient Indian texts is the same i.e. pooling of resources
that could be re-distributed in times of calamities such as fire, floods, epidemics
and famine. The early references to Insurance in these texts have reference to
marine trade loans and carriers' contracts.

Insurance in its current form has its history dating back until 1818, when Oriental
Life Insurance Company[3] was started by Anita Bhavsar in Kolkata to cater to
the needs of European community. The pre- independence era in India saw
discrimination between the lives of

foreigners (English) and Indians with higher premiums being charged for the
latter. In 1870, Bombay Mutual Life Assurance Society became the first Indian
insurer.

At the dawn of the twentieth century, many insurance companies were founded.
In the year 1912, the Life Insurance Companies Act and the Provident Fund Act
were passed to regulate the insurance business.

The Life Insurance Companies Act, 1912 made it necessary that the premium-
rate tables and periodical valuations of companies should be certified by an
actuary. However, the disparity still existed as discrimination between Indian
and foreign companies. The oldest existing insurance company in India is the
National Insurance Company , which was founded in 1906, and is still in
business.

12
The Government of India issued an Ordinance on 19 January 1956
nationalising the Life Insurance sector and Life Insurance Corporation came
into existence in the same year. The Life Insurance Corporation (LIC) absorbed
154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian
and foreign insurers in all. In 1972 with the General Insurance Business
(Nationalisation) Act was passed by the Indian Parliament, and consequently,
General Insurance business was nationalized with effect from 1 January 1973.
107 insurers were amalgamated and grouped into four companies, namely
National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd and the United India Insurance Company Ltd.
The General Insurance Corporation of India was incorporated as a company in
1971 and it commence business on 1 January 1973.

The LIC had monopoly till the late 90s when the Insurance sector was reopened
to the private sector. Before that, the industry consisted of only two state
insurers: Life Insurers (Life Insurance Corporation of India, LIC) and General
Insurers (General Insurance Corporation of India, GIC). GIC had four subsidiary
companies. With effect from December 2000, these subsidiaries have been de-
linked from the parent company and were set up as independent insurance
companies: Oriental Insurance Company Limited, New India Assurance
Company

Limited, National Insurance Company Limited and United India Insurance

Company Limited.

The insurance sector in India dates back to 1818, when Oriental Life Insurance
Company was incorporated at Calcutta. Thereafter, few other companies like
Bombay Life Assurance Company, in 1823 and Triton Insurance Company, for
General Insurance, in 1850 were incorporated.

13
Insurance Act was passed in 1928 but it was subsequently reviewed and
comprehensive legislation was enacted in 1938. The nationalisation of life
insurance business took place in 1956 when 245 Indian and Foreign Insurance
provident societies were first merged and then nationalized. It paved the way
towards the establishment of Life Insurance Corporation (LIC) and since then it
has enjoyed a monopoly over the life insurance business in India. General
Insurance followed suit and in 1968, the insurance act was amended to allow
for social control over the general insurance business. Subsequently in 1973,
non-life insurance business was nationalised and the General Insurance
Business (Nationalisation) Act, 1972 was promulgated. The General Insurance
Corporation (GIC) in its present form was incorporated in 1972 and maintains
a very strong hold over the non-life insurance business in India. Due to
concerns of

Relatively low spread of insurance in the country.

The efficient and quality functioning of the Public Sector insurance companies

The untapped potential for mobilizing long-term contractual savings funds for
infrastructure the (Congress) government set up an Insurance Reforms
committee in April 1993.

The Committee submitted its report in January 1994, recommended a phased

program of liberalization, and called for private sector entry and restructuring of
the LIC and GIC. But now the parliament has given a nod to the Insurance
Regulatory and Development Authority (IRDA) bill with some changes in the
original structure.

14
Size of the insurance market

Insurance is a Rs.400 billion business in India, and together with banking

services adds about 7% to India’s GDP. Gross premium collection is about 2%
of GDP and has been growing by 15-20% per annum. India also has the highest
number of life insurance policies in force in the world, and total investible funds
with the LIC are almost 8% of GDP. Yet more than three-fourths of India’s
insurable population has no life insurance or pension cover. Health insurance
of any kind is negligible and other forms of non-life insurance are much below
international standards. To tap the vast insurance potential and to mobilize
long-term savings we need reforms which include revitalizing and restructuring
of the public sector companies, and opening up the sector to private players. A
statutory body needs to be made to regulate the market and promote a healthy
market structure. Insurance Regulatory Authority (IRA) is one such body, which
checks on these tendencies.

15
MARKET STRUCTURE

Individuals buying an insurance contract pay a price (called the "premium") to

the insurance company and the insurance company in turn provides
compensation if a specified event occurs. By making such contractual
arrangements with a large number of individuals and organizations the
insurance company can spread the risk. This gives insurance its "social"
character in the sense that it entails pooling of individual risks.

The price of insurance i.e., the premium is based on average risk. This premium
is too high for people who perceive themselves to be in a low risk category. If
the insurer cannot accurately determine the risk category of every customer
and prices insurance on the basis of average risk, he stands to lose all the low
risk customers. This in turn increases the average risk, which means premia
have to be revised upwards, which in turn drives away even more customers
and so on. This is known as the problem of "adverse selection".

Adverse selection problem arises when a seller of insurance cannot distinguish

between the buyer's type i.e., whether the buyer is a low risk or a high type. In
the extreme case, it may lead to the complete breakdown of insurance market.
Another phenomenon, the problem of "moral hazard" in selling insurance,
arises when the unobservable action of buyer aggravates the risk for which
insurance is bought.

For example, when an insured car driver exercises less caution in driving,
compared to how he would have driven in the absence of insurance, it
exemplifies moral hazard.

Given these problems, unbridled competition among large number of firms is

considered detrimental for the insurance industry. Furthermore,even the limited
competition in insurance needs to be regulated. Insurance companies can
differentiate among various risk types if there is a wide difference in risk profile
of the buyers insuring against the strong insurers. It also called for keeping life
insurance separate from the general insurance

16
.

INTRODUCTION TO: IDBI FEDERAL LIFE INSURANCE Co Ltd.

IDBI Federal Life Insurance Co Ltd. is a three way joint-venture of IDBI Bank,
an Indian development and commercial bank; Federal Bank, one of India’s
leading[peacock term] private sector banks and Ageas, a multinational insurance
giant based out of Europe.

IDBI Federal distributes its products through a multi-channel network consisting

of Insurance agents, Banc assurance partners (IDBI Bank, Federal Bank)
Direct channel, and Insurance Brokers.

Type Joint Venture

Industry Life insurance

Founded March 2008[1]

Headquarters Headquarters in Mumbai, India

Key people Vighnesh Shahane, CEO &

Whole Time Director

Products Life insurance

Number of 1,941 employees on-roll; over

employees 10,000 agents

17
HISTORY: IDBI FEDERAL LIFE INSURANCE Co Ltd.

In the year 2006, IDBI Bank, Federal Bank and Belgian-Dutch insurance major
Fortis Insurance International NV signed a MoU to start a life insurance
company in India. The company received its license from Insurance Regulatory
and Development Authority of India(IRDAI) (j.Arul jegadeesh one of the trainee
in the idbi federal life insurance company in Madurai) in December 2007.[2]

IDBI Fortis Life Insurance Co. Ltd. officially began its operations in March 2008.
In August 2008, the company collected the premium of over Rs.100 crore within
a record time of five months, thus becoming the fastest growing new life
insurance company in the private sector.[3]

India-Sri Lanka ODI series that took place in October 2009, found a title sponsor
in insurance major IDBI Fortis. The company’s AUM crossed the Rs. 1,000
crore mark for the first time in March 2010.[4]

In August 2010, the company was rechristened as IDBI Federal Life Insurance
Company. In 2012-13, it declared its maiden profits in record 5 years, thus was
one of the fastest to do so in the industry. It yet again clocked Rs. 80 crore
profits for the financial year 2013-14 and has maintained its profitable trajectory
from thereon

The company’s innovation and growth strategy helped it scale great heights in
the country only in 5 years within its commencement in 2008. The company
boasts of a good portfolio of offering its customers with wealth management,
protection and retirement solutions.

‘As on March 31, 2017, the company has issued nearly 10.29 lakh policies’

18
MY ROLE IN THE COMPANY AS A FINANCIAL ADVISOR

To create awareness about unit linked insurance plans provided by IDBI federal
& sell the more number of policies to the customers or insure people about the
importance of insurance in the life of a human being because getting insured is
a important activity to be done which could help secure your own future as well
as the financial requirements of family after untimely death of the insurer. IDBI
federal had designed an insurance plan under the IRDA guidelines for the
profitability of the insurer after him named as {FUTURE STAR PLAN} the policy
details are below.

19
IDBI Federal ULIP Plans

IDBI Federal Wealthsurance Growth Insurance Plan: A unit-linked plan that

offers you the freedom to invest in over 9 fund offerings and also provides life
cover benefit, thereby ensuring financial security of your loved ones. This is a
smart investment plan that lets you design your investments your way. It gives
you the flexibility to decide what you want to invest in and for how long you want
to invest in. Loyalty additions are provided to boost your investment.

IDBI Federal Wealthsurance Growth Insurance Plan Single

Premium: Enjoy the growth of your plan by paying one-time premium and also
get a life cover to protect the needs of your loved ones. You are offered a
bouquet of 9 funds and have the ability to switch between them. With this plan,
you are also eligible for partial withdrawals and bonus.

IDBI Federal Life Insurance Wealth Gain Plan: This is a comprehensive plan
that helps you build wealth and also provides you with life cover to ensure your
loved ones stay protected all throughout the term of the policy. The plan offers
you 8 fund offerings and gives you the freedom to invest in one or more funds.
Premium is waived off in case of permanent disability of the policyholder.

20
Unit-linked insurance plan [ULIP]

History [edit]

The first ULIP was launched by Unit Trust of India (UTI).[1] With
the Government of India opening up the insurance sector to foreign investors
in 2001[2] and the subsequent issue of major guidelines for ULIPs by
the Insurance Regulatory and Development Authority (IRDA), now Insurance
Regulatory and Development Authority of India (IRDAI), in 2005,[3]several
insurance companies forayed into the ULIP business leading to an
overabundance of ULIP schemes being launched to serve the investment
needs of those looking to invest in an investment cum insurance product.

Working principle [edit]

A Unit-Linked Insurance Plan is essentially a combination of insurance and an

investment vehicle. A portion of the premium paid by the policyholder is utilized
to provide insurance coverage to the policyholder and the remaining portion is
invested in equity and debt instruments. The aggregate premiums collected by
the insurance company providing such plans is pooled and invested in varying
proportions of debt and equity securities in a similar manner to mutual funds.
Each policyholder has the option to select a personalized investment mix based
on his/her investment needs and risk appetite. Like mutual funds, each
policyholder's Unit-Linked Insurance Plan holds a certain number of fund units,
each of which has a net asset value (NAV) that is declared on a daily basis.
The NAV is the value upon which net rates of return on ULIPs are determined.
The NAV varies from one ULIP to another based on market conditions and fund
performance.

Features [edit]

A portion of premium goes towards mortality charges i.e. providing life cover.
The remaining portion gets invested funds of policyholder's choice. Invested
funds continue to earn market linked returns.

ULIP policy holders can make use of features such as top-up facilities,
switching between various funds during the tenure of the policy, reduce or

21
increase the level of protection, options to surrender, additional riders to
enhance coverage and returns as well as tax benefits.

Types [edit]

Depending upon the death benefit, there are broadly two types of ULIPs. Under
Type-I ULIP, the nominee gets the higher of Sum Assured and Fund Value
while under Type-II ULIPs, the nominee of the policy holder gets the Sum of
Sum Assured and Fund Value in the event of demise of the policy holder.

There are a variety of ULIP plans to choose from based on the investment
objectives of the investor, his risk appetite as well as the investment horizon.
Some ULIPs play it safe by allocating a larger portion of the invested capital in
debt instruments while others purely invest in equity. Again, all this is totally
based on the type of ULIP chosen for investment and the investor preference
and risk appetite.

Tax benefits [edit]

Investment in ULIPs is eligible for tax benefit up to a maximum of Rs 1.5 lacs

under Section 80C of the Income Tax Act.

Maturity proceeds are also exempt from income tax. There is a caveat. The
Sum Assured or the minimum death benefit must be at least 10 times the annual
premium. If this condition is not met, the benefit under Section 80C shall be
capped at 10% of Sum Assured while the maturity proceeds will not be exempt
from income tax

22
THE ROLE OF IRA

The main motive of IRA is:-

The protection of consumers’ interest,

To ensure financial soundness of the insurance industry and

To ensure healthy growth of the insurance market.

These objectives must be achieved with minimum government involvement and

cost. IRA’s functioning can be financed by levying a small fee on the premium
income of the insurers thus putting zero cost on the government and giving itself
autonomy.

( a ) Protection of Customer Interests

IRA’s first brief is to protect consumer interests. This means ensuring proper
disclosure, keeping prices affordable but also insisting on some mandatory
products, and most importantly making sure that consumers get paid by
insurers. Ensuring proper disclosure is called Disclosure Regulation. Insurance
contracts are basically contingency agreements. They can be full of inscrutable
jargon and escape clauses. An average consumer is likely to be confused by
them. IRA must require insurers to frame transparent contracts. Consumers
should not have to wake up to unpleasant surprises, finding that certain

23
contingencies are not covered. The IRA also has to ensure that prices of
products stay reasonable and certain mandatory products are sold. The job of
keeping prices reasonable is relatively easy, since competition among insurers
will not allow any one company to charge exorbitant rates. The danger often is
that prices may be too low and might take the insurer dangerously close to
bankruptcy. As for mandatory products, those that involve common and well-
known risks, certain standardization can be enforced.

24
Furthermore, IRA can insist that for such products the prices also be
standardized. From the consumer’s point of view the most important function of
IRA is ensuring claim settlement. Quick settlement without unnecessary
litigation should be the norm. For example, in motor vehicle insurance, adopting
no-fault principle can speed up many settlements. Currently, LIC in India has a
claims settlement ratio of 97%, an impressive number by any standards.
However, it hides the fact that this settlement is plagued by long delays, which
reduce the value of settlement itself. If consumers have a complaint against an
insurer they can go to a body formed by association of insurers. The decision
of such a body would be binding on the insurers, but not on the complainant. If
complainants are not satisfied, they can go to court. Some countries such as
Singapore have such a system in place. This system offers a first and quicker
choice of settling out of court. IRA can encourage the insurers to have such a
grievance redressal mechanism. This system can serve the function of
adjudication, arbitration and conciliation. The second area of IRA’s activity
concerns monitoring insurer behavior to ensure fairness. It is especially here
that IRA’s choice of being a bloodhound or a watchdog would have different
implications. We think that an initial tough stance should give way to a more
forbearing and prudential approach in regulating insurance firms. When the
industry has a few firms there is some chance of collusion. IRA must be alert to
collusive tendencies and make sure that prices charged remain reasonable.
However, some cooperation among the insurance companies could be
considered desirable. This is especially in lines where claim experience of any
one company is not sufficient to make accurate forecasts. Collusion among
companies on information sharing and rate setting is considered “fair’. IRA must
have severe penalties in

25
case of fraud or mismanagement. Since insurance business involves managing
trust money, in some countries the appointment of senior managers and “key
personnel” has to be approved by the insurance regulatory agency.

( b ) Ensuring Solvency of Insurers :

There are basically four ways of ensuring enough solvencies.

First is the policy of a price floor.

Second is the restriction on capital and reserves, i.e., on what kind of

investments and speculative activities firms can make.

Third is putting in place entry barriers to restrict the number of competitors.

Fourth is the creation of an industry financed guarantee fund to bail out firms
hit by unexpectedly high liabilities. Entry restrictions of the IRA are implemented
through a licensing requirement, which involves capital adequacy among other
things. Since there are economies of scale and scope in insurance operations
it might be better to have only a few large firms. There is however no magic
number regarding the optimal number of firms. Restricting competition provides
a scope for higher profits to the companies thereby strengthening their solvency
position. After qualifying, the entrants are continuously subjected to restrictions
on reserves and investments, which ensure ongoing solvency. Additionally, a
guarantee fund, created by mandatory contributions from all insurance
companies is used to bail out any insurance company, which might be in
financial trouble. This guarantee fund does not imply that firms can

26
charge whatever they wish to their consumers. All insurance companies would
have an incentive to monitor the activities of their rival peer firms. This is
because insolvency of any insurance company would entail a price, which all
the insurance companies would have to shoulder. Peer review of accounts can
also be institutionalized.

IRA can have several ways for early detection of a potential insolvency. For
example, in the USA there is an Insurance Regulatory Information System
(IRIS) that regularly computes certain key financial ratios from financial
statements of firms. If some of these ratios fall outside given limits the company
is asked to take corrective action. Insolvency can also arise out of reinsures
abandoning insurance companies in the lurch, as witnessed in the USA in
1980’s. Reinsurance is a bigger business dominated by large international
reinsurers. Such litigation between reinsurer and insurance companies involves
cross boundary legalities and can drag on for years. IRA must evolve a set of
operational guidelines to deal with reinsurance matters.

Insurance intermediaries such as agents, brokers, consultants and surveyors

are also under IRA’s jurisdiction. IRA has to evolve guidelines on the entry and
functioning of such intermediaries. Licensing of agents and brokers should be
required to check against their indulging in activities such as twisting, rebating,
fraudulent practices, and misappropriation of funds. IRA can also consider
allowing banks to act as agents (as opposed to underwriters) of insurers in
mass base types of products. Given their wide network of branches and their
customer base, the banks can access this market for insurance products and
also earn commission income. The incremental cost of providing such
insurance products would be much lower.

27
( c ) Promoting Growth in the Insurance Industry :

A society experiences many benefits from the spread of insurance business.

Insurance contributes to economic growth by enabling people to undertake
risky but productive activity. In the past,

growth of trade has been facilitated by the development of insurance services.

One only needs to look at the history of insurance to see how evolution of
insurance helped trade flows along various trade routes. Promotion of
insurance also provides for long-term funds, which are utilized to fund big
infrastructure projects. These projects typically have positive externalities,
which benefit society at large. IRA can ensure growth of insurance business
with better education and protection to consumers, and by making the
insurance business a level playing field. They can also support Indian insurance
companies in the international field. IRA thus has to frame the rules, design
procedures for enforcement and also make operational guidelines. All this with
virtually no relevant historical data makes the task very difficult. An initial
conservative approach (the bloodhound) is justified since there is no prior
experience to fall back on, and it would be prudent to err by regulating more’
rather than less. As experience accumulates, the IRA can relax its initial harsh
stance and adopt a more accommodating stance (the watchdog). Regulation is
always an evolutionary process and experience constantly has to feed into
policy making. Care must be taken so that this process does not slow down and
cause regulatory lags. IRA can also consider allowing banks to act as agents
(as opposed to underwriters of insurers in mass base types of products. Given
there wide network of branches their customer base, the banks can access this
market for insurance products and also commission income. The
incremental cost of providing such insurance products would be much lower.
Such a move of allowing banks to operate insurance business and vice versa
is consistent with a worldwide trend of greater integration of banking and
insurance. The major insurance markets in South and East Asia are in varying
degrees opposite. This range from comparative free markets of Hong Kong and
Singapore to increasingly more liberal markets of South Korea and Taiwan to
more densely regular insurance.

28
BOTTLENECKS – GOVERNMENT REGULATIONS

The IRDA bill proposes tough solvency margins for private insurance firms, a
26% cap on foreign equity and a minimum capital of Rs.100 crores for life and
general insurers and Rs. 200 crores for reinsurance firms. Section 27A of the
Insurance Act stipulates that LIC is required to invest 75% of its accretions
through a controlled fund in mandated government securities. LIC may invest
the remaining 25% in private corporate sector, construction, and acquisition of
immovable assets besides sanctioning of loans to policyholders. These
stipulations imposed on the insurance companies had resulted in lack of
flexibility in the optimisation of risk and profit portfolio. If this inflexibility
continues, the insurance companies will have very little leverage to earn more
on their investments and they might not be able to offer as flexible products as
offered abroad.

The government might provide more autonomy to insurance companies by

allowing them to invest 50 % of their funds as per their own discretions.
Recently RBI has issued stiff guidelines, which had dealt a severe blow to the
plans of banks and financial institutions to enter the insurance sector. It says
that non-performing assets (NPA) levels of the prospective players will have to
be 1% point lower than the industry average (presently 7.5%). RBI has also
stipulated that all prospective entrants need to have a net worth of Rs. 500
crores. These guidelines have made it virtually impossible for many banks to
get into the insurance business. Also banks and FI’s who are planning to enter
the business cannot float subsidiaries for insurance. RBI has taken too much
caution to make sure that the new sector does not experience the kind of ups
and downs that the non-bank financial sector has

29
experienced in the recent past. They had to rethink about these guidelines if
India’s strong banks and financial institutions have to enter the new business.
The insurance employees’ union is offering stiff resistance to any private entry.
Their objections are

that there is no major untapped potential in insurance business in India;

that there would be massive retrenchment and job losses due to

computerization and modernization; and

that private and foreign firms would indulge in reckless profiteering and skim
the ‘urban cream’ market, and ignore the rural areas.

But all these fears are unfounded. The real reason behind the protests is that
the dismantling of government monopoly would provide a benchmark to
evaluate the government’s insurance services.

30
CHALLENGES FACED BY ME DURING MY INTERNSHIP TENURE.

The insurance industry is evolving rapidly, and so too must the process of
selling these services. But adapting to the ever-changing market environment
is challenging. A combination of factors, including increased competition,
changes in consumer behaviors, and new technology means insurance agents
are faced with a unique set of challenges.

Still, knowledge remains key to overcoming obstacles in business. That means

having a thorough understanding of insurance, internet marketing, and
probable future industry trends are key to your agency’s success. Here are
some of the primary challenges with marketing insurance services today, as
well as a few solutions

Low Lead Generation

Insurance agent marketing has a unique set of challenges. Firstly, prospects

rarely self-identify a need for the services you offer. Unless they are forced to
buy insurance, as with auto and home ownership, people are unlikely to show
interest in insurance products. Sellers of life and health insurance no doubt
recognize this challenge all too well.

Insurance agents need to be creative to overcome these challenges. When you

consider the increased competition coming from online insurance companies
like Warren Buffet’s GEICO, Flo’s Progressive, Liberty Mutual, USAA and more,
staying creative and compliant are even more imperative. . Utilize online
channels to initiate a proactive strategy to engage and educate your target
market. That means using social media marketing, online advertising, and
many other digital channels.

Another challenging aspect of lead generation lies in the reluctance of some

agents to make the digital shift. Without a strong, focused online marketing
efforlt your lead generation will be limited. You need to develop a sound online
presence by incorporating good SEO practices, ensuring proper business
listing management, and maintain a strong social media presence.

The Economy

The economy is still on rocky terrain. Most consumers are acutely aware of that
have adopted a budget-conscious mentality as a result. Most will be unwilling
to consider anything that might appear to be frivolous spending. They will need
to satisfy their conscience that the cost-benefit of the purchase is worthwhile.

31
That can be a challenging sell, depending on the type of insurance i was
selling.

These days, more than ever, it is crucial that you find ways to emphasize the
benefits of purchasing an insurance product. The benefits help people justify
the expenditure in their mind. That is not about overselling an insurance
product; it’s about making sure that the product is a right fit for the client. Then
the sell will be from a genuine urge to help the prospect improve their life.

The economy becomes almost irrelevant if the prospect is convinced that

making a purchase will make solve a problem and make their life better. The
job of the agent is to eliminate the fear that a low economy brings.

Being in the insurance industry is an exciting opportunity to serve numerous

different clients, but as the industry has evolved so too have the challenges that
insurance agents are facing. It’s important to be aware of these obstacles so
that you can approach them with an open mind and develop a comprehensive
strategy for addressing them.

Here are three ways to understand customer needs:

Develop an accessible digital platform that takes the customer’s personal

circumstances and evolving lifetime needs when providing personalized
financial advice or information.

Provide easy access to an advisor, producer or coach who provides tailored

guidance and actionable solutions to various financial wellness concerns. It also
helps if they can provide answers to specific questions on finance-related topics
such as insurance benefits or legal services.

Improve the range of customizable financial products. Give customers the

flexibility to piece together various solutions to arrive at one product that meets
all of their needs.

32
Consumers Do Not Trust Insurance Companies

As far as trust goes, insurance companies are not in good company.

Globally, consumers trust insurance companies less than banks and only
slightly more than pharmaceutical companies. Those who purchase
insurance also have very little loyalty. They tend to switch without
premeditation or warning, making it very difficult for insurers to take
preventative measures to regain trust in time. When asked what was most

33
important to them, insurance consumers gave cost and value as primary
concerns. However, “frequency/relevance of communication” and “level of
service received” were also cited as “top” concerns by a third of insurance
consumers. This indicates that there is plenty of room to earn and maintain
trust with customers, and that this level of reliable engagement could make a
big difference in sales and retention.

Consumers Do Not Understand Insurance or It’s Value

Studies have shown that many consumers do not understand even the most
basic insurance language, nor have a clear understanding of how to choose
a plan that’s right for them, even if they say they do. In fact, while about 65%
of consumers say they understand terms like “deductible”, “coinsurance”, and
“copay”, only about 45% of consumers actually do when tested. As one might
expect, only 40% of consumers say they feel confident in choosing the right
insurance plan for them. It stands to reason that consumers often describe
their ideal insurance company as “easy to understand” and “easy to deal with”
and offering “clear communication”. Although some insurance companies
may gain by exploiting consumers’ lack of understanding, ambiguity will
ultimately sacrifice customer loyalty.

Millennials are buying less insurance than any other generation, and less
than their age group has bought historically. Their reasons are cultural and
financial, but they also have to do with knowledge. While 47% of baby
boomers can define the insurance terms mentioned above, only 36% of
millennials can. Millennials, compared with their parents, acquire assets and
raise families later in life. Many have been able to stay on their parent’s
insurance until age 26. There’s little context to learn about insurance, so why
would they know when and how much to buy? Auto insurance is frequently
the first type of insurance a millennial will purchase. Yet, without the ability to
understand a policy, many may be shocked to find that their insurance doesn’t
cover the astronomical bill they just got from the auto mechanic after a small
collision. Again, there is room here for insurance companies to grow, offering
clear resources and explanations that specifically cater to millennials.

The biggest challenge, like most businesses, is probably staffing. Of course, if

you find and develop the right people, this makes the job that much easier. I've
personally gone back and forth on this particular topic, and I generally opt for
less insurance experience when hiring, as it can be difficult to "un-train" bad
habits from other agencies that don't have the same focus on customer service

34
that we have at our agency.

Another key challenge is rate competitiveness, especially given the fact that
insurance is viewed by many as a standard commodity (however, this is not
really the case, but it is the general assumption that a growing number of people
believe). Having a good mix of qualify companies is important if you're an
independent agent, but even as a "captive agent" with Allstate, if the rates are
simply competitive, you can earn the respect and loyalty of most of your
customers.

The insurance industry is evolving rapidly, but adapting to the ever-changing

market environment is challenging. A combination of factors, including
increased competition, changes in consumer behaviors, and new technology
means insurance agents are faced with a unique set of challenges.

ROLE OF INSURANCE IN ECONOMIC DEVELOPMENT

For economic development investments are necessary. Investments are made

out of savings. Life Insurance Company is a major instrument for the
mobilization of savings. All good life insurance companies have huge funds
accumulated through the payments of small amounts of premium of individuals.
These funds are invested in ways that contribute substantially for the economic
development of the countries in which they do business The system of
insurance provides numerous direct and indirect benefits to the individuals and
his family as well as to industry and commerce and to the community and the
nation as a whole. Present day organization of industry, commerce and trade
depend entirely on insurance for their operation, banks, and financial
institutions lend money to industrial and commercial undertakings only on the
basisof the collateral security of insurance. The economic reform of 1991
played a pivotal role in the economic development of India. Reaping its benefit
the growth of the country reached around 7.5% in the late2000s.Insurance is a
risk transfer mechanism whereby the individuals or the business enterprise can
shift some of the uncertainties of life on the shoulder of other. In case the
insurance providers of trade industry which ultimately contribution towards
human progress. Thus, insurance is the most lending force contribution towards
economic, social & technological progress of man. The Indian insurance market
is the 19th largest globally and ranks 5th in Asia, after Japan, South Korea china
and Twain.

Insurance promotes economic development

Insurance promotes economic development through various channels:

Insurance reduces the capital firms need to operate.

35
Insurance fosters investment and innovation by creating an environment of
greater certainty.

36
Insurers are solid partners for the development of a workable supplementary
system ofsocial protection, in particular in the field of retirement and health
provision.

As institutional investors, insurers contribute to the modernisation of financial

markets and facilitate firms’ access to capital.

Insurance promotes sensible risk-management measures through the price

mechanism andother methods and contributes to responsible and sustainable
economic development.

Insurance fosters stable consumption throughout the consumer’s life.

Moreover, in a global economy characterised by rapid social and demographic

change and by the emergence of new risks (e.g. by climate change or
technological developments)and new needs (health care, pensions),
cooperation between private insurance and public institutions is essential. This
cooperation can bring benefits in many fields, for example, health of the working
population, accident prevention, compensation for agricultural risks,
international trade (export credit insurance), etc.

How the insurance sector fosters economic growth? The insurance industry promotes
economic growth and structural development through the following channels:

Providing broader insurance coverage directly to firms, improving their financial

soundness :

Insurance allows firms to expand and take on economic risks without the need
to set aside capital in liquid contingency funds. The absence of adequate
business insurance cover tends to be particularly harmful for small firms.
Limited capital and difficulty in accessing financial markets make them
vulnerable to adverse events. Without insurance, large contingency funds
would be needed to protect firms against risk. For

37
many small firms this would represent more capital than they presently employ
in total. Therefore, without insurance, the population of firms would decrease
rapidly.

It is difficult to assess the exact extent of the positive effect of business

insurance oneconomic activity. Whereas comparison of insurance premiums to
GDP conveys informationon the performance of the insurance industry, it
overlooks the wider contribution to theeconomy

Fostering entrepreneurial attitudes, encouraging investment, innovation,

marketdynamism, and competition :

Being innovative presupposes the willingness to take risks. Since

(potential)entrepreneurs, much like ordinary people, are characterized by risk
aversion, the willingnessto take risks can be considered as a scarce resource
(Sinn 1986, 1988).The more willingness to take risk is available, the more will
be produced. Even if theinsurance industry cannot change the overall
willingness of actors in an economy to take risks(risk aversion does not change
with insurance), it does play a key role in freeingentrepreneurial spirit.
Insurance decreases the risk supported by entrepreneurs throughmitigating
and pooling procedures and allows them to take additional risks. Well
developedinsurance markets contribute by helping to optimize the allocation of
the scarce resource of “risk-taking” by shifting it from conservative to innovative
and high-profit activities. Underinsured firms, in contrast, usually do not exploit
new business opportunities; they invest less in innovation and their degree in
participation in global markets is low. The relationship between insurers and
their business customers should be considered at least as important as the
relationship between banks and their business customers.

38
Offering social protection alongside the state, releasing pressure on public
sector finance :

In all industrialized countries, the debate about the need to revise the social
protection offered by the state is increasing. The population structure is
changing fundamentally with a longer life expectancy, an increase in elderly
people and a falling birth-rate. At the same

time people expect to receive a high

level of healthcare, pensions, unemployment allowance and other social

benefits. It would be possible to achieve a more efficient balance between the
state and the market. This would encourage the growth of firms and
employment in the sector, offer more diversified responses to consumer
preferences and make possible a sustainable and lasting reduction in the tax
burden.

Promoting sensible risk management by firms and households, contributing to

sustainable and responsible development Insurers’ risk assessment is
reflected in price and policy conditions. In this way they offer firms and
households an indicator of their risk level. The policyholder can take action to
reduce the risk profile, or to reduce the potential damage, or both. Therefore,
by means of risk pricing, insurance acts as a precaution improver and
encourages responsible and sustainable use of resources; for example:
prevention of accidents at work, less polluting technology. The client will clearly
see the advantages of action taken to reduce risk. In some cases this will
happen because there will be no insurance if things are left unchanged, at other
times this will happen because of a high premium level. This process influences
investment decisions and thus contributes to the sustainable development of
the economy and society.

39
Fostering stable consumption throughout life :

Consumption represents almost 80% of GDP and constitutes one of the main
drivers of economic growth and citizen welfare. By offering lifelong financial
protection, insurance acts as a security net allowing stable consumption
throughout an individual’s life:

House and other damage insurance allow households to secure their assets in
case ofadverse events (see example on page 10 which works in the same way
for households as forfirms).

Liability insurance protects households from the consequence of damage they

may cause toother people

Life insurance protects relatives from financial burdens in case of death and/or
offersrevenue, under the form of capital or annuities, at the time of retirement.

Health and accident insurance provides resources when they are most needed.

Credit insurance eases consumption but also protects the consumer against
excessive debtthrough pricing and acceptation policies. By offering products
relevant to all aspects of life, insurance secures the standard of living and
sustains consumption, which is one of the main drivers of economic growth.
Guaranteeing a stable lifestyle to millions of Europeans increases their
confidence in the future and enhances consumption.

40
EMERGENCE OF REINSURANCE
Reinsurance is a process by which private insurers transfer some part of their
risk to reinsurers. That is, the reinsurer reimburses the private insurer any sum
paid to the policyholders against the claims lodged. The need for reinsurance
assumes importance given the increasing uncertainty faced by individuals and
businesses. Consider for instance, the earthquake in Gujarat that has left
millions homeless and damaged property worth crores of rupees. Will the
private insurers be in a position to honour claims of such magnitude?

The answer is No. The reason? The policy premiums are priced by the insurers
based on the probability of claims. But if the man-created stock market is itself
so difficult to predict, how can the insurance company predict with any
reasonable degree of certainty the quantum of claims that could arise due to
natural causes?

This means private insurers need to maintain adequate contingency funds to

honour such claims. Private insurers cannot resort to high levels of debt and
equity to finance their business for the earnings uncertainty will dampen the
returns. Will the private insurer be able to transfer their risk to reinsurers? That
is indeed, a moot point, for two reasons. First the basket of insurance products
is likely to expand once private insurers enter the market. The rationale is this:
at present General Insurance Corporation (GIC) offers products of a general
nature, such as theft and accident insurance. The corporation may enjoy a price
advantage over the private insurers, as it is not compelled to work on a profit
motive, thanks to being a government arm. And second, it is unlikely that the
reinsurance market will match the pace of the insurance market. The reason?
If a natural disaster occurs, the losses suffered on account of

41
the claims can cripple the reinsurers. This factor could inhibit the growth of
reinsurers in the country.

SO WHAT CAN THE PRIVATE INSURERS DO ?

A variable risk transfer mechanism is the capital market. This is because capital
market is huge and can take on the risk that insurance companies run. The
solution is Asset-backed securities (ABS). A private insurer can bundle off
policies with similar maturity and quality and sell them as securities to retail
investors. The private insurer can float a Special-Purpose Vehicle (SPV) and
sell the policies concerned to this entity. The SPV can bundle the policies and
sell them as securities to retail investors at attractive yields. The premium on
the policies underlying the ABS can be invested by the SPV in low-risk, highly
liquid instruments. The benefits of the SPV are First; the SPV is a separate
entity from the insurer. This enables easy rating of the ABS, as the credit rating
agency will be able to identify the underlying assets. Second, by selling the
policies to the SPV, the insurer removes the assets from its balance sheet. This
means that the private insurer frees capital that can be used for further business
and lastly, the SPV is not affected by the financial health of the insurer.

So when the policyholders (underlying the ABS) lodge the claims with the
private insurer, the private insurer simply passes on the claims to the SPVs.
The SPV, in turn will liquidate its investments and meet the claims. The SPV
will stop paying interest on the ABS. The retail investors, therefore, bear a
sizable portion of claims of the policyholders. There can of course be many
variants to the ABS. The most risky ABS, from the investors’ angle, will be those
that stop interest payments and delay principal repayments of claims are
honored. Also buying ABS helps retail investors truly diversify their portfolio.
This is because probability of claims from, say, a hurricane is largely unrelated
to the economic factors or industry-specific factors that drive equity and bond
values. Besides, investors get attractive yields for taking the risk. If mutual funds
invest in ABS, retail investors need not estimate the risk associated with the
investment, the fund manager will do the needful. The problem of adverse
selection, on the other hand, can be reduced if the ABS are credit-enhanced by
a third party and rated by a credit rating agency.

In India, debt market is not deep and liquid enough to receive products such as
asset-backed securities. Moreover, regulatory restrictions, such as high stamp
duty and a not-so-efficient judicial system, may act as deterrents. Finally the
alternative risk transfer market will only develop once the need for such risk
transfer assumes importance some time in the future.

42
Current Scenario Of The Insurance Sector

The insurance industry of India consists of 53 insurance companies of which

24 are in life insurance business and 29 are non-life insurers.

Among the life insurers, Life Insurance Corporation (LIC) is the sole public
sector company. Apart from that, among the non-life insurers there are six
public sector insurers. In addition to these, there is sole national re-insurer,
namely, General Insurance Corporation of India (GIC Re). Other stakeholders
in Indian Insurance market include agents (individual and corporate), brokers,
surveyors and third party administrators servicing health insurance claims.

Out of 29 non-life insurance companies, five private sector insurers are

registered to underwrite policies exclusively in health, personal accident and
travel insurance segments. They are Star Health and Allied Insurance
Company Ltd, Apollo Munich Health Insurance Company Ltd, Max Bupa Health
Insurance Company Ltd, Religare Health Insurance Company Ltd and Cigna
TTK Health Insurance Company Ltd. There are two more specialised insurers
belonging to public sector, namely, Export Credit Guarantee Corporation of
India for Credit Insurance and Agriculture Insurance Company Ltd for crop
insurance.

Market Size

India's life insurance sector is the biggest in the world with about 360 million
policies which are expected to increase at a Compound Annual Growth Rate
(CAGR) of 12-15 per cent over the next five years. The insurance industry plans
to hike penetration levels to five per cent by 2020.

The country’s insurance market is expected to quadruple in size over the next
10 years from its current size of US$ 60 billion. During this period, the life
insurance market is slated to cross US$ 160 billion.

43
The general insurance business in India is currently at Rs 78,000 crore (US$
11.7 billion) premium per annum industry and is growing at a healthy rate of 17
per cent.

The Indian insurance market is a huge business opportunity waiting to be

harnessed. India currently accounts for less than 1.5 per cent of the world’s
total insurance premiums and about 2 per cent of the world’s life insurance
premiums despite being the second most populous nation.

The country is the fifteenth largest insurance market in the world in terms of
premium volume, and has the potential to grow exponentially in the coming
years.

44
36 per cent. Once the foreign joint venture partner increases its stake to 36 per
cent, SBI’s stake in SBI Life will get diluted to 64 per cent.

Bangladesh has granted permission to the Life Insurance Corporation of India

(LIC) to run its business, making it the second foreign insurance company to
operate in the country.

Reliance Life Insurance Company (RLIC) today said it will add 20,000 agents
across India in this financial year as part of its expansion plans. It will increase
their agency force by 20 per cent which now stands at 100,000.

45
Government Initiatives
The Government of India has taken a number of initiatives to boost the
insurance industry. Some of them are as follows:

The Insurance Regulatory and Development Authority (IRDA) of India has

formed two committees to explore and suggest ways to promote e-commerce
in the sector in order to increase insurance penetration and bring financial
inclusion.

IRDA has formulated a draft regulation, IRDAI (Obligations of Insures to Rural

and Social Sectors) Regulations, 2015, in pursuance of the amendments
brought about under section 32 B of the Insurance Laws (Amendment) Act,
2015. These regulations impose obligations on insurers towards providing
insurance cover to the rural and economically weaker sections of the
population.

The Government of India has launched two insurance schemes as announced

in Union Budget 2015-16. The first is Pradhan Mantri Suraksha Bima Yojana
(PMSBY), which is a Personal Accident Insurance Scheme. The second is
Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), which is the
government’s Life Insurance Scheme. Both the schemes offer basic insurance
at minimal rates and can be easily availed of through various government
agencies and private sector outlets.

The Uttar Pradesh government has launched a first of its kind banking and
insurance services helpline for farmers where individuals can lodge their
complaints on a toll free number.

The select committee of the Rajya Sabha gave its approval to increase stake
of foreign investors to 49 per cent equity investment in insurance companies.

Government of India has launched an insurance pool to the tune of Rs 1,500

crore (US$ 226 million) which is mandatory under the Civil Liability for Nuclear
Damage Act (CLND) in a bid to offset financial burden of foreign nuclear
suppliers.

46
.

Purpose

To suggest the structure of the insurance industry, to assess strengths and

weaknesses of insurance companies in terms of the objectives of creating an
efficient and viable insurance industry, which will have a wide reach of
insurance services, a variety of insurance products with a high quality of
services to the public and servicing as an effective instrument for mobilization
of financial resources for developmen

47
To make recommendations for changing structure of insurance industry, for
changing general policy frame work etc.

To make specific suggestions regarding LIC and GIC with a view to improve
their functioning.

To make recommendations on regulation and supervision of the insurance

sector in India.

To make recommendations on role and functioning of surveyors, intermediaries

like agents etc in the insurance sector.

To make recommendations on any other matter which are relevant for

development of the insurance industry in India.

Recommendations

In 1994, the committee submitted the report and gave the following
recommendations.

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

Competition

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

allowed to enter the industry.

No Company should deal in both Life and General Insurance through in a single
entity.

48
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.

The Insurance Act should be changed.

An Insurance Regulatory Body should be set up.

Controller of Insurance (Currently a part of the Finance Ministry) should be

made independent.

Investment

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 (Their
current holdings to be brought down to their level over a period of time.)

Customer Service

LIS Should pay interest on delays in payments beyond 30 days.

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

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

the insurance industry.

Overall, the committee strongly felt that in order to improve the customer
services and

increase the coverage of the insurance industry should be opened up to

competition.

49
CONCLUSION

Future course of Insurance Business :

India's insurable population is anticipated to touch 750 million in 2020, with life
expectancy reaching 74 years. Furthermore, life insurance is projected to
comprise 35 per cent of total savings by the end of this decade, as against 26
per cent in 2009-10.

The future looks promising for the life insurance industry with several changes
in regulatory framework which will lead to further change in the way the industry
conducts its business and engages with its customers. Demographic factors
such as growing middle class, young insurable population and growing
awareness of the need for protection and retirement planning will support the
growth of Indian life insurance.

One of the main differences between the developed economies and the
emerging economies is that insurance products are bought in the former while
these are sold in latter. Focus of insurance industry is changing towards
providing a mix of both protection / risk over and long-term investment
opportunities. Some of the major international players in the insurance
business, which might try to enter the Indian market, are – Sun Life of Canada,
Prudential of the United Kingdom, Standard Life, and Allianz etc. Although the
insurance sector is officially open to private players, they still need a license
from the IRDA, which will announce its guidelines in May 2000. Following might
be the future strategies of insurance companies.

The new entrants cannot compete with the state owned LIC on price alone.
Due to its size, LIC operates at very low costs

50
and their premia on policies that offer pure protection are on a par with comparable
schemes across the globe. What the new insurance companies will probably offer
is higher returns than the annualized 9-10% one can hope to earn from LIC’s
policies. This will put pressure on LIC to offer more attractive returns.

Consumers can also expect product innovations. For instance,

at present, LIC provides cover for permanent disability and what the new
companies could offer is temporary disability insurance as well.

Apart from the basic term insurance, most insurance products worldwide are sold
as long-term investment opportunities with the protection component being clearly
spelt out in the scheme.

LIC’s policies are not flexible according to the customer’s needs. New entrants
have planned to offer universal life and variable life insurance products that allow
the holder flexibility in deciding how his premia are split between protection and
savings. New products would also enable product combinations that allow greater
customizing.

Private insurers would compete furiously on the service platform. These would not
only include faster claims settlement and other after-sales service but there agents
would be trained in pre-sales interaction to usher in a customer-oriented approach.
They would be better qualified in assisting clients in financial planning.

Foreign companies would also use superior software (like APEX) that will give
them an edge over the in-house LIC software. This technology will help private
insurers in product development and 48ustomizing products to suit individual
needs.

51