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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:
FUNCTIONS OF INSURANCE
The functions of Insurance will give you an idea on how to go ahead with the
approach of insurance and what type of insurance to choose. In a layman's
words, insurance means, ‘a guard against pecuniary loss arising on the
happening of an unforeseen event’. In developing economies, the insurance
sector still holds a lot of potential which can be tapped. Majority of the people in
the developing countries remains unaware of the functions and benefits of
insurance and it is for this reason that the insurance sector is still to grow.
1. 1.Primary Functions
2. 2.Secondary Functions
3. 3.Other Functions
Primary functions of insurance
• Threat of New Entrants: The insurance industry has been budding with
new entrants every other day. Therefore the companies should carve out
niche areas such that the threat of new entrants might not be a hindrance.
There is also a chance that the big players might squeeze the small new
entrants.
• Power of Suppliers: Those who are supplying the capital are not that big
a threat. For instance, if someone as a very talented insurance
underwriter is presently working for a small insurance company, there
exists a chance that any big player willing to enter the insurance industry
might entice that person off.
• Power of Buyers: No individual is a big threat to the insurance industry
and big corporate houses have a lot more negotiating capability with the
insurance companies. Big corporate clients like airlines and
pharmaceutical companies pay millions of dollars every year in premiums.
• Availability of Substitutes: There exist a lot of substitutes in the
insurance industry. Majorly, the large insurance companies provide similar
kinds of services – be it auto, home, commercial, health or life insurance.
Indian Insurance Industry: New Avenues for Growth 2012
With an annual growth rate of 15-20% and the largest number of life insurance
policies in force, the potential of the Indian insurance industry is huge. Total
value of the Indian insurance market (2004-05) is estimated at Rs. 450 billion
(US$10 billion). According to government sources, the insurance and banking
services’ contribution to the country's gross domestic product (GDP) is 7% out of
which the gross premium collection forms a significant part. The funds available
with the state-owned Life Insurance Corporation (LIC) for investments are 8% of
GDP.
Till date, only 20% of the total insurable population of India is covered under
various life insurance schemes, the penetration rates of health and other non-life
insurances in India is also well below the international level. These facts indicate
the of immense growth potential of the insurance sector.
The life insurance industry in India grew by an impressive 36%, with premium
income from new business at Rs. 253.43 billion during the fiscal year 2004-2005,
braving stiff competition from private insurers. The market share of the state
behemoth, LIC, has clocked 21.87% growth in business at Rs.197.86 billion by
selling 2.4 billion new policies in 2004-05. But this was still not enough to arrest
the fall in its market share, as private players grew by 129% to mop up Rs. 55.57
billion in 2004-05 from Rs. 24.29 billion in 2003-04.
Though the total volume of LIC's business increased in the last fiscal year (2004-
2005) compared to the previous one, its market share came down from 87.04 to
78.07%. The 14 private insurers increased their market share from about 13% to
about 22% in a year's time. The figures for the first two months of the fiscal year
2005-06 also speak of the growing share of the private insurers. The share of
LIC for this period has further come down to 75 percent, while the private players
have grabbed over 24 percent.
There are presently 12 general insurance companies with four public sector
companies and eight private insurers. According to estimates, private insurance
companies collectively have a 10% share of the non-life insurance market.
Though the focus of this market research report is on the potential growth on the
Indian Insurance Sector, it also talks about the market size, market
segmentation, and key developments in the market after 1999. The report gives
an instant overview of the Indian non-life insurance market, and covers fire,
marine, and other non-life insurance. The data is supplied in both graphical and
tabular format for ease of interpretation and analysis. This report also provides
company profiles of the major private insurance companies.
The insurance companies in India dealing in life insurance are mainly engaged in
offering two categories of life insurance products- the Endowment Assurance
Products and the Money Back Products. The vehicle insurance products rank
next to life insurance product in terms of demand. The up coming products
comprise linked products. The products offer various facilities to the investors as
for example they are available with free look facility so that the investor gets time
to examine the policy within the free look period. They are offered the facility to
return the policy in case it is not able to satisfy his requirements.
Insurance Policy India provides the clients with the details required for the
coverages 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:
b. Whole Life Policy: A typical whole life policy runs as long as the policyholder
is alive. In other words, the risk is covered for the entire life of the policyholder,
which is why they are know as whole life policies.
c. Term Life Policy: Term life insurance or term assurance is life insurance which
provides coverage at a fixed rate of payments for a limited period of time, the
relevant term. If the insured dies during the term, the death benefit will be paid to
the beneficiary. Term insurance is the most inexpensive way to purchase a
substantial death benefit on a coverage amount per premium dollar basis.
d. Money-back Policy: Unlike ordinary endowment insurance plans where the
survival benefits are payable only at the end of the endowment period, money
back policies provide for periodic payments of partial survival benefits during the
term of the policy, of course so long as the policy holder is alive. An important
feature of this type of policies is that in the event of death at any time within the
policy term, the death claim comprises full sum assured without deducting any of
the survival benefit amounts, which may have already been paid as money-back
components. Similarly, the bonus is also calculated on the full sum assured.
e. Joint Life Policy: Joint life policies are similar to endowment policies in as
much as these policies also offer maturity benefits to the policyholders, apart form
covering the risks as all life insurance policies. But these are categorized
separately as these cover two lives together thus offering a unique advantage in
some cases; notable, for a married couple or for partners in a business firm.
g. Loan Cover Term Assurance Policy: Loan cover term assurance policy is
an insurance policy, which covers a home loan. Such a policy covers the
individual's home loan amount in case of an eventuality. The cover on such a
policy keeps reducing with the passage of time as individuals keep paying their
EMIs (equated monthly instalments) regularly, which reduces the loan amount.
h. Pension Plan or Annuities: The individual plans that look into your future
and helps to foresee the financial stability during the age of retirement is are the
Pension plans. These plans are particularly helpful for those senior citizens and
those who plan for a future with security and safety. The main aim of these
pension plans is that they provide security to the entire family with respect to the
financial support during the productive plan and a happy lifestyle to oneself and
their spouse at the age of retirement.
i. Unit Linked Insurance Plan: Unit Linked Insurance Plan (ULIP) provides for
life insurance where the policy value at any time varies according to the value of
the underlying assets at the time. ULIP is life insurance solution that provides for
the benefits of protection and flexibility in investment. The investment is denoted
as units and is represented by the value that it has attained called as Net Asset
Value (NAV).
a. Home Insurance: is the type of property insurance that covers private homes.
It is an insurance policy that combines various personal insurance protections,
which can include losses occurring to one's home, its contents, loss of its use
(additional living expenses), or loss of other personal possessions of the
homeowner, as well as liability insurance for accidents that may happen at the
home or at the hands of the homeowner within the policy territory. It requires that
at least one of the named insureds occupies the home.
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.
Jan Arogya Bima Policy – a scheme for the adults upto 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 a 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 upto the age of 18 whose parents age does not exceed 60 years, with a
premium of Rs.15 per annum.
At this point, it is important to note that not all activities can be insured. If
that were possible, it would completely negate entrepreneurship. Professor
Frank Knight in his celebrated book “Risk Uncertainty and Profit” emphasized
that profit is a consequence of uncertainty. He made a distinction between
quantifiable risk and non-quantifiable risk. According to him, it is non-quantifiable
risk that leads to profit. He wrote “It is a world of change in which we live, and a
world of uncertainty. We live only by knowing something about the future; while
the problems of life or of conduct at least, arise from the fact that we know so
little. This is as true of business as of other spheres of activity”. The real
management challenges are uninsurable risks. In the case of insurable risks,
risk is avoided at a cost.
Such a stupendous growth after along wait was well deserved for the insurance
companies. Sharp and excellent market scheme along with wide product
bandwidth proved to be a winner among the masses. A considerable growth rate
was also recorded by the private companies. The India insurance sector is likely
to put its foot forward towards more competition with growing importance and
recognition.
Assessment of Risks
The reform of the insurance sector is part of the overall economic reform process
that is underway. The basic philosophy underlying the new economic policy is to
improve the productivity and efficiency of the system. This is sought to be
achieved partly by creating a more competitive environment. The growth of the
real economy depends upon the efficiency of the financial sector. A greater
element of competition is being injected into the financial system as well.
All regulators need to keep in mind that there is a fine distinction between
regulations and controls. Regulations lay down norms while controls have a
propensity to micromanage institutions. Regulators must take care to ensure
that regulations do not slide into controls.
The insurance industry in our country underwent a big change in 2000 when
private participants were allowed into the industry along with a streamlined
regulatory and supervisory regime. There are at present 14 private life insurance
companies along with LIC and 12 entities in non-life sector. There is evidence to
show that competition has done good to insurance industry. The rate of growth
of the industry in the post liberalization period has been faster. It has also
developed in terms of product innovation and the use of alternative distribution
channels.
FUND MANAGEMENT IN INSURANCE SECTOR
Any reform of the insurance sector must necessarily consider aspects related to
the investment of insurance funds. Under sec 27A of the insurance act and its
application in the LIC act, the manner in which LIC can deploy its funds is stated.
Under the current guidelines, the LIC is required to invest 75% of the accretions
through a controlled fund in certain approved investments. 25% of accretions
may be invested by LIC for investments in private corporate sectors, loans to
policyholders, construction and acquisition of immovable assets. These
stipulations have resulted in the lack of flexibility in the optimization of its risk and
profit portfolio.
It has been reported that the government is planning to offer
greater autonomy to LIC through the following:
It is proposed that the deployment of the balance of 50% of the funds will be left
to discretion of LIC. Similarly, it is proposed that the GIC will be subject to the
following guidelines:
One of the contentious issues raised by foreign companies seeking an entry into
the insurance sector in India is the minimum paid up capital requirements. The
Malhotra committee (1994) recommended
The Emerging Insurance sector of India.
Rs 100 crores as the norm. The multilateral insurance working group (an industry
forum representing most of the interested foreign and Indian companies seeking
an entry into the insurance sector) has recommended Rs. 50 crore. The IRA is
also reported to considering a graded pattern for capitalization of the companies
keeping in mind the volume of business likely to be handled by them.
The Insurance Potential :
The main reason why the leading insurance companies in the world and
the leading corporate group in India have shown a keen interest in the insurance
sector, is the vast potential for future business. Restricted, as the market has
been, through the operations of the two monopolies (LIC and GIC), it is generally
felt that the sector can grow exponentially if it is opened up. The decade 1987-97
has witnessed a compounded growth rate of marginally more than 10% in life
insurance business. LIC predicts for itself that its business has potential to grow
by 16.27% p.a. in a decade 1997-2007 (LIC, 1997). If we take a look at
insurance coverage index for the age group of 20- 59 years a considerable gap
between India and other countries in Asia can be observed. In this scenario,
naturally insurance companies see a vast potential.
The introduction of private players in the industry has added value to the
industry. The initiatives taken by the private players are very competitive and
have given immense competition to the on time monopoly of the market LIC.
Since the advent of the private players in the market the industry has seen new
and innovative steps taken by the players in this sector. The new players have
improved the service quality of the insurance. As a result LIC down the years
have seen the declining phase in its career. The market share was distributed
among the private players. Though LIC still holds the 75% of the insurance
sector but the upcoming natures of these private players are enough to give
more competition to LIC in the near future. LIC market share has decreased from
95% (2002-03) to 81 %( 2004-05).The following companies has the rest of the
market share of the insurance industry.
NAME OF THE PLAYER MARKET SHARE (%)
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.
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 •
Bancassurance •
Conclusion
The insurance sector has a vast potential not only because incomes are
increasing and assets are expanding but also because the volatility in the system
is increasing. In a sense, we are living in a more risky world. Trade is becoming
increasingly global. Technologies are changing and getting replaced at a faster
rate. In this more uncertain world, for which enough evidence is available in the
recent period, insurance will have an important role to play in reducing the risk
burden individuals and businesses have to bear. In the emerging scenario, the
insurance industry must pay attention to (a) product innovation, (b) appropriate
pricing, and (c) speedy settlement of claims. The approach to insurance must be
in tune with the changing times.