PORTFOLIO MANAGEMENT

FUNDAMENTAL ANALYSIS OF INSURANCE SECTOR

PRESENTED BY; POOJA AGARWAL SHAGUFTA QURESHI YASHMEEN SHAIK ROHIT SHARMA MOHIT SURANA CHIT DESAI 02 34 37 40 45 50

Contents:

Sr.NO Topic
1 2 3 4 5 Introduction to Insurance Need of Insurance Business Model of Insurance Company Types of Insurance Companies Life Insurance Companies and Non-Life Insurance Companies Licensed by IRDA Life Insurance Industry in India Development of India Insurance Industry Fundamental Principle of the Insurance General / Non-Life Insurance Company Analysis

Page No.

6 7 8 9 10

1. Introduction to Insurance

Insurance is a social device in which a group of individuals (insured) transfer risk to another party (insurer) in order to combine loss experience, which permits statistical prediction of losses and provides for payment of losses from funds contributed (premiums) by all members who transferred risk. Insurance plays a crucial role in every risk management program, regardless of size. In whichever form, insurance almost always represents the ultimate hedging device to protect the budget and the overall financial integrity of the firm against a single catastrophe or sharply skewed loss experience. Insurance sector in India was traditionally dominated by state owned Life Insurance Corporation and General Insurance Corporation and its four subsidiaries. Government of India is now considering increase in FDI in insurance sector up to 49% from the existing 26%. Financial sector reforms in India in 90s have advocated the objectives of opening the constituent segments to competition & liberalized operations. The thrust of financial reforms was to promote a diversified, efficient and competitive financial system, with the ultimate objective of improving the allocative efficiency of resources through operational flexibility, improved financial viability and institutional strengthening. Increasing integration with

global markets then became another catalyst for further reforms. The management of financial sector has been oriented towards gradual rebalancing between efficiency & stability and the changing shares of public and private ownership. Enhanced competition among diverse players has been encouraged. The banking and insurance system has witnessed greater levels of transparency and standards of disclosure. Risk: Risk can be defined as peril, danger, hazard, chance of bad consequences, loss, uncertainty, exposure to mischance. Risk may be defined as the possibility of adverse results flowing from any occurrence. It also represents the possibility of an outcome being different from the expected. If it is known for certain that a loss will occur, there is no risk. The term risk is used in insurance business to also mean either a peril to be insured against (e.g. fire is a risk to which property is exposed) or a person or property protected by

insurance (e.g. young drivers are often not considered good risk for motor insurance companies).

PRESENT SCENARIO OF INSURANCE INDUSTRY

India with about 200 million middle class household shows a huge untapped potential for players in the insurance industry. Saturation of markets in many developed economies has made the Indian market even more attractive for global insurance majors. The insurance sector in India has come to a position of very high potential and competitiveness in the market. Indians, have always seen life insurance as a tax saving device, are now suddenly turning to the private sector that are providing them new products and variety for their choice. Consumers remain the most important centre of the insurance sector. After the entry of the foreign players the industry is seeing a lot of competition and thus improvement of the customer service in the industry. Computerization of operations and updating of technology has become imperative in the current scenario. Foreign players are bringing in international best practices in service through use of latest technologies The insurance agents still remain the main source through which insurance products are sold. The concept is very well established in the country like India but still the increasing use of other sources is imperative. At present the distribution channels that are available in the market are listed below. Direct selling Corporate agents Group selling Brokers and cooperative societies Banc assurance

Customers have tremendous choice from a large variety of products from pure term (risk) insurance to unit-linked investment products. Customers are offered unbundled products with a variety of benefits as riders from which they can choose. More customers are buying products and services based on their true needs and not just traditional money back policies, which is not considered very appropriate for long-term protection and savings. There is lots

of saving and investment plans in the market. However, there are still some key new products yet to be introduced - e.g. health products. The rural consumer is now exhibiting an increasing propensity for insurance products. A research conducted exhibited that the rural consumers are willing to dole out anything between Rs.3, 500 and Rs.2, 900 as premium each year. In the insurance the awareness level for life insurance is the highest in rural India, but the consumers are also aware about motor, accidents and cattle insurance. In a study conducted by MART the results showed that nearly one third said that they had purchased some kind of insurance with the maximum penetration skewed in favor of life insurance. The study also pointed out the private companies have huge task to play in creating awareness and credibility among the rural populace. The perceived benefits of buying a life policy range from security of income bulk return in future, daughter's marriage, children's education and good return on savings, in that order, the study adds.

The functions of Insurance can be bifurcated into three parts:

1. Primary Functions 2. Secondary Functions 3. Other Functions The primary functions of insurance include the following:

Provide Protection - The primary function of insurance is to provide protection against

future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for the losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.

Collective bearing of risk - Insurance is a device to share the financial loss of few
among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute the premiums towards a fund and out of which the persons exposed to a particular risk is paid.

Assessment of risk - Insurance determines the probable volume of risk by evaluating

various factors that give rise to risk. Risk is the basis for determining the premium rate also.

Provide Certainty - Insurance is a device, which helps to change from uncertainty to

certainty. Insurance is device whereby the uncertain risks may be made more certain.

The secondary functions of insurance include the following:

Prevention of Losses - Insurance cautions individuals and businessmen to adopt suitable

device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Prevention of losses cause lesser payment to the assured by the insurer and this will encourage for more savings by way of premium. Reduced rate of premiums stimulate for more business and better protection to the insured.

Small capital to cover larger risks - Insurance relieves the businessmen from security
investments, by paying small amount of premium against larger risks and uncertainty.

Contributes towards the development of larger industries - Insurance provides

development opportunity to those larger industries having more risks in their setting up. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery. The other functions of insurance include the following:

Means of savings and investment - Insurance serves as savings and investment,

insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured's For the purpose of availing income-tax exemptions also, people invest in insurance.

Source of earning foreign exchange - Insurance is an international business. The

country can earn foreign exchange by way of issue of marine insurance policies and various other ways.

Risk Free trade - Insurance promotes exports insurance, which makes the foreign trade
risk free with the help of different types of policies under marine insurance cover.

FEATURES OF INSURANCE INDUSTRY

Insurance Policy India provides the clients with the details required for the coverage in the policy, date of commencement of the policy and their adopting organizations. It plays a important role in the Indian insurance sector. The Insurance Policy India is regulated by certain acts like the Insurance Act (1938), the Life Insurance Corporation Act (1956), General Insurance Business Nationalization) Act (1972), Insurance Regulatory and Development Authority IRDA) Act (1999). The insurance policy determines the covers against risks, sometime opens investment options with insurance companies setting high returns and also informs about the tax benefits like the LIC in India. There are two types of insurance covers: 1. Life insurance 2. General insurance

Life insurance - this sector deals with the risks and the accidents affecting the life of the
customer. Alongside, this insurance policy also offers tax planning and investment returns. There are various types of life Insurance Policy India: a. Endowment Policy b. Whole Life Policy c. Term Life Policy d. Money-back Policy e. Joint Life Policy f. Group Insurance Policy

General Insurance - this sector covers almost everything related to property, vehicle,
cash, household goods, health and also one's liability towards others. The major segments covered under general Insurance Policy India are: b. Home Insurance b. Health Insurance

c. Motor Insurance d. Travel Insurance

Some of the well-known Insurance Policy in India are: Social Security Group Scheme - a scheme covering the age group of 18-60 years and
an insurance of Rs.5000 for natural death and of Rs.25000 on due to accidental death.

Shiksha Sahyog Yojana - a scheme providing an educational scholarship of Rs.300 per

quarter per child is given for a period of four years.

Jan Arogya Bima Policy - a scheme for the adults up to the age of 45 years is Rs.70
and for children it is Rs.50. The limit coverage is fixed at Rs.5000 per annum.

Mediclaim Insurance Policy - a scheme covering the age group from 5-80 years with a
tax benefit of up to Rs.10, 000.

Jana Shree Bima Yojana - this is coverage of Rs.2, 000 on natural death and Rs.50,
000 for accidental death. The premium amount is fixed at Rs.200 for single member. Videsh Yatra Mitra Policy - a scheme-covering medical expenses during the period of overseas travel.

Bhagya Shree Child Welfare Bima Yojana - a scheme covering one girl child in a
family up to the age of 18 whose parents age does not exceed 60 years, with a premium of Rs.15 per annum.

Raj Rajeshwari Mahila Kalyan Yojana - a scheme providing protection to woman

in the age group of 10 to 75 years with an insurance of Rs.25, 000 and premium Rs.15 per annum.

Ashray Bima Yojana - scheme-covering workers in case of loss of jobs.

Personal Accident Insurance Scheme for Kissan Credit Card a scheme covering all the KCC holders up to an age of 70 years. Insurance coverage includes 50,000 for accidental death and 25,000 for partial disability.

2. Need of Insurance
Today, there is no shortage of investment options for a person to choose from. Modern day investments include gold, property, fixed income instruments, mutual funds and of course, life insurance. Given the plethora of choices, it becomes imperative to make the right choice when investing your hard-earned money. Life insurance is a unique investment that helps you to meet your dual needs - saving for life's important goals, and protecting your assets. Let us look at these unique benefits of life insurance in detail.

Asset Protection
From an investor's point of view, an investment can play two roles - asset appreciation or asset protection. While most financial instruments have the underlying benefit of asset appreciation, life insurance is unique in that it gives the customer the reassurance of asset protection, along with a strong element of asset appreciation. The core benefit of life insurance is that the financial interests of one's family remain protected from circumstances such as loss of income due to critical illness or death of the policyholder. Simultaneously, insurance products also have a strong inbuilt wealth creation proposition. The customer therefore benefits on two counts and life insurance occupies a unique space in the landscape of investment options available to a customer.

Goal based savings

Each of us has some goals in life for which we need to save. For a young, newly married couple, it could be buying a house. Once, they decide to start a family, the goal changes to planning for the education or marriage of their children. As one grows older, planning for one's retirement will begin to take precedence. Clearly, as your life stage and therefore your financial goals change, the instrument in which you invest should offer corresponding benefits pertinent to the new life stage. Life insurance is the only investment option that offers specific products tailor made for different life stages. It thus ensures that the benefits offered to the customer reflect the needs

of the customer at that particular life stage, and hence ensures that the financial goals of that life stage are met.

The table below gives a general guide to the plans that are appropriate for different life stages.

TABLE NO 2.1
Life Stage Young & Single Young Married & Primary Need Asset Creation Life Insurance Product Wealth Creation Plans Wealth Creation & Mortgage Protection Plan

Just Asset Creation & Protection

Married with kids Childrens Education, Asset Education, Wealth Creation & Mortgage Creation & Protection Protection Plan Solutions & Mortgage

Middle age with Planning for Retirement & Retirement grown up kids Across stages all Asset Protection life Health Plans

Protection Plan Health Insurance

3. Business Model of Insurance Company

Insurance Business Model: Profit = Earned Premium + Investment Income Incurred Loss - Underwriting Expenses.
An insurer's underwriting performance is measured in their combined ratio. The loss ratio (incurred losses and loss-adjustment expenses divided by net earned premium) is added to the expense ratio (underwriting expenses divided by net premium written) to determine the company's combined ratio. The combined ratio is a reflection of the company's overall underwriting profitability. A combined ratio of less than 100 percent indicates profitability, while anything over 100 indicates a loss. Insurance companies also 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 insurance premium but has not been paid out in claims. Insurers start investing insurance premium as soon as it is collected and keeps earning interest on it until claims are paid out. The investment regulations are made in exercise of power conferred by Sections 27A, 27B, 27D and 114A of the Insurance Act, 1938. 27A: Life insurance business investments, 27B: General insurance business investments, 27D: Manner & conditions of investment, 114A: power of Authority to make regulations, 27C: Prohibition for investment of funds outside India. Approved investments: Investments which are in accordance with the provisions of section 27A & 27B of Insurance Act, 1938 for life & general insurance respectively. Insurance companies in India have to invest in the following as per IRDA guidelines. Central Government securities State Government securities Other Approved Securities Funding to State Governments for housing / electricity purposes Debentures/ bonds

 Preference shares Equity shares Term loans Unsecured short term loans

4. Types of Insurance Companies

Insurance companies may be classified as Life insurance companies, who sell life insurance, annuities and pensions products. Non-life or general insurance companies, who sell other types of insurance. Reinsurance companies In most countries, life and non-life insurers are subject to different regulations, tax and accounting rules. The main reason for the distinction between the two types of company is that life business is very long term in nature coverage for life assurance or a pension can cover risks over many decades. By contrast, non- life insurance cover usually covers a shorter period, such as one year. Reinsurance companies are insurance companies that cover risks of other insurance companies, allowing them to reduce their risks and protect themselves from very large losses. The reinsurance market is dominated by a few very large companies, with huge reserves. In India, insurance business is divided into the following major categories: 1) Life Insurance (Transacted by life insurers) 2) Fire Insurance 3) Marine Insurance and 4) Miscellaneous Insurance (Transacted by non-life insurers) No composite insurance companies are permitted as per law.

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.

5. Life Insurance and Non-Life Insurance Companies Licensed by IRDA

LIFE INSURANCE COMPANIES LICENCED BY IRDA (Sept. 2010)
1. Life Insurance Corporation of India 2. SBI Life Insurance Co. Ltd 3. Birla Sun Life Insurance Co. Ltd 4. HDFC Standard Life Insurance Co. Ltd 5. ICICI Prudential Life Insurance Co. Ltd 6. ING Vysya Life Insurance Company Pvt. Ltd. 7. Reliance Life Insurance Company Limited. 8. Met Life India Insurance Company Ltd. 9. Kotak Mahindra Old Mutual Life Insurance Limited 10. Tata AIG Life Insurance Company Limited

NON-LIFE INSURANCE COMPANIES LICENCED BY IRDA (Sept. 2010)

1. Bajaj Allianz General Insurance Co. Ltd 2. ICICI Lombard General Insurance Co. Ltd 3. IFFCO Tokio General Insurance Co. Ltd 4. National Insurance Co. Ltd 5. The New India Assurance Co. Ltd 6. The Oriental Insurance Co. Ltd 7. Reliance General Insurance Co. Ltd 8. Royal Sundaram Alliance Insurance Co. Ltd

9. Tata AIG General Insurance Co. Ltd 10. United India Insurance Co. Ltd

6. Life Insurance Industry in India

More than a century in India. Large mobilization of savings next only to banks. Significant participant in the capital markets. Capital Deployed more than Rs. 16,400 Crores. Assets under management more than Rs. 8, 47,600 Crores. Invested in Infrastructure more than Rs. 90,200 Crores. Number of branches more than 8500. Number of direct employeesmore than 2.5 lakhs. Number of agents more than 25 lakhs. Number of In-force policies approximately 26 Crores. Sum assured in-force more than 23,600 Crores. Four hazards of human life: 1. Loss of employment 2. Old age 3. Disability 4. Death Utility of life insurance: 1. Family protection 2. Savings 3. Tax saver 4. Collateral Life Insurance is a contract for payment of a sum of money to the person assured or to the person entitled for receiving the sum, on happening of an event insured against. Usually a contract provides payment of an amount on the date of maturity or on specified dates or on death of the assured. Contract provides for periodic payment of premium.

Types: Medical/ Non-medical, with profit/ without profit, Single premium/ multiple premium, single life/ group. Whole Life Policies and Endowment policies are permanent type of policies. Term assurances are temporary contracts which provide basic death risk cover. When a person has a reasonably large sum of money and wants to provide an income for himself after retirement he can buy an annuity. An annuity is a method by which a person can receive a yearly sum, an annuity, in return for payment to an insurance company of a sum of money. Insurance Regulation: World over, the State, in some form or the other depending upon its philosophy, administrative capabilities, socioeconomic/political compulsions and preferences regulates insurance business. The objective of regulation is to ensure that the business is run fairly, conducted by competent persons, does not result in undue losses to the insurers themselves resulting in their insolvency and that the legitimate interest of the insuring public is protected. subjects. IRDA has come out with various guidelines and regulations on different

7. Development of India Insurance Industry

Developments in Indian Insurance Industry: The Indian Insurance Industry is nearly two centuries old. The life insurance business began with the setting up of the Oriental Life Insurance Company in 1818. The general insurance industry took roots with the setting up of the Triton Insurance Company in 1850 in Calcutta. Bombay Mutual life assured Society, formed in 1870 was the first Indian owned life insurer. In 1907, The Indian Mercantile Insurance limited was set up to transact all classes of general insurance business. The first piece of legislation to regulate the conduct of life business was the Indian Life Assurance Companies Act, 1912. A comprehensive law was enacted in 1938 (the Insurance Act) which consolidated earlier legislation and provided for administrative and regulatory measures for the regulation of insurance business in India. Substantial amendments were made in 1950 to the Insurance Act to include provisions relating to investments, periodic filing of returns, equity capital requirements, controls on management expenses and commissions and for the appointment of administrators in respect of financially unsound companies. Around the time of India's Independence, there were 236 insurers in India, comprising of foreign companies and branches and provident societies. (These included 46 composite insurers.) The financial failure of some insurers at a time when the country was progressively moving towards a centrally planned command economy set the stage for nationalization of the life insurance business in 1956. The need for additional avenues of finance to fund Plan expenditure was another key consideration for passing the LIC Act in 1956, leading to the creation of the Life Insurance Corporation of India with a capital contribution of Rs.5 crore

from the Government of India. 245 Indian and foreign insurers and provident societies taken over by the central government. The other objectives of nationalization of the life insurance industry were: 1. To spread the reach of life insurance, particularly to rural areas 2. To conduct the business with utmost economy, in a spirit of trusteeship 3. To charge premiums no higher than warranted by strict actuarial considerations 4. To prudently invest funds in order to maximize yield to policy holders, consistent with safety of capital 5. To render prompt and efficient service to policy holders 6. Avoid preferential treatment in underwriting as also claims payment In 1968, Tariff Advisory Committee (TAC) was formed and rates and terms in Fire, Marine, Motor and Engineering businesses were brought under tariff. In 1972, non- life insurance business in India was nationalized by taking over the operations of then existing 107 companies and organizing them in to 4 companies- National, New India, oriental & United India. General Insurance Corporation of India (GIC) was formed as holding company for these 4 companies as also to take care of reinsurance needs. was realized by government as early as 1993 when the Committee on Reforms in Insurance Sector (CRIS) was formed under the Chairmanship of Mr. R N Malhotra. The committee was set up in the context of the several initiatives aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy. The terms of reference of the Committee included examination of the present structure of the insurance industry and to make recommendations keeping in view the structural changes currently under way in other parts of the financial system and in the economy. The Committee was also required to make specific suggestions regarding LIC and GIC which would help to improve their functioning in the changing environment. Recommendations for the strengthening and modernizing of the insurance regulatory system and matters relevant for the healthy and long term development of the insurance sector were also sought from the Committee. In 1994, the committee submitted the report and some of the key recommendations were: i) Structure: Government stake in the insurance Companies to be brought down to 50% Government should take over the holding 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 ii) 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. iii) Regulatory Body: The Insurance Act should be changed. An Insurance Regulatory body should be set up Controller of Insurance (a part of the Finance Ministry then) should be made independent. iv) 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 holdings to be brought down to this level over a period of time if was more) v) Customer Service: LIC should pay interest on delays in payments beyond 30 day. 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. The advantages of liberalization are expected to be in terms of: Development of nations infrastructure Market development through new intermediaries and distribution channels Enhanced level of customer satisfaction Competitive pricing as against tariff rates Professionalism & technology driven processes

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 by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to public sector insurance companies in order to improve their performance and enable them to act as independent companies with economic motives.

Opening up of Indian insurance sector for competition: Three major reasons for inviting competition in the sector where Government had monopoly, could be (1) low insurance penetration, (2) lack of customer focus and low service levels and (3) expectation of additional funding for infrastructure. New companies came into Indias insurance horizon from 2000 onward. GIC was separated from 4 state owned general insurance companies in 2001 and was made exclusively a reinsurance company

8. Fundamental Principle of the Insurance

Utmost Good Faith: In all General Insurance contracts we know that a property or
interest or liability or life is offered for insurance and the insured has to take decisions on the acceptance of the proposal. If he decides to accept the proposal a premium commensurate with the risk has to be charged. To enable him to take necessary decision in this regard, the insurer must have certain facts about the risk offered. These facts influence the judgment of the insurer in deciding about the acceptance or otherwise of the risk and the rate of premium to be charged, if accepted. Such facts are known as material facts.

1. Insurable Interest: Insurable interest means the legal right to insure. Insurable Interest
is a must and only then the insurance contract is enforceable at law. This principle differentiates a Contract of insurance from wager. Lack of insurable interest renders the contract null and void. For Insurable Interest to exist there must be Property, Rights, Interest, Life or Liability; this must be insured and the Insured should have a legally recognizable relationship thereto. The Insured should be benefited by the safety of the property or is prejudiced by its loss. Insurable Interest may arise in the following manner: Ownership: Absolute ownership entitles the owner to insure the property. This is the commonest method whereby Insurable Interest arises. Partial Interest is also insurable e.g. a mortgagee. A creditor can also insure the life of his debtor but only to the extent of his loan. Administrators and executors i.e. officials appointed by a court of law to take care of a property may also insure the property.

Relationship does not automatically constitute insurable interest. The only relationship recognized by law for this purpose is the one between a husband and wife.

An employer can insure his employee under a Personal Accident Policy as he has insurable interest in them.

2. Indemnity: To place insured after a loss in the same financial position as far as possible
as he occupied before the loss. There should not be a profit made by insured out of a loss. (Would not apply for life and personal lines of insurance business)

3. Contribution: An insured may have several insurances on the same subject matter. If
he recovers his loss under all these insurances, he will obviously make a profit out of loss. This will be an infringement of the principle of indemnity. Common Law has, therefore, evolved the doctrine of contribution whereby the insured is prevented from recovering more than his loss, despite his having several insurances on the subject-matter.

4. Subrogation: The principle of indemnity seeks to prevent the insured from making
profit out of loss. However, it may so happen that that the insured may recover his loss under his policy and he may also have rights against third parties. If, after the insurance claim is settled, the insured is allowed to enforce his rights against third parties and to retain whatever damages he receives from them, he will certainly make a profit and the principle of indemnity will be infringed. Common Law has therefore, evolved the doctrine of subrogation as corollary to the principle of indemnity. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurers who have indemnified the insured in respect of the loss. The Common Law right of subrogation is implied an all contracts on indemnity, as it arises only after payment of loss.

5. Proximate cause: Generally, the claims are payable under insurance policies if they
arise out of events which are proximately caused by the insured perils. In other words, the proximate cause of the event has to be peril covered by the policy, so as to constitute a valid claim. Proximate cause has been defined as "the active, efficient cause that sets in motion a train of events which brings about a result without the intervention of any force started and working actively from a new and independent source".

6. Intermediaries in insurance: Effective functioning of multiple agencies is an

essential prerequisite of the insurance business. The business primarily concerns with receipt of premium & issue of policy and claims processing & payment. There are various elements in this chain. The insurance company (insurer), publicity, agents, brokers, consultants,

surveyors, loss assessors, third party administrators, reinsurance brokers, courts and clients (insured).

7. Insurance legislation: Though Insurance Act, 1938 is the basic legislation governing
insurance, there are many other acts directly or indirectly applicable to insurance. To name a few: Companies Act, 1958, The Negotiable Instruments Act, The Motor Vehicles Act, Carriage of Goods Act, Income Tax Act, The Life Insurance Corporation Act, 1956, The Marine Insurance Act, 1963, The General Insurance Business (Nationalization) Act, 1972, The Personal Injuries (Compensation Insurance) Act, 1963, The Public Liability Insurance Act, 1991, The War Injuries (Compensation Insurance) Act, 1943, Insurance Regulatory Development Authority Act, 1999.

8. Actuary: The business enterprise relies on advice and services rendered by professionals
from various disciplines for smooth conduct of operations. Professionals could be from the field of engineering, information technology, accounting, auditing, taxation etc. Some of them would be involved full time being employed by the business while others would offer their services on a job or contract basis. In India, we are aware of services offered by professionals like engineers, software consultants, chartered accountants and cost accountants. The actuarial profession in India is relatively unknown. An actuary is a

financial expert, specializing in statistical estimation of various risks and their financial consequences. Actuary plays an important role in designing and pricing of insurance covers. Also helps in the areas of loss reserving, investments etc. Actuaries assemble and analyze statistics to: Calculate probability of a loss. Determine rates that are fair for the company and the policyholder. Help determine the reserves and surplus the company must establish to cover future losses.

9. Scope for actuarial profession: Actuarial expertise can not only be used in the area
of life insurance, but also in the areas of general insurance, health insurance, pension etc. In life insurance: Assessment and valuation of mortality risks In property insurance: risk appraisal and pricing accordingly In investment: investment decisions In health insurance: analysis of morbidity data and pricing accordingly

10. Underwriting: Underwriting is the process of selecting risks for insurance and
determining in what amounts and on what terms the insurance company will accept the risk. The process also includes rejection of those risks that do not qualify. Underwriter is a technician trained in evaluating risks and determining rates and coverage for them. The term derives from the practice at Lloyd's of each person willing to accept a portion of the risk writing his name under the description of the risk. Underwriter is responsible for selecting the people and properties the company will insure. The way underwriters know which business to accept is determined by how the insurance company defines its market. That is, every company must decide which risks they want to accept and how much they must be compensated to accept those risks. Their insurance contracts and rates reflect their marketing decisions. Underwriters consider many things in making their decisions. Review applications. Evaluate hazards and risks: Determine what premium is sufficient for coverage.

9. General / Non-Life Insurance

One faces a lot of risks in our daily lives. Some of these lead to financial losses. Insurance is a way of protecting against these financial losses. For a payment (premium), an insurance company will take the responsibility of compensating the financial losses. One of the main reasons one should insure is to protect ones belongings and assets against financial loss. When one has earned and accumulated property, protecting it is prudent. The law also requires us to be insured against some liabilities. That is, in case we should cause a loss to another person, that person is entitled to compensation. To ensure that we can afford to pay that compensation, the law requires us to buy liability insurance so that the responsibility of paying the compensation is transferred to an insurance company. Insuring anything other than human life is called non-life or general insurance or Property & casualty insurance. Examples are insuring property like house and belongings against fire and theft or vehicles against accidental damage or theft. Injury due to accident or hospitalization for illness and surgery can also be insured. Your liabilities to others arising out of the law can also be insured and is compulsory in some cases like motor third party insurance. General Insurance comprises of insurance of property against fire, burglary etc. personal insurance such as Accident and Health Insurance and liability insurance which covers legal liabilities. Marine Hull & Cargo also fall under this group. There are also other miscellaneous covers.

Non-life insurance companies have products that cover property against Fire and allied perils, flood, storm etc. There are products that cover property against burglary, theft etc. The nonlife companies also offer policies covering machinery against breakdown, there are policies that cover the hull of ships and so on. A Marine Cargo policy covers goods in transit including by sea, air and road. Further, insurance of motor vehicles against damages and theft forms a major chunk of non- life insurance business. Personal insurance covers include policies for Accident, Health etc. Products offering Personal Accident cover are benefit policies. Health insurance covers offered by non-life insurers are mainly hospitalization covers either on reimbursement or cashless basis. Nowadays health insurance policies which cover hospitalization costs have also a cashless settlement of claims. That is, you dont have to pay for the treatment at the hospital and then make a claim for reimbursement of the expenses. The insurance company has a service provider called the third party administrator (TPA) health services, who liaises with the hospitals and directly makes the payment for your treatment as per the terms of your policy and coverage. Cashless service is offered through Third Party Administrators (TPA) who have arrangements with various service providers, i.e., hospitals. TPAs also provide service for reimbursement claims. Sometimes the insurers themselves process reimbursement claims. Accident and health insurance policies are available for individuals as well as groups. A group could be a group of employees of an organization or holders of credit cards or deposit holders in a bank etc. Normally when a group is covered, insurers offer group discounts. Liability insurance covers such as Motor Third Party Liability Insurance, Workmens Compensation Policy, Public Liability Insurance Policy etc. offer cover against legal liabilities that may arise under the respective statutes Motor Vehicles Act, The Workmens Compensation Act etc. Some of the covers such as Motor Third Party and Workmens Compensation policy are compulsory by statute. Liability Insurance not compulsory by statute is also gaining popularity these days. There are general insurance products that are in the nature of package policies offering a combination of the covers mentioned above. For instance, there are package policies available for householders and shop keepers. Most general insurance covers are annual contracts. However, there are few products that are somewhat long-term. It is important for proposers to read and understand the terms and conditions of a policy before they enter into

an insurance contract. The proposal form needs to be filled in completely and correctly by a proposer to ensure that the cover is adequate and the right one. In case of an indemnity cover (one that seeks to compensate the actual loss)--for instance, a policy that covers property, if there are two policies in vogue, the loss shall be shared by both the policies. In no case can an insured get more than the actual pecuniary loss incurred. In indemnity policies, the upper limit of a claim is the sum assured and this usually applies for the period of the policy. Certain policies, however, allow for reinstatement of the Sum Insured by payment of proportionate premium for the remaining period of the policy. The actual claim will be the actual extent of financial loss as validated by documents like bills. If the property is underinsured, the insured shall bear a rateable proportion of the loss. There can be more than one claim in the policy period but the sum assured is usually the limit for the policy period unless reinstated. In India general insurance policies are annual and the premium payment is in advance as per sec. 64 VB of insurance act. No risk commences unless you have paid the premium in full. It is a feeling in most buyers that if one buys a policy and dont make a claim, it is a loss. So, why should one buy insurance? General insurance is not meant to be for savings or

investment returns. It is meant for protection. What you pay for is the protection against a risk. To approach it as something from which returns should be obtained is not the correct approach as there is a price to pay for protecting a property worth lakhs for a few hundred rupees.

Rural Insurance: Sections 32 B and 32 C of the Insurance Act provide for obligation on
insurers towards rural and social sector, as may be specified by IRDA. IRDA has, accordingly issued regulation for Obligations of insurers to Rural & Social Sectors 2000.

Existing Rural Insurance Covers: Cattle insurance, Poultry insurance, Sericulture

(silk worm) insurance, Honey Bee insurance, Horticulture/ floriculture insurance, failed well insurance, Agricultural pump set policy, Cycle rickshaw policy, and animal driven cart insurance.

Crop Insurance: India is one of the few countries in the world to have an agricultural
insurance scheme. On the basis of experience gained on implementation of Comprehensive

Crop Insurance scheme from 1984 till 1988, a new scheme National Agricultural Insurance Scheme (Rashtriya Krishi Bima Yojana) was introduced in 1999.

General Insurance Products: Fire Insurance- Fire insurance covers you against loss or damage to property caused by
fire or lightning and a list of other perils.

Consequential Loss Insurance- Consequential Loss insurance covers you for loss in
net profit and fixed charges following interruption of business caused by risks which are insured under a Fire policy.

Marine Insurance- Marine insurance covers loss or damage to goods whilst in transit by
sea, air or rail. Marine Hull insurance is available for the vessel.

Motor Insurance- Motor insurance covers motor vehicle against loss or damage caused
by accidents. It also covers legal liability for bodily injury or property damage to third parties.

Health Insurance- Hospital and Surgical expenses insurance covers hospital expenses,
surgical expenses incurred as a result of accident, sickness or disease.

Personal Accident Insurance- Personal Accident insurance will cover you for bodily
injury or death arising from an accident.

Money Insurance- Money insurance will cover loss or damage to money whilst in transit
and by theft from locked drawer, safe or strong room or by hold-up while in your premises.

Fidelity Guarantee Insurance- Fidelity Guarantee insurance provides cover for loss of
money or goods either belonging to employers or for which they are responsible as a result of acts of fraud or dishonesty by an employee.

Workmen's Compensation Insurance- Workmen's Compensation insurance

provides payment for accidental bodily injury and/or disease sustained by your employees whilst in the course of employment.

Public Liability Insurance- Public Liability insurance covers your legal liability to
third parties for accidental bodily injury or loss of or damage to property whilst in the course of business.

Machinery Breakdown Insurance- Machinery Breakdown insurance covers

unforeseen and sudden damage to machinery whilst at work or at rest and during cleaning, inspection, overhaul or removal to other position in the workplace.

Machinery and Equipment All Risks Insurance- Machinery and Equipment All
Risks insurance covers all risks of accidental physical loss or damage to property including the risk of loading and unloading.

Contractors All Risks Insurance-Contractors All Risks insurance covers the loss or
damage to contract works and all other materials on site as well as legal liability to third parties arising out of the performance of a contract.

Some Terms used in General insuranceProposer/applicant: A person seeking insurance. Proposal form: When buying
insurance, customers must fill out an application. Details on the application help the insurance company decide what policy and premium level is right for that customer. It is important to make sure all details on the application are correct or the payout may be affected.

Business interruption: Provides coverage for a loss of earnings if the policyholder's

business is shut down by fire, windstorm, explosion, or other insured event.

Claim: A demand made by the insured, or the insured's beneficiary, for payment of the
benefits provided by the contract.

Deductible/excess: This is the amount the insured will be required to contribute before
they can make a claim.

Exclusions: Specific circumstances listed in the policy for which the insurer will not
provide benefit payments.

Insurer: The party that provides, for a fee, benefits in the event of loss. Your insurance
company is your insurer.

Insured: In property and liability insurance, the person to whom, or on whose behalf,
benefits are payable. If you take out an insurance policy, you are the insured. Insurance

Penetration: The proportion of premium generated by a countrys insurance industry of

the Gross Domestic Product of the economy explains penetration of insurance in a country.

10. Company Analysis

After analyzing the economy and the respondent industry that are taken into consideration now its turn of the companies in the insurance industry and their performance and the environment they are operating into. Here we have taken 2 companies of insurance industry and have analyzed it. The companies are, 1. ICICI Prudential Life Insurance Company 2. Bajaj Allianz Life Insurance Company Limited

While analyzing the company the factor considered are Current Ratio, Debt to Equity and Interest coverage of each company. VALUATION RATIOS CURRENT RATIO =Current Assets /Current Liabilities Debt to Equity =Total Debt (Short Term +Long Term)/Equity + Preference Interest Coverage=Earnings Before Interest And Tax/Interest

1. ICICI Prudential Life Insurance Company

Incorporation Year Chairperson Managing Director Registered Office 2000 Ms.Chanda D. Kochhar Mr.V. Vaidyanathan, ICICI Pru Life Towers, 1089 Appasaheb Marathe Marg, Prabhadevi, Mumbai 400025. Website www.iciciprulife.com

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a premier financial powerhouse, and prudential plc. a leading international financial services group headquartered in the United Kingdom. ICICI Prudential was amongst the first private sector insurance companies to begin operations in December 2000 after receiving approval from Insurance Regulatory Development Authority (IRDA). ICICI Prudential Life's capital stands at Rs.4, 780 crores (as of December 31, 2009) with ICICI Bank and Prudential plc. holding 74% and 26% stake respectively. For the past thirteen years, ICICI Prudential Life has retained its leadership position in the life insurance industry with a wide range of flexible products that meet the needs of the Indian customer at every step in life. ICICI Prudential Life has one of the largest distribution networks amongst private life insurers in India. It has a strong presence across India with 1,960 branches (including 1,096 micro-offices) and an advisor base of over 230,000 (as on December 31, 2009).

TABLE NO-10.1
CURRENT RATIO YEAR CA CL CR 2009 7,174,265 11,303,713 0.634682162 2008 10,711,662 16,081,873 0.66607055 2007 7,183,106 10,061,083 0.713949582 2006 3,580,046 5,934,917 0.603217534

INTERPRETATION The above table shows the Current Ratio of ICICI PRUDENTIAL in 2009 is 0.6346, in 2008 it was 0.6660, in 2007 it was 0.7139 and in 2006 it was 0.6032 INFERENCE In terms of Current Ratio, ICICI PRUDENTIAL is high in 2007 and lower in 2006

TABLE NO-10.2
DEBT EQUITY RATIO YEAR DEBT EQUITY DEBT/ EQUITY 0.00113038 0.001005588 0.001949768 0.001202278 2009 54035 47801758 2008 37935 37724213 2007 40393 20716828 2006 14247 11850000

INTERPRETATION

The DEBT EQUITY RATIO in 2009 was 0.0011303, in 2008 it was 0.0010055, in 2007 it was 0.0019497, and in 2006 it was 0.0012022 INFERENCE The high D/E Ratio is in 2007 and lower is in 2008

TABLE NO-10.3
INTEREST COVERAGE RATIO YEAR PBIT INTEREST PBIT/ INTEREST -183.94063 -393.07744 -88.39975 2009 -47258763 256924 2008 -46042734 117134 2007 -23611574 267100 2006 -11840436 165786 -71.41999

INTERPRETATION The Interest coverage ratio in 2009 was -183.94, in 2008 it was -393.077, in 2007 it was 88.399 and in 2006 it was -17.419

INFERENCE Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk. Therefore ICICI PRUDENTIAL is at a high financial risk in all the four years

2. BAJAJ ALLIANZ Life Insurance Company Limited

Incorporation Year Chairman Company Secretary 2001 Mr.Rahul Bajaj Sameer Bakshi

Registered Office

Bajaj Allianz Life Insurance Company Limited Grnd floor, G.E Plaza, Airport Road Yerawada, Pune-411006

Email Website

life@bajajallianz.co.in www.bajajallianz.co.in

Bajaj Allianz Life Insurance Company Limited engages in life insurance business in India. The company was founded in 2001 and is headquartered in Pune, India. Bajaj Allianz Life Insurance Company Limited is a subsidiary of Bajaj Holdings and Investment Limited. Bajaj Allianz Insurance started its journey on May 2, 2001 when it received the certificate of Registration from Insurance Regulatory and Development Authority (IRDA) for conducting General Insurance business in India including Health Insurance. As on the end of March 2009, the income of Bajaj Allianz Insurance went up to Rs.2,866 crores with a growth of 11% over the previous year. It also registered a net profit of Rs.95 crore, highest by any private insurer, in the last financial year. Bajaj Allianz Life Insurance is a union between Allianz SE, one of the largest Insurance Company and Bajaj Finserv. Allianz SE is a leading insurance conglomerate globally and one of the largest asset managers in the world, managing assets worth over a Trillion (Over INR. 55, 00,000 Crores). Allianz SE has over 115 years of financial experience and is present in over 70 countries around the world.

TABLE NO-10.4
CURRENT RATIO Year Current assets Current liabilities 14,495,261 10,104,661 7,016,903 4,081,074 2009 8,295,295 2008 5,288,350 2007 3,358,711 2006 2,646,097

Current ratio

0.572276346

0.523357488

0.47866003

0.648382509

INTERPRETATION The above table shows the Current Ratio of BAJAJ ALLIANZ in 2009 was 0.5722,in 2008 it was 0.5233, in 2007 it was 0.4786 and in 2006 it was 0.6483 INFERENCE In terms of Current Ratio of BAJAJ ALLIANZ, the higher is in 2006 and lower is in 2007

TABLE NO -10.5
DEBT EQUITY RATIO YEAR DEBT EQUITY DEBT/EQUITY 2009 0 6724719 2008 0 5773150 2007 0 4034165 2006 0 2670720

INFERENCE There is no debt equity ratio, therefore the company has no financial problem.

TABLE NO-10.6
INTEREST COVERAGE RATIO YEAR PBIT INTEREST PBIT/ INTEREST 7.94504949 8.8372089 9.4361648 12.077043 2009 3911618 492334 2008 2965405 335559 2007 1935565 205122 2006 1184287 98061

INTERPRETATION The Interest coverage ratio in 2009 was 7.94, in 2008 it was 8.83, in 2007 it was 9.43 and in 2006 it was 12.07 INFERENCE Low Interest Coverage ratio (<2) is perceived to have a high degree of financial risk. Therefore in BAJAJ ALLIANZ all the four years it was >2 therefore the company is in a good financial condition