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INSURANCE COMPANIES- Life Insurance - General Insurance

10/19/09

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10/19/09

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MEANING OF INSURANCE Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premium, to pay the other party called insured a fixed amount of money on the happening of certain event. Insurance indemnifies assets and income. Every asset (living and non-living) has a value and it generates income to its owner. The income has been created through the expenditure of effort, time and money.10/19/09 4

MEANING OF INSURANCE contdEvery asset has expected lifetime during which it may depreciate and at the end of life period it may not be useful, till then it is expected to function. Some times it may cease to exist or may not be able to function partially or fully before the expected life period due to accidental occurrences like burglary, collisions, earthquakes, fire, flood, theft, etc. These types of possible occurrences are risks.

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MEANING OF INSURANCE contdFuture is uncertain, no body knows what is going to happen? It may or may not? Insurance is the concept of risk management the need to manage uncertainty on account of above stated risks. Insurance is a way of financing these risks either fully of partially. Insurance industry has both economic and social purpose and relevance Insurance business in India can be broadly divided into two categories such as Life Insurance and General Insurance of Non-life insurance.10/19/09 6

Phase

HISTORY OF INSURANCE IN INDIAPeriod Industry1818 to 1956 Many (245) private sector companies only, (about 138 yrs) competitive market. 1850 to 1972 Many (107) private sector companies only, (about 122 yrs) competitive market. 1956 to 2000 (about 44 yrs) 1972 to 2000 (about 28 yrs) Nationalization, public sector or State monopoly, only one company. Nationalization, public sector monopoly, only one company with its four subsidiaries.

Phase I a. Life Insurance b. General Insurance Phase II a.Life Insurance b.General Insurance

Phase III Life Insurance and General Insurance

After 2000

Opened to the entry of private domestic and foreign companies, mixed sector of public and private sector units, oligopoly of public sector companies (14 life insurance and 12 general insurance companies)7

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HISTORY OF INSURANCE IN INDIA contd..-1818 First life insurance company Oriental Life Insurance Company (in Calcutta). - 1850 First general insurance company Tritan Insurance Company (in Calcutta) - Till 1956/1972 life and general insurance industry grown in terms of number of companies (life 245 and General 107 with complete private sector ownership), the volume of premium, investible resources, and so on. And both type of insurance companies were competitive. - The insurance was regulated through the Insurance Act, 1938. - The picture changed after the Independence.10/19/09 8

HISTORY OF INSURANCE IN INDIA contd..- In 1956, 245 Indian and Foreign life insurers and provident societies were nationalized, and new single entity namely LIC was established by passing the LIC Act, 1956. - Similarly, in 1972, 107 general insurers were nationalized through the passing of General Insurance Business (Nationalisation) Act, 1972. - The existing 107 insurers were amalgamated and grouped into Five companies, viz., National Insurance Company (NIC), New India Assurance Company (NIAC), Oriental Insurance Company (OIC), United India Insurance Company (UIIC), and General Insurance Corporation (GIC). - Then insurance industry transformed into monopoly and Oligopolistic state or public sector insurance industry in India.10/19/09 9

1818 - Establishment of British firm Oriental Life Insurance Company in Calcutta 1823 - Establishment of Bombay Life Assurance Company 1912 - The Indian Life Assurance Companies Act 1912 (First statutory measure to regulate Life Insurance business) 1938 The Act 1928 was consolidated and amended by the Insurance Act with effective control over the activities of insurers 1950 The Act was amended resulting in far reaching changes in the insurance sector, including, a statutory requirement of equity capital for companies carrying on life insurance business, ceiling on share holdings in such companies, strict control on investments, submission of periodical returns relating to investments and such other information to the controller.

CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR

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CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR cotd 1956 154 Indian insurers, 16 foreign insurers and 75 provident societies were carrying on life insurance business in India mostly concentrated in Urban Areas 1956 January 19, the management of life insurance business of 245 Indian and Foreign insurers and provident fund societies, then operating in India, was taken over by the Central Government. By an Act of Parliament, viz., LIC Act 1956, with a capital contribution of Rs.50 million, Life Insurance Corporation (LIC) was formed in September 1956. 1971 Management of Non-Life insurers was taken over by the Central Government as a prelude to nationalization10/19/09 11

of organized trade and Industry. 107 insurers including branches of foreign companies operating in the country were amalgamated and grouped into four companies, viz., The National Insurance Company Ltd., The Oriental Insurance Company Ltd., The New India Assurance Company Ltd., and The United India Insurance Company Ltd. 1973 Watershed in the history of General Insurance Business in India. The General Insurance Business was nationalized with effect from January 1, 1973 by the General Insurance Business (Nationalisation) Act, 1972. GIC was incorporated as a company in 1972 and commenced business on January 1st 1973. 1993 First Step to Liberalisation. In April 1993 Malhotra Committee formed to recommend measures to deregulate Indian Insurance Sector, and submitted its report in January 1994.

CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR cotd 1972 General insurance was urban-centric, catering mainly to the needs

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LIBERALISATION OF INSURANCE SECTOR 1990s saw the emergence of liberalisation. Liberalisation meant lifting government controls, permits, licenses and allowing competition to play its role in the economy. With respect to the insurance business, liberalisation means allowing private enterprises, including MNCs, to operate in the area that was hitherto monopolised by the Government of India. As a first step towards allowing private sector entry, Government of India appointed a committee under the chairmanship of Sri. Malhotra. The Committee submitted its report in 1994, recommended, among after things, that the insurance sector in India be thrown open to private sector. Government accepted the recommendations and allowed private players to offer insurance cover to Indian citizens.10/19/09 13

MALHOTRA COMMITTEE RECOMMENDATIONSStructure Government stake in the insurance Companies to be brought down to 50 per cent. Government should take over the holdings of GIC and its subsidiaries, to act these as independent companies. All insurance companies should be given greater freedom to operate. No special dimension is given to government companies. Increase of capital base of LIC and GIC up to Rs. 200 crores, half retained by the government and the rest sold to the public at large with suitable reservations for its employees.10/19/09 14

MALHOTRA COMMITTEE RECOMMENDATIONS ContdCompetition Private Companies are allowed to enter insurance industry with a minimum paid up capital of Rs. 1billion. No company should deal in both Life and General Insurance through a single entity. Foreign insurance may be allowed to enter the industry by floating an Indian company as joint venture with Indian partner. Postal Life Insurance should be allowed to operate in the rural market. Only and one State Level Life Insurance Company should be allowed to operate in each State.10/19/09 15

MALHOTRA COMMITTEE RECOMMENDATIONS ContdRegulatory Body Establishment of a strong and effective insurance regulatory body in the form of a statutory autonomous board on the lines of SEBI. Controller of Insurance to be made independent Investments Mandatory Investments of LIC Life Fund in government securities to be reduced from 75 per cent to 50 per cent. GIC and its subsidiaries are not to hold more than five per cent in any company (the current holdings to be brought down to this level over a period of time)10/19/09 16

MALHOTRA COMMITTEE RECOMMENDATIONS ContdCustomer Service LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in insurance industry.

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WHY LIBERALISATION OF INSURANCE SECTOR? To avoid monopolized (by the State run LIC and GICs) market. Create awareness in urban areas about the needs and benefits of insurance. To reduce the yawning gap between the needs of customers and products being offered by the state owned companies. To mobilize funds from the economy for the infrastructure development. To provide multiple innovative products. To provide better customers service from existing state owned players.10/19/09 18

INSURANCE INDUSTRY IN INDIA

Public Sector

Private Sector

Life

General

Life ( 16 Companies)

General (09 Companies)

GIC and its Four subsidiaries Post Office Insurance19

LIC of

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