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Insurance

Source : IW Committee, JBIMS

1) Background of the Industry

    India insurance is a flourishing industry, with several national and international players competing and growing at rapid rates. Thanks to reforms and the easing of policy regulations, the Indian insurance sector been allowed to flourish, and as Indians become more familiar with different insurance products, this growth can only increase, with the period from 2010 – 2015 projected to be the ‘Golden Age’ for the Indian insurance industry.

India Insurance: History

 The history of the Indian insurance sector dates back to 1818, when the Oriental Life Insurance Company was formed in Kolkata. A new era began in the India insurance sector, with the passing of the Life Insurance Act of 1912.

The Indian Insurance Companies Act was passed in 1928. This act empowered the government of India to gather necessary information about the life insurance and non-life insurance organizations operating in the Indian financial markets.

The Triton Insurance Company Ltd formed in 1850 and was the first of its kind in the general insurance sector in India. Established in 1907, Indian Mercantile Insurance Limited was the first company to handle all forms of India insurance.

Historical Development

19th c The insurance company market was set up in India by British offices such as Commercial Union Assurance, which established an operation in Kolkata (Calcutta) in 1862.

1907 National Insurance Co was established in Calcutta.

1923 The Workmen’s Compensation Act was passed.

1938 The Insurance Act consolidated a number of previous ordinances and regulations concerning insurance.

1950 Following a report prepared by a committee chaired by Sir Cowasji Jehangir, important amendments were made to the 1938 act. These included measures to strengthen the financial structure of insurance companies, particularly life offices following a series of insolvencies.

1956 Life insurance companies were nationalised and the Life Insurance Corporation of India (LIC) was established and granted a monopoly of writing life business.

1972 The government nationalised all general insurance business both domestic and foreign.

1974 The nationalised companies were merged to form the four subsidiaries of the General Insurance Corporation of India, namely National, New India, Oriental and United India.

1994 The Malhotra Committee recommended the privatisation of the insurance industry.

1999 The Insurance Regulatory and Development Authority Act was passed. It established a new regulatory authority and approved the entry into the market of private insurers, abolishing the monopolies previously enjoyed by the state-owned General Insurance Corporation of India (non-life) and its four subsidiaries and the Life Insurance Corporation of India (LIC).

2000 The first applications for the registration of private insurers, most with minority foreign shareholders, were processed by the regulator, the Insurance Regulatory and Development Authority (IRDA), and approved.

2002 Regulations for the control of brokers were issued following the passage of the Insurance (Amendment) Act.

2007 Non-life tariffs except those for compulsory third party motor insurance and terrorism were abolished.

2008 A terrorist attack on Mumbai resulted in the deaths of 179 people and extensive damage to property particularly to two luxury hotels

 2) Key Terms and Jargons used in the Industry

 What Is Insurance?

Insurance is a form of risk management in which the insured transfers the cost of potential loss to another entity in exchange for monetary compensation known as the premium.

Types of Insurance

Life Insurance – It is bought in order to secure one’s life by paying premiums to the insurance companies for ac certain period of time.

Non Life Insurance: It is related to the non living things such as house, motor, factory, office, property, etc…..

 Fundamentals Of Insurance

How does insurance work?

Insurance works by pooling risk. What does this mean? It simply means that a large group of people who want to insure against a particular loss pay their premiums into what we will call the insurance bucket, or pool. Because the number of insured individuals is so large, insurance companies can use statistical analysis to project what their actual losses will be within the given class. They know that not all insured individuals will suffer losses at the same time or at all. This allows the insurance companies to operate profitably and at the same time pay for claims that may arise. For instance, most people have auto insurance but only a few actually get into an accident. You pay for the probability of the loss and for the protection that you will be paid for losses in the event they occur.

Risks

 Life is full of risks – some are preventable or can at least be minimized, some are avoidable and some are completely unforeseeable. What’s important to know about risk when thinking about insurance is the type of risk, the effect of that risk, the cost of the risk and what you can do to mitigate the risk. Let’s take the example of driving a car.

Type of risk: Bodily injury, total loss of vehicle, having to fix your car

The effect: Spending time in the hospital, having to rent a car and having to make car payments for a car that no longer exists

The costs: Can range from small to very large

Mitigating risk: Not driving at all (risk avoidance), becoming a safe driver (you still have to contend with other drivers), or transferring the risk to someone else (insurance) Let’s explore this concept of risk management (or mitigation) principles a little deeper and look at how you may apply them. The basic risk management tools indicate that risks that could bring financial losses and whose severity cannot be reduced should be transferred. You should also consider the relationship between the cost of risk transfer and the value of transferring that risk.

Risk Control

There are two ways that risks can be controlled. You can avoid the risk altogether, or you can choose to reduce your risk.

 Risk Financing

If you decide to retain your risk exposures, then you can either transfer that risk (ie. to an insurance company), or you retain that risk either voluntarily (ie. you identify and accept the risk) or involuntarily (you identify the risk, but no insurance is available).

 Risk Sharing

 Finally, you may also decide to share risk. For example, a business owner may decide that while he is willing to assume the risk of a new venture, he may want to share the risk with other owners by incorporating his business. So, back to our driving example. If you could get rid of the risk altogether, there would be no need for insurance. The only way this might happen in this case would be to avoid driving altogether. Also, if the cost of the loss or the effect of the loss is reasonable to you, then you may not need insurance. For risks that involve a high severity of loss and a low frequency of loss, then risk transference (ie. insurance) is probably the most appropriate protection technique. Insurance is appropriate if the loss will cause you or your loved ones a significant financial loss or inconvenience.

Do keep in mind that in some instances, you are required to purchase insurance (i.e. if operating a motor vehicle). For risks that are of low loss severity but high loss frequency, the most suitable method is either retention or reduction because the cost to transfer (or insure) the risk might be costly. In other words, some damages are so inexpensive that it’s worth taking the risk of having to pay for them yourself, rather than forking extra money over to the insurance company each month.

Underwriting

Underwriting is the process of evaluating the risk to be insured. This is done by the insurer when determining how likely it is that the loss will occur, how much the loss could be and then using this information to determine how much you should pay to insure against the risk. The underwriting process will enable the insurer to determine what applicants meet their approval standards. For example, an insurance company might only accept applicants that they estimate will have actual loss experiences that are comparable to the expected loss experience factored into the company’s premium fees. Depending on the type of insurance product you are buying, the underwriting process may examine your health records, driving history, insurable interest etc.

The concept of “insurable interest” stems from the idea that insurance is meant to protect and compensate for losses for an individual or individuals who may be adversely affected by a specific loss. Insurance is not meant to be a profit center for the policy’s beneficiary. People are considered to have an insurable interest on their lives, the life of their spouses (possibly domestic partners) and dependents. Business partners may also have an insurable interest on each other and businesses can have an insurable interest in the lives of their employees, especially any key employees.

Insurance terminology you should know:

 Premium: An insurance premium is the actual amount of money charged by insurance companies for active coverage. An insurance premium for the same service can vary widely among insurance providers, which is why experts strongly recommend getting several quotes before committing to an insurance policy. Insurance agents or brokers will take your basic information and calculate an insurance premium estimate based on your answers and other factors. The lowest quoted price on an insurance premium may be the better bargain, but the level of coverage may also be lower.

The cost of an insurance premium is largely based on statistics, not necessarily on individual habits or history.

An insurance premium is generally collected in monthly or semi-yearly payments. If the policy holder fails to make a scheduled payment, the insurance company can choose to cancel the policy entirely. This is often referred to as a ‘lapsed policy’. Either the customer will pay the balance of the insurance premium and become reinstated or the policy will become null and void. Because the billing cycle can be lengthy, it is not unusual for policy holders to forget to make a payment before the policy lapses.

 Bound:

Once the insurance has been accepted and is in place, it is called “bound”. The process of being bound is called the binding process.

 Insurer: A person or company that accepts the risk of loss and compensates the insured in the event of loss in exchange for a premium or payment. This is usually an insurance company.

Insured: The person or company transferring the risk of loss to a third party through a contractual agreement (insurance policy). This is the person or entity who will be compensated for loss by an insurer under the terms of the insurance contract.

 Insurance Rider/Endorsement: An attachment to an insurance policy that alters the policy’s coverage or terms policy may be purchased to cover losses above the limit of an underlying policy or policies, such as homeowners and auto insurance. While it applies to losses over the dollar amount in the underlying policies, terms of coverage are sometimes broader than those of underlying policies.

Insurable Interest: In order to insure something or someone, the insured must provide proof that the loss will have a genuine economic impact in the event the loss occurs. Without an insurable interest, insurers will not cover the loss. It is worth noting that for property insurance policies, an insurable interest must exist during the underwriting process and at the time of loss. However, unlike with property insurance, with life insurance, an insurable interest must exist at the time of purchase only

India Insurance Policies at a Glance

 Indian insurance companies offer a comprehensive range of insurance plans, a range that is growing as the economy matures and the wealth of the middle classes increases. The most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance.

Due to the growing demand for insurance, more and more insurance companies are now emerging in the Indian insurance sector. With the opening up of the economy, several international leaders in the insurance sector are trying to venture into the India insurance industry.

3) More on Insurance industry

In 2008-09, non-life insurance premiums amounted to INR 260.1bn (USD 5.37bn) an increase of 5.60% over the previous year.

Part of the reason for the relatively modest increase and related unprofitability was the fact that following the abolition of tariffs, the free market found itself in a fiercely competitive price war, not least in property. In many cases rates touched rock bottom. This has prompted market practitioners to comment ruefully that ”premiums are what brokerage used to be”. It is understood that all too often there has been little or no risk underwriting and that insurers strive to retain important business at any price.

At the same time, underwriting profits have been very scarce in spite of the fact that there have been no major natural hazard losses since the catastrophic floods in Mumbai in 2005 when insurance losses amounted to INR 35bn (USD 794mn). The losses registered by the Indian Motor Third Party Pool which covers commercial vehicles and is shared amongst all non-life insurers have been having a particularly negative influence on results.

In 2008-09, overall underwriting losses for the non life market as a whole amounted to INR 53.26bn (USD1.10bn) compared to INR 38.99bn (USD 896.22mn) in 2007-08. (Source: IRDA Annual Report 2008-09)
Overall profit, however, has been achieved thanks to satisfactory investment income at a time when interest rates have been high.

In the middle of 2010, insurance sources were of the opinion that probably the bottom of the rating cycle had been reached and that increases would begin to emerge. Indeed there was already some evidence at that time to suggest that a hardening of rates had started particularly in policies in which coinsurance
partners could agree premium increases.
Pressure to return to more realistic rating levels has come from the “market’s preferred national reinsurer”, the General Insurance corporation of India (GIC Re), which tightened its 2010-11 renewal terms for its domestic ceding companies due to the very poor technical results. The companies have been restricted as to the volume of coinsurance business that they can cede to their automatic treaties and also the amount of facultative business they can write.

This could result in more facultative business being ceded to foreign
markets. The GIC Re says that this is worth the price.
As from 1 April 2010 further remedial measures involving enhanced deductibles for property and engineering classes have been introduced on a voluntary basis by the insurers themselves.

Gradually private insurers are eroding the state-owned companies’ market share. Should the proposed increase in permissible foreign ownership (from 26% to 49%) be approved by parliament the impact on market share could be considerable.

In so far as specific non-life classes are concerned, demand for construction (CAR) and product liability, for example, is growing. Demand for the former is driven by the huge number of current development projects in India and the latter by the increasing exposure generated by exported goods, not least those sent to North American destinations. Motor insurance is written at a loss, and inadequate pricing is a problem. Third party claims are a major contributor to the unprofitability of this class. Marine cargo is no longer looked upon as a “loss leader” but is expected to stand on its own feet as far as rating is concerned.
There is evidence to suggest that because of intense competition for corporate business, more private insurers are turning to “consumer lines” ie personal accident, motor, homeowners’ and the like.

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