INTRODUCTION

“The Business of Insurance is related to the protection of the

economic values of the assets”. Every human being has the tendency to

save to protect him from risks or events of future.

Insurance is one form of savings where in people try to assure

themselves against risks or uncertainties of future. It is assurance

against risks or events or losses. People can save their earnings either

in the form gold, fixed assets like property or in banking and insurances.

All the savings of people of a country account for gross domestic

savings. In India, although savings rate is high but people prefer to

invest either in gold or fixed assets so that they can make money out of

it. Hence insurance sector is still untapped in India.

A. What is insurance?

Insurance is a tool by which fatalities of a small number are

compensated out of funds (premium payment) collected from plenteous.

Insurance is a safeguard against uncertain events that may occur in the

future. It is an arrangement where the losses experienced by a few are

extended over several who are exposed to similar risks. It is a protection

against financial loss arising on the happening of an unexpected event.

Insurance companies collect premium to provide security for the

purpose. Loss is paid out of the premium collected from people and the

insurance companies act as trustees to the amount so collected. These

companies have proposal forms which are filled to give details of

insurance required. Depending upon the answers in the proposal forms

insurance companies assess the risk and decide on the premium.

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Insurance companies are risk bearers. They underwrite the risk in

return for an insurance premium. The function of insurance is to provide

protection, prevent losses; capital formation etc. hence insurance can be

defined as a tool in which a sum of money as a premium is paid by the

insured in consideration of the insurer’s bearing the risk of paying a large

sum. It may also be defined as a contract wherein one party (insurer)

agrees to pay the other party (insured) or his beneficiary, a certain sum

upon a given contingency against which insurance is required.

Insurance industry commands massive funds through sales of

insurance products to large number of clients. Insurers also create

liabilities and commit themselves to compensate for losses occurring to

the policyholders on future date. It also plays an important role in

process of capital formation.

B. Nature of insurance

1. Risk sharing and risk transfer:

Insurance is used to share the financial losses that might occur to an

individual or his family on the happening of specified events. The loss

arising from such events are shared by all the insured in the form of

premium. Example: Suppose in a village, there are 250 houses, each

valued at Rs.200000. Every year one house gets burnt, resulting into a

total loss of Rs 200000. If all the 250 owners come together and

contribute Rs.800 each, the common fund would be Rs200000. This is

enough to pay to the owner whose house gets burnt. Thus the risk of

one owner is spread over 250 house owners of the village.

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2. Risk assessment in advance:

Insurance companies are risk bearers. They assess the risk before

insuring to charge the amount of premium.

3. It is not gambling or charity:

The uncertainty is changed to certainty by insuring property and life

because the insurer promises to pay a definite sum at damage or death.

Insurance is antithesis of gambling. Failure of insurance amounts to

gambling because the uncertainty of loss is always looming. Moreover

insurance is not possible without premium. So it is different from charity

because charity is given without consideration.

4. Huge number of insured people:

It is essential to insure larger number of people or property to make cost

of insurance less consequently premium would also be less.

5. Assists in capital formation:

Insurance provides capital to society. Accumulative funds are invested in

productive channels.

C. Types of insurance

Insurance is broadly classified into two parts covering different types of

risks:

1. Life Insurance: It can be classified as follows:

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Types Meaning

a. Whole Life

Insurance

In whole life assurance, insurance company collects premium

from the insured for whole life or till the time of his retirement

and pays claim to the family of the insured only after his death.

b. Endowment

Insurance

In case of endowment assurance, the term of policy is defined

for a specified period say 15, 20, 25 or 30 years. The insurance

company pays the claim to the family of assured in an event of

his death within the policy's term or in an event of the assured

surviving the policy's term.

cTerm

Assurance

The basic feature of term assurance plans is that they provide

death risk-cover. Term assurance policies are only for a limited

time, claim for which is paid to the family of the assured only

when he dies. In case the assured survives the term of policy,

no claim is paid to the assured.

d. Money Back

Policy

Money back policy is a policy opted by people who want

periodical payments. A money back policy is generally issued

for a particular period, and the sum assured is paid through

periodical payments to the insured, spread over this time period.

In case of death of the insured within the term of the policy, full

sum assured along with bonus accruing on it is payable by the

insurance company to the nominee of the deceased.

2. General Insurance: It can be classified as follows:

Types Meaning

Fire

Insurance

Fire insurance provides protection against damage to property

caused by accidents due to fire, lightening or explosion, whereby

the explosion is caused by boilers not being used for industrial

purposes. Fire insurance also includes damage caused due to other

perils like storm tempest or flood; burst pipes; earthquake; aircraft;

riot, civil commotion; malicious damage; explosion; impact.

Marine

Insurance

Marine insurance basically covers three risk areas, namely, hull,

cargo and freight. The risks which these areas are exposed to are

collectively known as "Perils of the Sea". These perils include theft,

fire, collision etc. Marine cargo policy provides protection to the

goods loaded on a ship against all perils between the departure and

arrival warehouse. Marine hull policy provides protection against

damage to ship caused due to the perils of the sea.

Miscellaneou

s

As per the Insurance Act, all types of general insurance other than

fire and marine insurance are covered under miscellaneous

insurance. Some of the examples of general insurance are motor

insurance, theft insurance, health insurance, personal accident

insurance, money insurance, engineering insurance etc.

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D. Functions of insurance

  Primary functions:

1. Provide protection: Insurance cannot check the happening of the risk,

but can provide for the losses of risk.

2. Collective bearing of risk: Insurance is a device to share the financial

losses of few among many others.

3. Assessment of risk: Insurance determines the probable volume of risk

by evaluating various factors that give rise to risk.

4. Provide certainty: Insurance is a device, which helps to change from

uncertainty to certainty.

Secondary functions:

1. Prevention   of   losses : Insurance cautions businessman and individuals

to adoptsuitable device to prevent unfortunate consequences of risk by 

observing safety instructions.

 2. Small capital to cover large risks: Insurance relives the businessman

from security investment, by paying small amount of insurance against

larger risks and uncertainty.

3. Contributes towards development of larger industries.

Other Function:

Means of savings and investment: Insurance companies are business

houses. The product they sell is financial protection. To succeed and

survive, they must cover their costs, which include payments to cover

the losses of policyholders, as well as sales and administrative

expenses, taxes and dividends

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E. History of insurance industry in India

The insurance industry in India over the past century has gone

through big changes. In India this industry reveals the 360 degree turn.

360 degree turn means that it started in India from being an open

competitive market to nationalization and back to a liberalized market

again.

Insurance industry in India started as a fully private system with no

restriction on foreign participation in the nineteenth Century.

Before independence, a few British insurance companies dominated the

market. Life insurance was first set up in India through a British company

called the Oriental Life Insurance Company in 1818, followed by the

Bombay Assurance Company in 1823 and the Madras Equitable Life

Insurance Society in 1829. All of these companies operated in India but

did not insure the lives of Indians. They were there insuring the lives of

Europeans living in India. Some of the companies that started later did

provide insurance for Indians. But, they were treated as "substandard"

and therefore had to pay an extra premium of 20% or more. The first

company that had policies that could be bought by Indians with "fair

value" was the Bombay Mutual Life Assurance Society startingin1871.

The first general insurance company, Triton Insurance Company Lt

d. was established in 1850. It was owned and operated by the British.

The first general insurance company was the Indian Mercantile

Insurance Company Limited set up in Bombay in 1907. By 1938; the

insurance market in India had nearly 176 companies (both life and non-

life).

After the independence, the industry went to the other extreme. It

became a state-owned monopoly. The industry started to witness a

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problem like fraud. Hence many regulations were put in place to reduce

and control the problems in the industry. After which insurance was

nationalized. In 1956, the then finance minister S. D. Deshmukh

announced nationalization of the life insurance business and then the

general insurance business was nationalized in 1972. Only in 1999

private insurance companies have been allowed back into the business

of insurance with a maximum of 26% of foreign holding.

F. Indian scenario

1. Life insurance:

After the entry of new players and increase in the penetration

levels, could see the insurance sector cross the Rs 2,00,000 core mark

in business by 2010. The current size of the sector is estimated to be at

Rs 50,000 crore, which has seen a compound annual growth rate of

around 175 percent in the last few years.

The insurance sector, both life and non life, is likely to grow by

over 200 percent, and private insurers are expected to achieve a growth

rate of 140 percent as a result of aggressive marketing technique. It

added that state owned insurance companies are likely to be 35-40

percent.

On account of intense marketing strategies adopted by the private 

insurance players, the market share of state-owned insurance

companies like GIC, LIC and others has come down to 70 percent in last

4-5 years from over 97 percent. Despite regulation, the private players

are offering 35 percent rate of return to the policy holders against

20 percent by public-sector insurers.

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2. General insurance:

General insurance in India has been expecting growth except in

some portfolios like motor insurance, fire and engineering. These

portfolios are still under tariff- this means that premium depends on a

fixed predetermined rate structure.

In India, GDS as a proportion of GDP at current prices increased

from 26.1% in 2002-03 to 28.1% in 2003-04. House hold sector

continued to be the major contributor to GDS at 24.3% in 2003-04. This

can be attributed to soft interest rates prevailing in housing

sector. General Insurance has low market penetration. It is 1.95% and

ranks 51st. However in collection of premium it is ranked 23rd. The ratio

of the premium collected to that of GDP is 0.58. The main reason for the

general insurance industry to perform very poorly was because of the

slow settlement of claims. Moreover the rates of claim in India were

highest in the world. It was 70 percent compared to 40 percent

internationally. This meant that out of 100 people who had insured their

commodities 70 claimed for a loss or damage. The main reason for the

lack of demand for general insurance is that people consider it as an

unnecessary expenditure. However it must be noted that the general

insurance has been earning consistent profits and has an efficient

dividend paying record accompanied by a steady growth in its financial

resources. The industry is recognized as one of the largest financial

Institutions in the country. Some of the private players in this sector are-

ICICI – Lombard, Reliance, Royal-Sundaram, Chholamandalam etc

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G. Contribution of the insurance sector to Indian economy

Some surveys have predicted that India and China will play a very

vital role in the years to come. Indian economy can be termed as an

emerging economy as it is doubling its GDP in 3 to 5 years and

moreover it is not dependent on any particular sector for its GDP.

If we look at the GDP of the Indian economy very closely over the

years, we can easily come to know the changing structure of the

economy. We can also come to know the changing contribution of

the various sectors like agriculture, manufacturing and the service

sector. In the financial year 1993-94, agricultural sector contributed to

31%, manufacturing accounted to 26.3% and the service sector

contributed to 42.7% of the total GDP of the country. Thus over

the years as India became an emerging economy in 2003-04

manufacturing sector contributed for 21.7 %, manufacturing contributed

for 26.8 whereas service sector contributed for 51.4% of the total GDP.

There has been 7.5% growth in the total GDP of the country and is

estimated to grow at 8.0% in 2006-07. The Indian economy has shown

signs of strong performance despite a rise in oil prices, high inflation rate

and abnormal rains in many parts of the country. The overall growth of

the Indian economy has been equally supported by all the three sectors

of the economy, i.e. the agriculture, manufacturing and the service

sector. Insurance, together with the banking sector, contributes to about

7.3 % of the total GDP of India, and the gross premium collected

contributes to about 2% of the total GDP of the country.

The insurance sector in India has completed a full circle from being

an open competitive market to nationalization and back to a liberalized

market again. Tracing the developments in the Indian insurance sector

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reveals the 360 degree turn witnessed over a period of almost 200

years.

H. Government policies regarding insurance

Insurance Regulatory and Development Authority (IRDA) 1999

Reforms in the insurance sector were initiated with the passage of the

IRDA bill in December 1999. It was set up as an independent body and it

has been able to frame globally compatible legislations.

The IRDA was set up to protect the interests of holders of insurance 

policies, to regulate, promote and insure orderly growth of the insurance

industry and for matters connected there with or incidental thereto. This

act extends to whole of India. With the establishment of this act,

government amended Insurance act 1938, Life Insurance Act 1956 and

General Insurance Act 1972.IRDA was formed on the recommendations

of Malhotra Committee. In 1999 government of India has set up Malhotra

Committee to examine the structure of insurance industry and

recommend changes, under R.N Malhotra –former governor of RBI.

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THE INSURANCE INDUSTRY: FACTORS OF POSITIVE

PERCEPTION

The insurance industry brings multiple benefits to society. Through the

mechanism of risk analysis and loss compensation, it ensures the

smooth running of the economic system. Through its efforts to reduce

and prevent risk, it represents a decisive factor of individual and

collective welfare. Besides, a number of companies have now adopted a

corporate social responsibility policy, which leads them to

develop initiatives regarding community involvement, to strive to

integrate the environmental concern into their management, and to join

the socially responsible investment movement.

1. The insurance mechanism benefits society in many respects:

The basic function of the insurance sector in modern societies is to

cover a large number of risks through the mediation of contracts that

guarantee compensation to the insured, be they individuals or

organizations, when they experience losses due to a huge variety of

causes. For instance, private health insurance contracts complement

national health systems and enable policyholders to cover escalating

medical costs which is important in several countries that are facing an

ageing population; life and disability insurance contracts provide the

beneficiaries with financial amounts that allow them to live decently;

home insurance contracts protect individual property against theft,

fire and other natural hazards. Public liability insurance covers the

potential damage one could cause to others, e.g. by driving a car; other

contracts protect the subscribers against the accidents of life. Credit

insurance and travel insurance contracts provide the consumer with a

safety net in a number of situations.

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The insurance mechanism is thus essential for individuals: it

enables all of us as citizens to lead our lives free from the fear of being

left with nothing after a tragic event, and to feel a relative sense of

security in our everyday activities. But the insurance mechanism is also

vital for businesses. Accident, fire and theft insurance policies protect

companies against these three basic dangers, thereby enabling the

entrepreneurial spirit to express itself fully. Accident insurance contracts

cover the potential harm a company may cause to its employees. By

compensating injured employees in the case of an accident in the

workplace, employers’ liability insurance avoids the bankruptcy of the

responsible firm should the cost of the claims be too high. Similarly,

customers harmed by a defective product can be compensated by an

appropriate contract of manufacturer’s guarantee insurance.

Insurance for loss of trade can also prove useful, should the

company be unable to carry on its operations after a dreadful event.

Group insurance, transportation insurance, market exploration

insurance, or comprehensive site insurance, are other examples of

contracts which facilitate transactions among economic actors and the

running of firms of all kinds. The insurance mechanism releases

entrepreneurial energies and initiatives and allows economic agents to

create and develop their activities without feeling paralyzed by liabilities

and their potential consequences.

The insurance mechanism therefore ensures the smooth running

of the economic system, and decisively contributes to the freedom

of individuals and to the vitality of the entrepreneurial spirit. Through

its expertise in analyzing risks and compensating losses, the insurance

industry provides a sense of security to all economic and social factors.

Of course, it does not suppress the multiple dangers of life, but it

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significantly reduces the fears associated with them, and therefore

permits everyone to lead their lives with the ability to cope with the sense

of danger. Individuals and businesses alike do not need to hoard

excessive cash reserves to face risk, which releases them to spend and

invest.

Without the insurance mechanism, a number of professionals and

businesses would be at a loss to carry out their duties: surgeons, for

instance, wouldn’t be able to practice, due to the enormity of the

financial consequences of a lawsuit if a problem happened during an

operation. Similarly, transport companies dealing with dangerous

materials, or the most toxic chemical industries, would find themselves

in great difficulty if an accident happened, since the compensations

granted to victims of such accidents by the courts now usually reach

millions of dollars. Besides, even if it cannot assume all the costs of a

natural disaster, the insurance sector plays a role of solidarity in case of

catastrophes and helps the economy to recover. In sum, this industry

has taken such an important place in our modern lives that we can

hardly imagine a developed society without insurance companies.

To conclude, it may be asserted that the insurance sector has

largely contributed to the edification of our complex and sophisticated

economy: without insurance contracts, transactions would be more

difficult and costly, and a great part of them would probably never take

place. And as far as ordinary life is concerned, individuals would be

much more cautious in all that they do, less willing to engage in some of

their risky activities – such as driving a car for instance. Therefore, it can

be said that the insurance sector is almost as indispensable to the

functioning of a modern society as is the legal system that protects

companies and individuals against wrongdoings and crimes.

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2. Insurance companies’ efforts to foster risk reduction and prevention

Beyond risk analysis and loss compensation, the insurance sector

contributes to the reduction of risk in a number of domains. Insurance

companies are interested in reducing risk and avoiding loss for

profitability reasons in the first place: prevention is not only better but

also cheaper than cure. Since insurers – often – bear most of the cost if

a risk happens to become an actual event, they devote considerable

efforts to minimize risks – and potential costs associated with them.

Insurers have applied this sound principle to many areas of their activity.

For individual subscribers, they offer incentives (in the form of

discounts on premiums) to householders who install efficient door locks

and alarms, and to motorists who possess car alarms, immobilizers or

central locking systems; they encourage in the same way those car

owners who take additional safe driving instruction.

As regards insurance for businesses, insurers educate employers

to view risk management as a useful concern that improves safety;

they inspect hundreds of business and public buildings everyday to

check fire safety; they fund research to improve building security

standards (both against fire and crime); they audit company fleets

to monitor the way commercial vehicles are maintained and to

improve driving practices. They also exert continuous pressure on car

manufacturers to influence vehicle design in a sense that improves

security, and have elaborated a rating system which classifies vehicles

according to a number of criteria; manufacturers have a clear interest to

follow insurers’ recommendations, since a good ranking for their vehicles

means lower insurance premiums, and consequently a lower cost of car

ownership for the buyers, who in turn will have a financial incentive to

buy these cars.

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Moreover, insurance companies are strongly involved in promoting

public health: they have started years ago to offer lower premiums for

non-smokers and moderate drinkers. They are now placing the

emphasis on the rehabilitation of individuals who have experienced an

accident, including getting them back to work within a reasonable time,

which is essential for their personal psychological health as well as for

their quality of life. In their efforts to foster risk reduction and prevention,

insurance companies are helped by policyholders themselves, due to a

key principle of the insurance mechanism: the greater the risk, the higher

the premium. In other words, the insured, simple individuals and

large multinationals alike, and whatever the kind of contract they have

signed, have an incentive to reduce the possibility of loss and to take

precautions, in order to minimize the level of the premium they will pay.

On the contrary, should an accident happen, this would result in a higher

price of the premium, especially when the policyholder is responsible for

it.

To sum up, it seems that in many respects, the insurance industry

contributes to improve our lives: it helps businesses to protect

themselves from risk, provides a wide range of services to citizens, and

favors the well-being of society as a whole through a variety of initiatives.

Insurance companies protect the persons against the accidents of life

and provide them with a safety net; they enable entrepreneurs to engage

in risk-taking free from the fear of liabilities, thereby possibly allowing

new technologies to develop; and their interventions have led to the

adoption of higher security standards in several important areas such as

car safety for instance. They also promote public health through

incentives for customers and investments in medical care and

rehabilitation schemes; they conduct inspections in industrial

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establishments on a regular basis to reduce risks and prevent accidents;

they are also involved in research efforts for the prevention of fire and

crime.

3. Insurance companies’ growing interest for socially responsible

investment

Besides, insurance companies are financial institutions, and as

such, they are involved in the management of financial investments.

How do they manage their financial assets? Do they simply adhere to

the dominant conception of the maximization of shareholder value as the

unique objective of the firm, and expect quarterly results of companies

they invest in to be always higher? Insurance companies are big

investors focused on the long-term, and therefore have a preference for

companies that will deliver long-term value. Being themselves experts in

risk analysis, they also take a growing interest in the way the companies

they invest in manage their own risks; increasingly, they play their

role as institutional investors, investigating how the boards of these

companies handle risk issues, looking at the reporting methods that are

implemented, and occasionally advising changes in corporate

governance schemes.

Additionally, some leading insurance companies have also started

to incorporate sustainability-related issues into their investment

decisions. In this regard, it seems that minds are changing at a relatively

fast pace. For the past two decades, the movement of socially

responsible investing (SRI) has kept continuously increasing, in relation

with the alarming visibility of global warming and other environmental

threats, but also with some pressing societal issues such as the rise of

social inequalities and exclusion, child labor in overseas factories, or

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human rights violations. These pioneering, sustainability-oriented

insurance companies, have understood that businesses which

deliberately ignore the societal and environmental dimensions do so

at their own peril: they may experience lawsuits, tarnished reputations,

and see their possibility to operate in important markets significantly

reduced.

A group of leading insurance companies have now adopted clear

policies of socially responsible investment, and have undertaken to

implement them in their asset management practices. By choosing to

integrate environmental and social criteria into their decision- making

process, these companies have joined the movement of socially

responsible investing, which is gaining momentum worldwide.

Socially responsible investing (SRI) consists in the inclusion of

non-financial criteria, such as environmental, social and governance

considerations, into the process of investment decision-making. It thus

aims at achieving non-financial results as well as a financial return. In

today’s society, a number of observers – and scientists alike – suggest

that there is no fundamental contradiction between the promotion of

social or environmental values on the one hand, and the search for

financial gains on the other; on the contrary, the good performance

of socially responsible indices and mutual funds, as well as

several recent studies, support the idea that values-led investing does

not compromise financial gains.

Three main SRI strategies are available for responsible investors:

screening, shareholder activism and community investing. The practice

of screening, the first SRI strategy, consists in choosing securities based

on social or environmental criteria; the choice process may be negative,

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positive, or a combination of both. For instance, negative screening

implies the exclusion of companies that manufacture harmful

products such as tobacco, alcohol or weapons, or that have

developed management practices considered negatively. Alternatively,

positive screening implies buying shares of companies that bring a

positive contribution to society, such as developing renewable energies,

sustainable buildings and organic agriculture, fostering diversity in the

workplace and social inclusion, or other beneficial practices. And of

course, any combination of both strategies is possible. Screening is thus

a selection process, whereby the investor filters the shares that he

prefers to buy or to avoid. However, since the process requires

extensive research into company policies and practices, most

socially responsible investors rely on mutual funds to manage their

investments.

The second option open to socially responsible investors is

shareholder activism. The ownership of company shares provides

investors with rights and responsibilities, and a growing number of

them are using their rights as corporate owners to advocate whatever

Lastly, the third identified SRI strategy resides in community investing.

For instance, financial institutions choosing this path can propose low

interest rate loans to people who earn a low or moderate income, and

who would otherwise be at a loss to finance affordable housing; they can

develop such programs either in poor areas of the cities of rich countries,

or in villages in developing countries. The logic of community investing

can also be applied through micro-insurance for the economically

deprived: for instance in India, Aviva has insured 450,000 people

belonging to this category, almost exclusively poor women, thereby

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enabling them to commence productive activities, for if they are ensured,

they can get a loan, etc.

To a certain extent, the choice of insurance companies to adopt

SRI policies is a matter of consistency between risk management and

financial management: is it appropriate for an insurance company to

invest in tobacco firms with a view to reaping high short-term benefits,

knowing that at the same time these firms manufacture products that

increase public health risks and will generate heavy compensations for

the victims? Belth and Dorfman are right when they claim that insurance

companies should divest their tobacco investments, not only on moral

grounds, but also for good economic reasons. Besides, the choices

made by the insurance industry exert an influence on corporate behavior

in many other sectors, and thus this industry can act as a lever to

encourage positive change in society as a whole. For all these reasons,

the investment policies of the insurance sector have a great effect in

designing the future of our economic system, and they condition our

quality of life and that of our children; therefore the integration of

extra-financial concerns and values in the investment choices of

insurance companies is of great importance.

To conclude this section, it is undeniable that the insurance

industry brings numerous positive contributions to society, and that some

pioneering companies are striving to operate in a more socially

responsible way. However, it is also undeniable that the industry suffers

from a negative image in the public opinion, which may be ascribed to a

variety of causes; the next section will precisely investigate the

underlying causes of this negative perception problem.

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THE INSURANCE INDUSTRY: FACTORS OF NEGATIVE

PERCEPTION

The insurance business is faced with several kinds of ethical issues.

Some of these issues are common to all economic sectors, such as for

instance operations localization, social inclusion, diversity in the

workplace, governance mechanisms, and so on. We will concentrate

here on those issues that are the most pressing for the insurance

industry and that account most for its being negatively perceived by the

public opinion: the uncovering of corporate scandals, misrepresentation

and mis-selling practices, the agents’ remuneration system, the respect

of customers privacy, and the consequences of outsourcing.

1. The uncovering of recent scandals has tarnished the industry’s image

Amid the spate of highly publicized accounting and corruption scandals

that have been uncovered in several high-profile corporations around the

world in recent years, the insurance business has not been spared.

Some of the world’s largest insurers and insurance brokers have been

named in corporate scandals, ranging from bid rigging, price

fixing, improper accounting methods, to overstating earnings. The

adverse publicity generated by these scandals has obviously hurt

the industry’s reputation. Customers, both corporations and

individuals, have criticized the market conduct in the industry. The two

main sectors of the insurance industry – the life insurance business, and

general insurance business – have received their fair share of criticism.

This is from an article in India Today. Indian insurance companies have

collectively lost a whopping Rs.30,401 crore due to various frauds which

have taken place in the life and general insurance segments during the

year, according to a study. The losses work out to about nine per cent of

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the total estimated size of the insurance industry in 2011, the study

carried out by Pune-based company India forensic states said.

The total premium income of the insurance industry, comprising life, non-

life and health, is around Rs.3.5 lakh crore, according to the figures by

Insurance Regulatory and Development Authority (IRDA).

The company has identified collusion between employees of insurance

companies and beneficiaries furnishing false documents, and

manipulation in citing the cause of death as part of the modus operandi

adopted by fraudsters to claim undue insurance benefits. India forensic

carries out regular studies in examining frauds, security, risk

management and forensic accounting and claims to have assisted the

Central Bureau of Investigation (CBI) in the multi-crore Satyam scam.

The life insurance segment accounted for as much as 86 per cent of the

frauds while remaining 14 per cent took place in the general insurance

sector, which includes false claims for cars, houses and accidents, the

report showed. The study also highlighted that the frauds in the life

insurance segment had more than doubled in the last five years while

those related to general insurance sector increased by 70 per cent.

In 2007, insurance firms had lost as much as Rs.15,288 crore, of which

life insurance accounted for 13,148 crore while the general insurance

segment lostRs.2,140 crore. The insurance sector is susceptible to

various frauds in the country. There is an urgent need to have strict

measures, including setting up of a dedicated unit to detect and check

frauds in the companies, said anti-fraud and money laundering expert

Mayur Joshi, who is a founder member of India forensic. However,

insurance experts assert that while it is true that insurance companies

are cheated, the quantum of losses is not as high as the study claims.

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IRDA chairman J. Harinarayan brushed aside the study. He said the

insurance firms are capable enough to protect their interests. However,

he admitted that insurance companies were not reporting scams or other

malpractices in the insurance industry. "It is just a sensational claim. I do

not think so. Insurance companies have not reported to me about such

frauds. Let me see the report first and what it says and how it claims that

a `30,000-crore frauds was committed in 2012 in the insurance sector.

Insurance companies are capable enough to protect their interest,"

Harinarayan told Mail Today on Sunday. LIFE Insurance Council

secretary general S.B. Mathur said, "I think the figures of fraud as

claimed are unrealistic. The fraud committed could be higher in non-life

insurance compared to life insurance companies. However, the total

figure for fraud cannot be as high asRs.30,000 crore. "I went through

reports submitted by the respective insurance companies to their audit

committees which are not open documents. But I have not come across

such mind-boggling figures. It is next to impossible.

The internal laws are not so lax." The study said that clients were

defrauding the insurance companies by not disclosing existing diseases.

This was being done by manipulating the impaneled doctors while

applying for the policy. False age certificates are also being submitted to

become eligible for insurance. The forging of medical bills are the most

common fraud that affect the health insurance sector. In as many as 31

per cent of the total falsified documentation, medical bills were the

common target of the frauds by external parties.

Travel abroad for surgery without disclosing it, or getting a damaged

vehicle insured without disclosing the accident are some of the common

methods of cheating insurance companies, the report states as

examples of frauds in the general insurance sector.

23

To sum up, the fact that these episodes simply reinforces the message

that the negative image faced by the insurance industry is a global issue,

not limited to a given country. These high-profile cases have given

stakeholders the impression that the unethical behavior uncovered does

not only apply to a few black sheep in the insurance business, but

indicates a bigger problem that concerns the entire industry. The

unfavorable media coverage has shaken people’s confidence, and led to

customer suspicion toward insurance companies.

2. The opacity of the insurance business: misrepresentation and mis-

selling practices

One of the sources of the negative image conveyed by the

insurance sector resides in the perceived opacity of the language and

procedures it has developed. For ordinary citizens, insurance

professionals are viewed as specialists in financial techniques, who often

use – and hide themselves behind – an unintelligible jargon. Contracts

are usually fraught with a myriad of obscure clauses, often written in

small print, which prove difficult to understand for the layman.

More generally, the complexity of the market makes comparisons

difficult for customers. Due to the large number of existing companies

and to the variability of available contracts, the insurance arena is very

sophisticated and looks like a jungle; individual customers often lack

reliable elements to assess the offers of different companies. Besides, it

is an obligation for customers – individuals or businesses – to subscribe

various policies (e.g. against fire, accidents, etc.) and they often sense

that the level of the premiums is too high compared to the risks at stake;

they don’t have the necessary knowledge to check that they pay the

right level of price for the service they receive. In sum, subscribers may

24

have the impression of being trapped in a system that is organized to

take their money without caring very much about their real insurance

needs. It is no surprise then that the insurance industry has been the

target of widespread criticism for its commercial practices, often

characterized by misleading advertising, misrepresentation, and mis-

selling – especially in the long-term savings and life insurance

businesses.

A number of financial institutions – not only insurance

companies – have been confronted to consumer protest for not giving

enough information about the products they sold, in particular relating to

the risky aspect of variable income, stock-based investments.

Sometimes, misrepresentations are not deliberately done to deceive

buyers, but are instead due to agents’ lack of product knowledge and

training. Besides, numerous complaints against the insurance industry

concern agents who sell customers products that are unsuitable to them,

in order to meet sales quotas and/or boost their earnings as these

products give the agent higher commission: this is mis-selling. Mis-

selling could also be due to agents giving wrong advice to customers.

The policies are considered mis-sold because they do not meet

customers’ needs. Moreover, it happens frequently in insurance

contracts that charges are hidden, or disclosed only in small print in

advertisements, brochures or policy documents. There are also

instances where insurance agents do not highlight exclusions of the

coverage to customers.

3. Issues linked to the insurance agents’ reward system

The remuneration system of intermediaries for distributing

investment products poses several problems that account for the bad

25

reputation of the savings and life businesses, since it rests on heavily

front-end loaded commission structures. Salespeople in the industry are

often paid commission upfront for the sale of products. Some critics

believe that such a way of rewarding insurance agents is the underlying

cause of unethical behavior as it gives rise to a conflict between the

agent’s and the client’s interests. The commission-based selling system

would generate a bias to over-sell, since this mode of remuneration of

advisers can lead them to push a customer to purchase an investment

product on the basis of the resulting payment it generates for them,

irrespective of the best choice for the customer, who could alternatively

prefer to reduce his/her debt or to hold savings in cash. Moreover, this

system can also bring about a product bias, which occurs when the

adviser has an incentive to recommend a particular investment

product that does not necessarily meet the customer’s needs (supposing

that this time he/she is willing to purchase an investment product), but

that grants them a higher remuneration. For instance, agents are

usually paid more commission for the sale of full life insurance products

than term life ones; it has been alleged that in order to earn more

commission, agents would have a higher tendency to recommend full life

insurance to their clients, whereas term life insurance is much cheaper

for the customer to buy.

The structure of remunerations across products and providers is

really confusing for customers, who often do not understand the

rationale behind it. Whereas an initial cost is associated with the start of

the advice process, ongoing commission (renewal and trail) is a current

practice, the justification of which is not quite clear; the customer is not

always aware of its purpose. As a matter of fact, it is hard to understand

if trail commissions correspond to a deferred initial commission, or if they

26

imply the provision of ongoing advice. The practice of “churning”

customers’ portfolios is also highly questionable. Churning refers to a

sales method in which insurance agents persuade policyholders to

terminate their existing policies after a short period of time and switch to

new, similar ones for no valid reason. In the process, the insurance

agent earns commissions on the new policies sold. Other problems

happen to occur in the customer-advisor relationship, for instance when

the latter refuses to provide feature documents and personal illustrations

if the former does not go through with the transaction.

4. Dilemmas related to the consequences of outsourcing decisions

Another determinant of the bad image conveyed by the

insurance industry may be ascribed to the off shoring trend that has

been rapidly developing during the past few years: insurance companies

have massively delocalized jobs to India, especially to operate their call

centers in this country where wages are largely lower than in the

Western developed world, and also to transfer thousands of back office

staff to separate companies. For instance Aviva has delocalized 6,000

jobs in India – in the cities of Pune, Bangalore and New Delhi and plans

to create 3,000 more jobs while implementing a BOT model, entering

into new types of relationship and governance with Indian partners. Jobs

concerned are not anymore those of phone operators, but are now

extending to back office functions. Similarly, Scottish Widows, an

insurance business belonging to Lloyds TSB, transferred 125 jobs to

New Delhi in September 2005, following a first wave of 40 delocalized

jobs in 2004; Standard Life Investments has transferred administration

jobs to Citigroup and Bank of New York recently, and several other

examples could be quoted here. However, this offshoring and

outsourcing trend raises many complex questions. Certainly, while

27

reducing operating costs in home countries, it contributes to the

development of host-country economies (creating jobs, transferring

know- how, developing skills, paying some taxes, etc), and in some

specific cases it may enhance the quality of service, while bringing

innovations at home. But what are the consequences in terms of

employment in the home country? Does this imply that part of the

workforce should be made redundant, or can the consequences of such

massive staff transfers be amortized, smoothed through the non-

replacement of retirement leaves? In the case of Aviva, in the aftermath

of its move to India, the 3,500 staff in Edinburgh and Perth remained

almost intact, but other sites including Norwich lost 2,500 jobs, according

to ABI, though in reality the number of employees may have increased,

with different jobs created.

And after call centers, back office operations, some administration

jobs, what might be the next step? Due to global competitive pressure,

thanks to IT progress, almost everything – except perhaps the Board

and the top management – could be delocalized to India or other lower

cost countries in Asia or elsewhere, to the appreciation of shareholders

happy to see how such effective cost-cutting offshoring strategy can

improve the bottom line. Overtime, a massive offshoring trend (e.g. in

manufacturing and financial services) can’t but bring increased

unemployment problems in the insurance companies’ home countries,

and it seems that there would be some lack of realism to deny that

simple reality. Besides, isn’t it contradictory for a company to engage

in community investment programs in order to gain a good corporate

citizen image, and at the same time to make decisions that impact

so negatively on the social fabric?

RESEARCH METHODOLOGY

28

Objectives of the study:

1. The main objective of this study was to understand the growth of the

insurance sector in India and to find out the important criteria that people

think about before investing in an insurance policy.

2. To study the reasons of customer’s perception towards insurance,

since India is a very fast developing country.

3. To find out the awareness level of insurance and to recommend

improvement in the different sectors of insurance.

4. To know about the current and future prospects of insurance to the

customers.

Limits of the study:

1. The study of this project is limited to 40 people of Mumbai who have

been questioned to understand the project well.

2. Nearly 90% of the respondent belonged to the age group of 20-50

years and only 10% were above 50 years. So, the responses and the

opinions of the experienced and aged were not available. So,

the findings may not be correct when we think about the opinion of the

elderly people about insurance.

3. The selection of people for the questionnaire was done on the basis

of convenient random sampling, so there were certain cases in which

the people selected did not have any insurance policy, so they could not

give any positive feedback regarding the important criteria to be

considered before taking an insurance policy. So, this further reduced

the actual number of respondents to 30 from 40.

Methodology used:

29

1. Primary data:

a. Survey: Questionnaire distributed among 40 people out of which 30

were insurance policy holders

2. Secondary data:

a. Internet

b. Reference books by various authors and newspapers

c. Case-studies

SURVEY AND DATA ANALYSIS

30

Below 30 30-40 40-50 Above 500

2

4

6

8

10

12

14

AGE

30%

35%

25%

10%

ANNUAL INCOME

Below 1 lakh1-3 lakh3-5 lakhAbove 5 lakh

31

Interpretation: It was founded that 83% customers who have taken the

policy are job oriented or having some kind of business.

Very costly Not needed Lack of awareness

Lack of trust Complex products

0%

5%

10%

15%

20%

25%

30%

35%

REASONS FOR NOT BUYING AN INSURANCE POLICY

Interpretation: the main reason for not buying insurance is either people

feel it is not required or they lack trust dues to various insurance frauds.

32

Interpretation: The main cause of taking the insurance policy by majority

of consumer is future security followed by tax saving.

60%

40%

APPROACH

Company approachOthers

Interpretation: It was founded that 60% people have taken policy

because of company approach and rest bought either by their approach

or other reasons

33

44%

66%

SECTOR

PrivatePublic

Interpretation:

After the survey it was found that still major portion of customers go for

public insurance companies because of the trust factor, but with the

entry of more and more private companies the scenario is changing

rapidly, people who need more and better returns are opting for private

companies, and this can be justified by the increasing market share of

private companies in the Indian insurance sector. There are various

ways in which private companies are found much more lucrative than

public companies and the fact which support this statement are as

follows:

1. Versatility of products

2. Efficient fund managers

3. Better customer services

4. More returns

5. Regular follow up

6. Quicker settlement

34

Premuim Services Accessibility Company image and reputation

0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

FACTORS CONSIDERED WHILE TAKING A POL-ICY

Interpretation: Now if we consider one of the criteria we can see that

45% of the respondent has rated premium as the most important factor

that they consider before taking any insurance policy from any company.

So, it can be clearly interpreted that premium that the policy holder has

to pay to continue his/her policy plays a very important role before

selecting the terms and conditions of the policy and also the

company from which the policy is to be taken.

There were many respondents who think that many of the companies

provide them satisfactory services only till the policy is being taken by

the respondent, but after that if there is any requirement from the point of

view of the customer, the company does not pay the same attention to

them as they had paid earlier. So, nearly 20% of the respondents feel

that services (both pre and post sales) provided by the company is

highly important to consider before undertaking any kind of life

insurance policy.

The term accessibility refers to the easy availability of the facilities that

the company provides to its customers. The facilities may be regarding

35

information about the company and the various products offered by

them, it can be made available through internet and other media.

According to the study 10% of the respondents think it is an important

factor while that one may consider before taking any insurance policy.

Company image also plays a very important role in influencing the

decision of a prospective customer while taking the final decision. From

the study it has been found out that nearly 30% of the people feel that it

plays a significant role in their decision making.

To further analyze the perception of the respondents about what they

think as the important criteria before taking an insurance policy, two

independent parameters can be considered:

a) Age of the People

b) Annual Income of the People.

After taking these two independent parameters, the analysis is being

made to see which age group people think what criterion is important or

what is the difference in perception among the people who have annual

income which are significantly different from each other.

36

Below 30 31-40 41-50 Above 500%

5%

10%

15%

20%

25%

30%

35%

40%

45%

AGE-PERCEPTION

PremuimServicesAccessibilityCompany image

People who belong to the age group of less than 30 consider premium

as the highly important criterion in comparison to the people who belong

to an age group of 30-40. So, people who have started their professional

life consider more about the money that has to be spent on the

insurance policy in comparison to the people who are working for a

relatively longer period of time. Again, if we consider those people 41-50

years who have come to the important stage of their working life, we can

say that these people also think that the expense regarding the premium

to be paid is the highly important criteria for them because they likely to

spend or save their money on medical, education etc.

In this case, we can conclude that the people who belong to the age

group of less than 30 years who may be taking an insurance policy for

the first time, give much importance on services in comparison to the

people belonging to the age group of 30–40, who put more emphasis on

the other benefits than services provided by the company.

We can say that not much importance is given to the accessibility criteria

by the respondents belonging to below 30 and 31-40 years. But only

37

respondent belonging to 41-50 years consider that it is highly important,

because of their long period of working age they like to get easy

availability of the products offered.

In the case of company image also, we see most of the respondents of

the age group 41-50 consider it an important criterion. This is mainly

because people feel secure and comfortable of their money which they

spend on the company which has a brand name or image.

Below 1 lakh 1-3 lakh 3-5 lakh Above 5 lakh0%

5%

10%

15%

20%

25%

30%

35%

40%

45%

50%

ANNUAL INCOME- PERCEPTION

PremiumServicesAccessibilityCompany image

In this scenario mostly the respondents of all the annual income groups

think that premium to be paid in a policy is the most important criterion,

even though the income increases it is considered to be the highly

important.

If we consider the services provided by the company we can see that the

people who are having less income put more emphasis on this criterion

because people are more conscious about their money than the people

who belong to 1-3 lakh. So, they expect better services for their money

38

even though it is less and among all respondents above 5 lakh who have

more job responsibility also think of service as a highly important

criterion for decision making.

If we consider the accessibility as one of the criterion for taking

insurance policy, we can see that as the income of the person increases,

they put less importance on the accessibility criterion.

When we compare company image among different age groups and

annual income groups we find similar opinion, considering that it is highly

important for decision making. This mainly because people feel safe and

secure with the company they invest.

30%

20%

50%

USE OF INTERNET

PurchaseSeeking informationTraditional methods

RECOMMENDATION AND CONCLUSION

One of the most striking and positive findings from the survey is that the

reputation of the insurance industry has not been tarnished by various

frauds. The majority of customers still have reasonably high satisfaction

levels and are confident that their products meet their needs. But there is

no room for complacency: for a significant minority of customers,

39

insufficient information about product suitability is creating a lack of

confidence that their product is right for their needs. Customers are

looking for value to be clearly demonstrated, reflecting a balance of

price, product features and service tailored to their needs. They also

expect the buying process to be convenient and transparent, allowing

them to buy with confidence. In non-life insurance, price is often the

main measure of value since products are more comparable and

frequency of purchase drives greater customer familiarity. Brand and

reputation are more important criteria.

In every case it was found that customers intend to do more research

using the internet, even if they ultimately rely on conventional channels

for purchase. Majority of the customers continue to have a high

preference for personal interaction including agents/brokers and direct

channels to actually complete the purchase, with the main reason being

the need for expert assistance because the products are too complex.

The degree of use of online by customers also varies by type of

transaction; some customers are happy to use the internet to make a

purchase but not to deal with a claim but most respondents still wanted a

mix of online and personal contact.

Customers want to build relationships with providers they trust and who

make it convenient for them. Insurers must except this challenge and

adjust to live up to this expectation. The reason for switching providers is

that the provider is unable to respond to their changing needs. Another

key area where insurers can encourage longer-term relationships is

through rewarding loyalty. Consumers are used to many other industries

rewarding their loyalty, such as supermarkets, airlines or hotels, and

they expect the same from insurers. The following are a few

recommendations and suggestions to help the insurance companies to

40

bring about a positive perception in the minds of the customers towards

insurance:

Integrating online and offline channels seamlessly to meet

changing customers’ needs over the product life cycle.

Making sales and renewal simple and convenient for customers

across whichever channel or medium they chose.

Understanding how to personalize service and show customers

they are valued, particularly in an ever more digital environment.

Putting the customer, rather than the intermediary, at the center of

the business model, and using customer data to develop deep

insight into their needs and to offer the right product, at the right

time, to the right customer, and to follow through with service that

responds to their changing needs

Providing a suite of simple and transparent products, tailored to life

stage needs that customers can understand and buy with

confidence.

Making it easy to access relevant products and information

throughout the product life cycle, particularly online, but supported

by trusted personal interaction where necessary.

Building trust by delivering a great customer experience and

anticipating and responding to customers’ changing needs.

Rewarding customers’ loyalty with incentives that recognize

multiple purchasing and value of the overall relationship.

Improving customer retention by addressing the underlying causes

of lapses and being better at meeting their changing needs and

expectations over the life cycle

Consumer should be aware of company’s profile and returns

associated with insurance.

41

The Financial advisor should be right enough to serve the

consumers. The consumer should also be aware of the advisor or

others who is looking after their investments.

Company should publish their performance by comparing it with

their competitors.

BIBLIOGRAPHY

Websites:

1.http://www.indianexpress.com/news/huge-potential-in-untapped-

market/732418/3

2.http://topics.nytimes.com/topics/reference/timestopics/subjects/i/

insurance/index.html

3. http://articles.cnn.com/keyword/health-insurance

4. http://www.eurojournals.com/EJSS_25_2_09.pdf

42

5. http://businesstoday.intoday.in/story/insurance-cover-health-

insurance-profit-fraud-fake-data/1/22898.html

Books:

1. Principles of insurance By William Franklin Gephart

2. Consumer perception of credit insurance on retail purchases By Joel

Huber

3. Perception of Service Quality and Loyalty: Among Customers of

Insurance Companies: A Comparative Analysis by Djalalie Itana Ayana

4. Delivering Quality Service:  Balancing Customer Perceptions and

Expectations by Valarie A Zeithaml

APPENDIX

Survey about insurance:

1. Name: _______________________________________

2. Age:

Below 30 31-40 41-50 Above 50

3. Annual income:

Below 1 lakh 1-3 lakhs 3-5 lakhs 5 lakhs does not

work

4. Do you have an Insurance Policy with any Insurance Company?

43

Yes No

a) If yes, name the company

__________________________________  

b) Name the policy which you own

______________________________

c) If no, reason for not buying an insurance

________________________

5. What is the main reason for buying an insurance policy?

Future security Future investment Tax benefits

6. What factors do you consider while selecting a life insurance

company?

Premium Company Reputation and image Services

Accessibility

7. What made you decide to purchase an Insurance policy?

Company approach Friends Family Advertisements

Others

8. For what purpose do you use internet taking insurance into

consideration?

Purchase of insurance Seeking information Traditional

channels only

9. Any suggestions for improving the service offered by insurance

companies:

44

_________________________________________________________

_________________________________________________________

______

45