THE CONCEPT OF

INSURANCE
many, exposed to similar risks.
Insurance is a contract between
Insurance is a mechanism for
two parties where by one party
transferring risk and reducing risk
called insurer under takes in
by having a large number of
exchange for a fixed sum called
individuals who share in the
premiums, to pay the other party
financial losses of the group. Risk
called insured a fixed amount of
in hibitsaction and is highly
money on the happening of a
subjective on an individual basis.
certain event.
Insurance objectifies risk. People
Insurance is a protection against
trade the possibility of financial loss
financial loss arising on the
for the relative certainty of the
happening of an unexpected event.
premium paid and reimbursement
Insurance companies collect
for loss. Insurance frees people to
premiums to provide for this
take action even in the face of
protection. A loss is paid out of the
possible financial loss. Thus,
premiums collected from the
insurance provides utility even if no
insuring public and the Insurance
loss ever occurs.
Companies act as trustees to the
Some people believe insurance is
amount collected. For Example, in
similar to gambling or opening a
a Life Policy, by paying a premium
savings account.
to the Insurer, the family of the
insured person receives a fixed
BASIC INSURANCE
compensation on the death of the TERMINOLOGIES
insured. Similarly, in a car
Insured
insurance, in the event of the car
The person known as the policy
meeting with an accident, the
holder ,a person with insurance
insured receives the compensation
coverage.
to the extent of damage. It is a
Insurer
system by which the losses
suffered by a few are spread over
A company licensed to transact the
business of insurance and issue
insurance policies.
Policy
It's the written contract between an
A licensed person or organization
who sells insurance and represents
the insurance company to
the policy holder.
ORIGIN OF INSURANCE

insurance company and its insured. Whenever there is uncertainty

It defines what the company agrees there is risk. We do not have any

to cover for what period of time and control over uncertainties which

describes the obligations and involves financial losses. The risk

responsibilities of the insured. may be certain events like death,

pension, retirement or uncertain
Premium
events like theft, fire, accident, etc.
It's the amount of money a
Insurance is a financial service for
policyholder pays for insurance
collecting the savings of the public
protection.
and providing them with risk

Claim coverage. It comes under service

It's the notice to the insurance
company that under the terms ofa
policy, a loss maybe covered.
Indemnity
Legal principle that specifies an
insured should not collect more
than the actual cash value of a loss
but should be restored
approximately the same financial
position as existed before the loss.
Agent
sector and while marketing this
service due care is taken in quality
product and customer satisfaction.
The main function of the Insurance
is to provide protection against the
possible chances of generating
losses. The insurance sector in
India has come a full circle from
being an open competitive market
to
to nationalization and back to a
liberalized market again. Tracing
the developments in theIndian
insurance sector reveals the 360-
 business was concentrated in
degree turn witnessed over a
urban area.
period of almost two centuries.
INSURANCE SECTOR
The opening up of Insurance sector
was a part of theon going
liberalization in the financial sector
GENERAL INSURANCE of India. The changing face of the
financial sector and the entry of
General (non life) insurance
provide a short term coverage several companies in the field of

,ususall for a period of one year. life and non life Insurance segment

general insurance transact fire are one of the key results of these
insurance, motor insurance, marine liberalization efforts. Insurance
insurance, and miscellaneous business by way of generating
insurance business. Among these premium income adds significantly
categories fire and motor
to be the GDP. Over the past three
insurance business are
years, more than thirty companies
predominant motor vehicle
have expressed interest in doing
insurance is compulsory in india
business in India. The IRDA
and the motor insurance portfolio
(Insurance Regulatory
constitutes around 40 percent of
the total gross premium collected Development Authority) is the

by the general insurance regulatory authority, which looks

industry .Moreover,
insurance due to third party liability
claims has substantially contributed
to underwriting losses.
motor over all related aspects of the
insurance business. The provisions
of the IRDA bill acknowledge many
issues related to insurance sector.

The government nationalized the
general insurance business on 1
jan 1973, by passing the general
insurance business act, 1972.prior
to nationalization, insurance
The IRDA bill provides guidance for
three levels of players - Insurance
Company, Insurance brokers and
Insurance agent. Life Insurance
sector is one of the key areas
where enormous business potential a better Chance to save as well as
exists. InIndia currently the life insure. The regulatory system in
insurance premium as a India is relatively new and takes
percentage of GDP is 1.3 % some more time to make the
against, 5.2 per centin the US. Insurance sector a perfectly
General Insurance is another
competitive one. Insurance
segment, which has been growing
Regulatory Authority of India issued
at a faster pace. But as per the
regulations on 15 subjects which
current comparative statistics, the
general insurance premium has included appointed. Actuary,

been lower than life insurance. actuarial report, Insurance agents,

General Insurance premium as a solvency margins, reinsurance

percentage of GDP was a mere 0.5 registration of Insurers, and
'per cent in 1996. In the General obligation of insurers to rural and
Insurance Business , General social sector, investment and
Insurance Corporation (GIC) and
accounting procedure. The reform
its four subsidiaries viz. New India
in Insurance in India is guided by
Insurance, Oriental Insurance,
factors like availability of a variety
National Insurance and United
of products at a competitive price,
India Insurance, are
doing major business. The General improvement in the quality of

Insurance Industry has been customer services etc. Also the

growing at a rate of 19 percent employment opportunities in the
per year. Insurance sector wil1increase as

The entry of several private major players set their business

insurance companies, particularly plans in India. The policy of the

international insurance companies, government to openup the financial

through joint ventures, will speed sector and the Insurance sector is

up the process of insurance expected to bring greater FDI

mobilization. The competition will inflow into the country. The

unleash new schemes and increase in the investment limit in

benefits, which will give consumers this vital sector has generated
 The private sector general
considerable business interests
insurance companies are:
among the foreign Insurance
companies" Their entry wil1  The general Royal sundram

certainly change the Insurance alliance insurance company

limited.
sector considerably

 Reliance general insurance

Sector and companies in general company limited.
insurance:
 IFFCO Tokio general
There are four nationalized and insurance company
nine private general insurance limited.
companies:
 TATA AIG general
The government notified the insurance company limited.
general insurance corporation of
india (GIC) as an Indian reinsurer  Bajaj Allianz general

in November 2000. With this the insurance company limited.

four public sector companies which  ICICI Lombard general

were subsidiaries of GIC have insurance company limited.
been delinked from it and are noe
broadly run as board managed  Cholamandalam general

companies. the four public sector insurance company limited.

companies are:
 HDFC-Chubb general

 The oriental insurance insurance company limited.

company limited.  Star health and allied

 The new india assurance insurance company limited.

company limited. Two new public sector entrants in

general insurance business are:
 The national insurance
company limited.  Export credit guarantee
corporation limited.
 The united india insurance
company limited.
  Agriculture
company of india Ltd.
The minimum paid up capital of the
general insurance companies was
raised to Rs 100 crore under the
modified insurance Act.the four
nationalised general
companies enhanced their paid up
capital from 40 crore to Rs 100
crore.
insurance insurance segment is the most
lucrative as fire rate as govern by
tariff.the compitation is maximum in
the segment .bulk of the premium
comes from corporate clients with
large industrial assets. fire
insurance today accounts for a fifth
insurance
of business for non-life insurance
companies and brings in most of
their profits.

The general insurance market is

not big as the life insurance market. Motor insurance
While life insurance accounts for 81
The coverage is for the following:
per cent of the insurance market in
india, general accounts for the  Various types of cars,
remaining 19 per cent. trucks, two-wheelers, and
three –wheelers.
General insurance products

Fire insurance  There are two types of motor

insurance namely:
This cover the following:
 Third party insurance which
 Bulding or flat. only insure the party other
than the owner in an
 Furniture fixtures and other
accident.
contents.

 Comprehensive insurance
 Loss of profit, that is,
which insure the owner as
consequently loss.
well as the third party
Fire insurance is comprehensive involved.
policy which covers loss on
In motor insurance, the rates were
account of fire, earthquakes, flodd,
revised upwards twice,once in1982
strike. It can be taken only by
and then in 1990 as the high cost
premises to be insured.fire
of repairs coupled with third party insurance business in india through
claims had adversely affected the their agents. Subsequently,they
incurred loss ratio.motor insurance established their companies
is mandatory leading to good inindia. The triton insurance
amount of premium collection but it company limited was the first
is not financed upon as it could general insurance company
lead to litigation problem.motor established in Calcutta in
insurance is the single largest and 1850.Foreign companies had a
the fastest growing business line monopoly in the insurance
for insurance companies . business upto the close of
nineteenth century.the first Indian
Marine cargo insurance
company to transact general
This covers: insurance business was Indian
mercantile insurance company
 Cargo in transit.
limited in Bombay in 1907.in

 Cargo declaration policy. 1957,the general insurance

council .Framed a code of conduct
 Marine hull insurance. for insuring fair transaction of
general insurance business. A
Inland vessels, ocean going
controller of insurance was
vessels,fishing and scaling vessels,
appointed to implement this code of
freight at risk,construction of
conduct.
ships,ship breaking insurance.the
marine hull portfolio is a Rs 400 In 1965 , insurance floated a
crores business and detarifing the reinsurance company,Indian
competition among general reinsurance corporation limited, for
insurance to offer cheaper prices retention of the general insurance
wil increase,as a result the shiping business in india. In 1961,the
industry will be the beneficiary. Indian guarantee and general
insurance company limited ,a
Development of general
government company along with
insurance:
Indian reinsurance corporation
British and other foreign insurance were notified as Indian reinsurance.
companies transacted general The insurance companies
voluntary ceded to each of them 10 company of these four companies
percent of their gross direct in November 1972.
premium. In 1960,the govt of made
The general insurance company is
it mandatory for every insurer to
smaller than the life insurance
ceded 20 percent in fire and marine
company. The total market size in
cargo,10 percent in marine hull and
annual premium is about half of
miscellaneous insurance and 5
that life insurance. The general
percent in credit and solvency
insurance in nidia has currently
business to these two
about Rs20,000 crores of premium
reinsurancers.
income with a five year
In1966 , Indian reinsurance compounded annual growth rate in
companies are formed the the 16 percent range. The demand
reinsurance pools in fire and hull for general insurance is still
department for retention of higher generated by some of mandatory
premiums in the country. The or regularitybrequirements. Motor
members companies ceded a vehicle insurance is compulsory
specified percentage of premium to and hence motor insurance
the respective pools which were premium dominates the total
managed by two statutory premium portfolio.the growth of
reinsurance. general insurance business is
hampered by lack of product
The government nationalized the
innovation,lack of quality data on
general insurance business Act
risks and associated parameters
1972. One hundered and seven
handicaps product innovation.
insurer including the branches of
foreign companies operating in De-tariffing of non-life
india were amalgamated and group insurance products:
into four companies, namely the
national insurance company limited Most of the non-life insurance

,the new india assurance company business transacted in india was

limited ,the oriental insurance governed by tariffs. Tariffs are

company limited,the united india documents that prescribe the rates

assurance limited..the general as well as policy coverage and

insurance corporation as a holding condition pertaining to a class of

insurance. This had resulted in a  With a view to pre-empting a
very little room for competition in rate war in motor
these areas. This also left very insurance,the regulator has
less incentives for a rating better asked companies not to
managed risks, thus resulting in offer vehicle cover at rates
avoidable claim costs for the lower then 10 percent of the
insurers. To add fuel to fire tariff.
,features like adverse selection and
 If the companies want to
moral hazard ensured that bottom
offer higher discount after
lines of insurance always under
jan 2007,they would have to
pressure regardless of volume of
explain their pricing
business. The year 2007 will
rationale.
witness a switch over to atariff-free
pricing regime for non life  Insurance are allowed to
insurance. This is excepted to bring marginally increase the rates
about hectic competition in pricing for third party insurance.
of non life insurance
 The third party premium
products.hoeever,with a view to
would go into a special pool
ensuring a gradual transition to a
which will be managed by
free market regime,the regulator
general insurance council
has put on hold the freedom
and claims will be paid out of
tomodify coverage or policy
this pool.
conditions.

De=tariffing of motor insurance  If the premium in the pool is

from 1 january, 2007,will be the inadequate to meet all

biggest deregulation in the claims,the claim shortfall be

insurance industry since shared by the insurer in

nationalization. Motor insurance proportion of their overall

today accounts for over 35 percent business size.

of the premium income of non life  Insurance companies will

insurance companies . IRDA receive 10 percent of the
adopted a phased approach to premium as management
detariffing in motor insurance. expenses,while general
 insurance council will get2.5
State Govt. securities and other
percent for managing the
government guaranteed securities,
pool.
including (1) above, being not
 In the first phase,companies less than
will issue polcies and settle 30%
Loans to HUDCO/DDA/GIC-HF
claims through their and to state govts. For housing and
branches.the claims shortfall firefighting equipment, not
less than15%
Market sector not more than 55
 Would be shared by the
industry at the end of the
year.
CURRENT TRENDS IN
INSURANCE SECTOR
GENERAL INSURANCE
India's insurance sector is zooming
COUNCIL:
to show an unprecedented
The function of the general progressive growth of more
insurance council include aiding than200% by the period of 2009-
and advising the insurer carrying
10. The Associated Chambers of
on general insurance business in
Commerce and Industry of
the matters of setting up standards
Indiahas clocked out the fact that
of conduct and sound practice and
during this period, private players in
in the matter of rendering efficient
services to holders of policies of the industry will see a growth of

general insurance. The council has about 140 per cent, owing to the
deliberated on issues relating to de adoption of the aggressive
tariffing of the motor insurance marketing techniques in
business,review of the motor comparison of the growth rate of 35
vehicles Act and structure of per cent-40 per cent achieved by
compensation/remuneration
the state owned insurance
payable to agents.
companies. The chamber is
expected to poise the business of
INVESTMENT POLICY OF GIC
insurance to reach at
Central Govt. securities being not
Rs.2000billion in coming 2 years
less than20%
from the present level of Rs. 500
billion. With the result of adoption
of the intense marketing strategies
by the private players, the
declination has been witnessed in
respect of the share of the state
owned insurance companies
captured in the market. The market
share fallout has been noticed in
context of such companies like
GIC, LIC, which have comedown to
nearly 70 per cent in the past 4-5
years from the 97 per cent. The
experts have forecasted the more
severe competition in the insurance
sector likely to be occurred in the
near future. Till recently, insurance
sector was majority driven by the
government sector players but now
many private sector multinational
players have come into the picture.
Like HDFC, ICICI, Kotak, Mahindra
and Birla Sunlife. Insurance sector
has been characterized as the
booming sector of the Indian arena,
which has shown the growth rate of
more than 15 per cent to 20
percent. Insurance in India is put
under the federal subject and is
governed by the Insurance
Act,1938, the Life Insurance
Corporation Act, 1956 and General
Insurance
Business(Nationalization). Act,
1972, Insurance Regulatory and
Development Authority(IRDA) Act,
1999 and by various other acts.
The roots of the insurance sector
can be tracked down in the year
1818 in the formation of thelife
insurance Corporation in Calcutta.
The idea was to provide means to
the English widows.During that
time different premiums were
charged for the Indian and English
people lives. In1870, the Bombay
Mutual Life Insurance Society
started its insurance business and
it chargedthe same premium from
all people irrespective of whether
they were Indian or English. In the
year 1912, insurance regulation
was started due to the passing of
the Life Insurance Companies Act
and the Provident Fund Act. By the
year of 1938, in India there were
total 176 insurance. companies. In
the year of 1938, with the passing
of Insurance Act, 1938 there was
the introduction of the first
comprehensive legislation. It was came into effect- National
passed with the aim of providing Insurance Company, New India
the strict state control over the Assurance Company, Oriental
insurance business. After the Insurance Company and United
independence, insurance sector in India Insurance Company.
India grew at a much higher pace.
In the year 1956, Indian
government combined together 245
Indian and foreign insurers and the
provident societies under the name
of nationalized
monopolycorporation. It was the
same period when the life
insurance corporation (LIC)came
into theexistence by the passing of
the Act of Parliament and through
the contribution of capital around
Rs. 5 crore. Till 1972, private sector
has enjoyed somehow monopoly in
the general insurance sector. There
were around 107 private
companies in the field. With the
effect of the General Insurance
Business (Nationalization) Act,
1972, the general insurance
business got the India. Due to the
amalgamation of 107 private
insurance companies, 4 new
companies, as the subsidiaries of
the General Insurance Company,