Dissertation Project Report on a Comparative Analysis

DISSERTATION PROJECT REPORT ON A COMPARATIVE ANALYSIS OF LIFE INSURANCE CORPORATION AND PRIVATE INSURANCE COMPANIES Report submitted in partial fulfillment of the requirements for Post Graduate in Management PROJECT GUIDE: SUBMITTED BY: Prof. Usha Kiran Rai Shashank Tripathi FMS BHU MBA IV Sem (Finance) FMS BHU CONTENTS ÿ Acknowledgement ÿ Introduction ß Concept of Insurance ß Global Insurance Industry ß Performance of Indian Industry ß Insurance sector reforms in India ß New avenues for growth of the Insurance industry ÿ Research Methodology ß Research Objectives ß Research Design ß Research Process ß Limitations of the Study ß Significance of the study ÿ Analysis and Interpretation ÿ Findings & Conclusions ÿ References 2 ACKNOWLEDGEMENT I must acknowledge my indebtedness to various personalities, but for whom, this project could not have seen the light of the day. I am profoundly grateful to Prof. Usha Kiran Rai, Faculty of Management Studies, BHU who agreed to become my mentor and guide for the project and gave me the opportunity to

work on this project. I am also grateful, for her support and guidance throughout this project with valuable information and giving me a better insight of the things, without which the successful culmination of this project would not have been possible. Not only did she inspired me throughout the progress of the project, but, also motivated me to get an insight into the field of my work. I would also like to extent my immense gratitude to Prof. A. K. Agrawal, and respected Dean Prof. Deepak Barman, Faculty of Management Studies, BHU who allowed me to choose the topic for my Dissertation. Shashank Tripathi 3 CHAPTER 1 INTRODUCTION 4 1. CONCEPT OF INSURANCE : Life has alwa ys been an uncertain thing. To be secure against unpleasant possibilities, alwa ys requires the utmost resourcefulness and foresight on the part of man. To pra y or to pay for protection is the spirit of the humanity. Man has bee n accustomed to pray God for protection and security from time immemorial. In modern days Insurance Companies want him to pay for protection and security. The insurance man says "God helps those who help themselves"; probably he is correct. Too many people in this countr y are not in employme nt; and work for too many no longer gua ra ntees income security. Several millions are part-time, self employed and low-earning workers living under pitiable circumstances where there is no security cover against risk. Further the inherent changing employment risks, the prospect of continual change in the work place with its attendant threats of unemployment and low pa y especially after the ad option of New Economic Polic y and the imminent life cyc le r isks - a new source of insecurity which inc ludes the cha nging demands of family life, sepa ration, divorce and elderly dependents ± are tormenting the society. Risk has become central to one's life. It is within this background life insurance polic y has been introduced by the insurance companies covering risks at various levels. Life insurance coverage is aga inst disableme nt or in the event of death of the insured, economic support for the dependents. It is a measure of social security to livelihood for the insured or dependents. This is to make the right to life meaningful, worth living and right to livelihood a me ans for sustenance. Therefore, it goes without saying that an appropriate life insurance policy within the paying capacity and means of the insured to pay premium is one of the social security measures envisaged under the India n Constitution. Hence, right to social security, protection of the

family, economic empowerment to the poor and disadvantaged are integral part of the right to life and dignity of the person gua ranteed in the constitu tion. Man finds his security in income (money) which enables him to buy food, clothing, shelter and other necessities of life. A person has to earn income not only for him self but also for his dependents, viz., wife and children. He has to provide le gally for his family needs, and so he has to keep aside something regularly for a rainy day and for his old age. This fundamental need for security for self and depende nts proved to be the mother of invention of the institution of life insurance. 5 What is Insurance : The business of insurance is related to the protection of the economic values of assets. Every asset has a value. T he asset would have been created through the efforts of the owner. The asset is valuable to the owner, because he expects to get some benefit from it. The benefit ma y be an income or some thing else. It is a benefit be cause it meets some of his needs. In the case of a factory or a cow, the product generated by is sold and income generated. In the case of a motor car, it provides comfort and convenienc e in transportation. There is no direct income. Every a sset is expec ted to last for a certain period of time during which it will perform. After that, the benefit may not be available. There is a life-time for a machine in a factory or a cow or a motor car. None of them will la st for ever. The owner is aware of this and he can so manage his affairs that by the end of that period or life-time, a substitute is ma de ava ilable. Thus, he makes sure that the value or income is not lost. However, the asset ma y get lost earlier. An accident or some other unfortunate event may destroy it or make it non-functional. In that case, the owner and those deriving benefits from there, would be deprived of the benefit and the planned substitute would not have been ready. There is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the effect of such adverse situations. Insurance, in law and economics, is a form of risk management primarily use d to hedge against the risk of a contingent loss. Insurance is de fined as the equitable transfer of the risk of a potential loss, fro m one entity to another, in exc hange for a premium. Insurer, in economics, is the company that sells the insuranc e. Insurance rate is a factor used to

determine the amou nt, called the premium, to be charged for a certain amount of insurance coverage. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. Origin of Insurance PRACTICE OF INSURANCE IN INDIA: 1818-1956 It is claimed that insurance was practiced in India even in Vedic times in one form or the other. The Sanskrit term "Yogakshema " in the Rigveda me ant some kind of insurance, which was practiced by the Aryans in India nearly 3000 years ago. During the Mughal period insuranc e took firm roots. There are eve n references to the cover a gainst war risks. Losses due to the passage of ro ya l troops through farms were compensated b y the Sta te as a gesture of goodwill. The ye ar 1818 is an epoch -making year in the histo ry of our country. The first Life Insurance Company on India soil appe ars to have been started in this ye ar. A group of Europeans pioneered the establishment of the Oriental Life Insurance Society to afford relief to the distressed relatives of European. The venture was not quite successful but the company was reformed in 1829.The renewed Company also got into trouble in 1833 when Agency Hou se of Calcutta, partners of the same, fell. 6 Prince Dwarkanath Tagore was the only solvent partner & the sole responsibility for carrying on the institution developed on him. Meanwhile, e arly in Janury1834, the Government made up its mind to establish a Public Insurance Company & a Committee was set up for this purpose .A number of foreign Insurance Companies then operating in the country viewed this move with alarm. The y set up Committees of the ir own enquire into their individual affairs. Dwarkanath Tagore, too, had a Committee appointed to look into the affairs of the Oriental. As a result, another company was born out of the previous one in the name of "New Oriental Company" In the reorganization of the "Oriental" in the year 1834, two other gentlemen were associated. One was Ramta nu Lahiri and the other Rustamjee Cowasjee. The latter was another prominent figure of the business world. Rustamjee entered insurance business in 1828, he was already known to the community and the Government as a we althy Parsi merc hant. Rustamjee's connection with insurance also started with "Laudable Societies", but he was later on associated with Companies like "Sun Life Office (1834) ", New Orienta l (1835),Universal Life (1835) , New Laudable (1840) , and Indian Laud able (1841) . He was

also on the Committee of the Union Insurance Company which was formed b y a group of five persons. This Company was issuing policies covering river-risks only. He was intimately connected with the Committee of Insurance Offices in Ca lcutta. Rusta mjee Cowasjee & Dwarkanath Tagore was probably the first Indians to join in partnership business with the Europeans & in the field of insurance the y were pioneers on this side of the country. Apart from Calcutta, several enterprising people in Bombay started in 1823 the "Bombay Life" Assurance Company. The company went into liquidation soon and could not revive. In 1829, the "Madras Equitable "was formed. It fina lly ceased to function in 1921 due to financial difficulties after the First World War. The effort to set up a public insurance company at the government level also went in vain, mainly from objection of private operators. Majority of the early attempts to form insurance offices were in the province of Bengal. This was due to its political & economic importance at that time. The contribution of Raja Ram Mohan Roy, one of the greatest social reformers of India, to the development of life insurance is very great. He was deeply concerned about the sad plight of de sperate widows and helple ss orphans. OVERSEAS INSURERS Initially, when Life Offices were established in large numbers in Britain, some of them ventured to issue sterling policies to the British residents in India. Premiums collected here were credited to England largely for British beneficiaries. Business seems to have been brisk and profitable and was usually under short term policie s. Insurance mortality tables and insufficient mortality data of Englishmen in India made the premiums heavy-hea vier than at home. Insurance was denied to the "natives" even if they wa nted it- for their lives were always considered risky and sometimes valueless. When Indian lives were accepted as a very special case, the extras charged were still hea vier. Promine nt amongst the companies which came to India around this period was the "Med ical Inva lid and General" incorporated in London in 1841. As more areas were annexed and the 7 ruling power, with vested interests in developing trade, took charge , the "Medical" extended its area of operation, established large connections, absorbed the" Agra Life" and in 1835, took over the "New Oriental". P.M. Tate, the then manager of the "Medical", was a keen businessman, widely liked, influential a nd shrewd. With W.F. Ferguson, who was

the manager of the "New Oriental" before amalgamation, he commenced very active operations which were temporarily affected by the 1857 "Mutiny". The Universal Life Insurance Company established in England in 1836 opened its Indian Branch in 1840 and enjoyed a long period of successful operations until it was taken over b y the "North British" in May 1901. Insurance exceeding Rs. 10 crores were issued in India during this period. Another English Company ope rating in India at that time was the Colonia l Life Assurance Company. It was established in 1846 under the auspices of the Standard Life Assurance Company. The original prospectus of this company declared its purpose as "extending to the Colonies of Great Britain and to Indian the full benefit of Life Assurance". It appointed agents with local boards whic h were first established on Calcutta, Bombay, Madras and Colombo. Later on this company was taken over by the "Standard Life" and made valuable contribution to investigations into the mortality experience of assured lives in India. Eventually it ceased its operations in India in 1938. It is difficult to say which was the oldest Life Policy in India, but the oldest known appears to be one sold by the Royal Insurance (which commenced business in India in 1845) on the life was to Cursetjee Furdonjee on 6th January 1848, no reference to any earlier polic y being available. In the year 1853, the Liver pool and London and Globe Insurance Compa ny established in England in 1836, commenced business in India. Sir Charles Forbes was its first agent, succeeded by M/s. Forbes, Forbes and Campbell. It a ccepted only European live s and commenced insuring Indian lives only after 1929.This too, was mainly to oblige good agents of the Company for classes other than life business. The North British and Mercantile was the next company to appear on the Indian scene. It started fire insurance business in the year 1861 and life business 1864. The London Assurance started life business in 1864, limited principally to European lives and closed down its life department when the Life Assurance Companies Act 1912 made submission of returns compulsory. On 3rd December, 1870, seven earnest men of Bomba y with just se ven rupees for initia l expenses gave shape to a plan of offering insurance to the public without the risk of ruin and the "Bombay Mutual Life Assurance Society" came into existence. This was followed by the Orie ntal Life Assurance Company in1874, the Bharat in 1896 and the Empire of India in 1897. THE BIRTH OF INDIAN INSURERS

With the advent of the 20th century, the glorious renaissanc e of swadeshi days dawned. At the same time, well- to do Indians realized the potentiality of Indian Insurance business. The Swadeshi movement of 1905-1907 gave rise to more insurance companies. The United India in Madras, National Indian and Nationa l Insurance in Calcutta and the Cooperative Assurance at Lahore were established in 1906. In 1907, Hindustan Co-operative Insurance Company took its birth in one of the rooms of the Jorasanko House of the great poet Rabindranath Tagore, in Calcutta. The Indian Mercantile (1907) was started in Bombay, 8 General Assurance (1908) at Ajmer and the Swadeshi Life (Later Bombay Life) in Bombay in 1908. The end of the First World War (1914-18) witnessed a n influx of insurance companies in India. Famous Indian business houses started new insurance companies. Industrial and Prudential Bombay, Western India, Satara, were floated before the war, but by 1919, companies like Jupiter General, New India, Vulcan Insurance Company etc. came into being. Pandit K.Santhanam with blessing of Lala Lajpat Rai and Pa ndit Motilal Nehru started Laxmi Insurance Co. Similarly, Andhra Insurance was started in M asulipatnam, with the initiative of stalwarts like Dr. Pattabhi Sitaramaiah. From political platforms also, national leaders supported this cause. It is duty to every Indian to support only Indian Insurance. The keynote of our Swaraj is in placing a ll our insurance with our Indian companies", said Mahatma Gandhi in his m essage. "I hope Indians will realize the importance of patriotism only through Indian insurance institution", stated Pandit Jawaharlal Nehru. Thus, the cause of Indian insuranc e became a national issue. The pursuit to boost Indian insurance represented a crusade to extricate the Indian economy from foreign domination. PROGRESS IN INSURANCE BUSINESS The growth of Life Insurance in concrete terms could be said to being during the first two decades of twentieth century when most of the major companies were founded. They grew in terms of rise in the number of companies, in terms of number of polic ies and sum assured as well as total life fund. Indian Insurance Year Book, published for the first time in 1914, gives the figure of the total business-in -force as 22.44 crore whic h grew to Rs. 298 crore in 1938. In 1914, there were only 44companies tra nsacting insuranc e business in India, and during the next 25 years their number rose to 176. The total progress on all the primary

heads, viz. life fund (Rs. 50.50 crore), premium income (Rs. 10.50 crore) and new business (Rs. 43.30 crore) indicate that Indian Insurance Business had been ma king a definite headway during this years. The inter-war -years thus saw rapid growth life insurance in India. The promotion of new life insurance companies continued to be almost a craze and insurance companies mushroomed. In this period, 176 insurance companies were formed and many of them failed. Thus unhealthy growth was harmful to the interest of the polic y holde rs and insuranc e business in India. Feeling concerned about it, the All India Life Assurance Offices' Association urged upon the Governme nt in 1932 to undertake the insurance legislation to (a) Compulsorily register all Life Insurance companies. • (b) Secure a deposit of Rs.2 lakh from all Life Insurance companies. • (c) Compe l foreign companies doing business in India to keep sufficient funds in • India securities to meet their liabilities under all polic ie s issue d in India. 9 INSURANCE ACT, 1938 The Insurance Act, 1938, was the first comprehensive legislation gove rning not only life but also non- life bra nche s of insurance to provide strict state control over insurance business. In sub- sections to dealt with provide nt companies, mutual offices a nd co-operative societies as well. The silent features of the Act were as follows: (A) Constitution of a Department of Insurance under a superintendent ve sted with • wide powers of supervision and control over all kinds of insurance companie s. (B) Regulation for the compulsory registration of insurance companies and for filing • of returns of investme nt and financ ia l conditions. (C) Provisions for deposit, to prevent insurers of inadequ ate financial resources of • spe culative concerns for commencing business. (D) Provisions that 55% of the net life fund of an Indian or non- Indian insurer should • invested in Indian Government and approved securities with at least 25% in Indian Government Rupee securities.. All other companie s, i.e., foreign companies must invest 100% of their Indian liabilitie s in Indian Government and approved securities, with at least 33.3% Indian Government securities. (E) Prohibition of rebating, restriction of commission, lice nsing of agents etc. • Maximum rates of commission were fixed at 40% of the first premiums and 5% of the renewal premium in respect of life assurance business. The agent must be licensed, to

improve the status of the profession. (F) Periodical valuation of Indian Insura nce business of foreign companies and the • business of Indian companies. (G) Provision for polic yholders' directors, making it possible for the re presentatives of • policyholders to be on the Board of directors. (H) Standardization of policy conditions required all companies to file standard forms • and tables of premium approved by an Actuary. Under this requirement, the initia l deposit for life insurance business was raised from Rs. 25000 in Government securitie s to Rs. 50000 in cash approved securities, which was subsequently to be raised by installments to Rs. 2 lakh within a specified time limit. 10 GROWTH OF LIFE BUSINESS IN INDIA: 1914-1948 Sr 1914 1930 1940 1945 1948 no 1 No of insurers 44 68 195 215 209 200 189 (a) India n 44 68 179 (91.79) (93.02) (90.43) (b) Non-India n - - 16 15 20 Total No. of 2 748997 1628381 2714000 3016000 policies In force 1371963 2376000 2791000 (a) India n - 513925 (68.61) (84.25) (87.55) (90.15) (b) Non-India n - 220703 181247 261000 234000 (c) India n outside India - 14369 75171 77000 202000 Total business in 3 force 22.44 258.42 304.03 573.07 712.76 225.51 459.43 566.38 (a) India n (Rs. Crore) 22.44 84.89 (32.85) (74.17) (80.17) (79.46)

(b) Non-India n - 69.76 60.12 91.85 101.08 (c) India n outside India - 3.77 18.4 21.79 45.3 Total life funds 4 (Rs. Crore) 6.36 20.53 62.41 107.4 150.39 Note : Figures in brackets show percentage of the total. 11 Nationalization THE LIFE INSURANCE CORPORATION OF INDIA: 1956 This was the first step taken towards the nationalization of life insurance business in India. On 20th January, 1956 all life insurance companies were taken over by 43 nominated custodians. The custodians were experienced senior executives of private insurance companies, reporting directly to the Finance Ministry. From the word go, the complex task of running the industr y on a permanent basis and c ontinuing the services to polic y holders without interruption were their major concerns. The actual work of integration had to await le gislation. The custodians managed the insurance companie s till 1-09-1956, when Life Insurance Corpora tion was established under the genera l direction and control of the Ministry of Finance. The Ordinance provide d for the transfer of the control of 154 Indian insurers, 16 non Indian insurers and 75 provident societies. These arrangements were designed to ensure that no inconvenience whatsoever was caused to the policy holders. With the Government take over the ma nagement aimed towards the evolution of a common uniform premium rate, policy conditions and service and working procedures and above all to help promote team spirit. The corporation, a body corporate shall consist of not more than 15 members appointed b y the Central Government, one of them being appointe d by the government as chairman. The capital of the corporation was at Rs 5 crore provided by the ce ntral government. INSURANCE SECTOR REFORMS In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra was formed to evaluate the Indian Insurance industry and re commended its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient a nd c ompetitive financ ial system suitable for the requirements of the economy keeping in mind the structural change s currently underway and recognizing that insurance is an important part of the over all financial system where it was necessary to address the need for similar reforms...". In 1994, the committee submitted the report and some of the key recommendations

included: (1) STRUCTURE Government stake in the Insurance Companies to be brought down to 50%. • Government should take over the holdings of GIC and its subsidiaries so that these • subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate • 12 (2) COMPETETION Private Companies with minimum paid up capital of Rs.1 bn should be allowed to • enter the industry. No Company should deal in both Life and General Insurance through a single entr y. • Foreign Companies may be allowed to enter the industry in collaboration with the • domestic companies. Postal Life Insurance should be allowed to operate in the rural market. • Only one State Leve l Life Insurance Company should be allowed to operate in each • state. (3) REGULATORY BODY The Insurance Act should be cha nged • An Insurance Regulatory Body should be set up. • Controller of Insurance (Currently a part from the Fina nce Ministry)should be made • independent (4) INVESMENTS Mandatory Investments of LIC Life Fund in government securities to be reduced from • 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (There current • holdings to be brought down to this leve l over a period of time). (5) CUSTOMER SERVICE LIC should pay interest on d elays on payments beyond 30 days. • Insurance Companies must be encouraged to set up unit linked pension plans • Computerization of operations and updating of technology to be carried out in the • insurance industry. The committee emphasized that in order to improve the customer service and increase the coverage of insurance industry should opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industr y. Hence, it was decided to allow competition in a limited way by stipulating the

minimum capital requirement of Rs. 100 crores. The committee felt the need to provide gre ater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory bod y. 13 Liberalization : OPENING UP OF INSURANCE SECTOR – 1999 THE INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY Reforms in the Insurance sector were initiated with the passa ge of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance compa nies wa s the launch of the IRDA's online service for issue and renewal of licenses to agents. The app roval of institutions for imparting training to age nts has a lso ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products, which are expected to be introduced by early next year. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. In the private sector 14 life insurance co mpanies have been registered. ENTRY OF PRIVATE COMPANIES Under the IRDA Act, private companies ca n now operate in India's insurance industry. However, they must obtain a license from the IRDA before being permitted to write busine ss. To have its license application considered, a domestic private company must be registered in accordance with the Companies Act of 1956 and have approximate ly US$ 20 million of investment capital. The specific licensing requirements that Private Indian Companies must fulfill are set forth in the Registration on Indian Insurance Companie s Regulations, published by the IRDA 2000. LIFTING OF BARRIERS TO FOREIGN INVESTMENT The IRDA Act also lifts certain barriers to foreign direct investment in Indian insurance industry. Global insurers are now permitted to set up and register a domestic company in order to write business in India. However, regulations stipulate that the y have a capital base of at least US $ 20 million, and their investment in such company is capped at 26 percent. Thus, to participate in the market, they must form a joint venture with an India n partner that is able to inve st the remaining funds. The equity investments limit is the same for global reinsures seeking to write business in India, but they are required to put up a capital of approximately US$ 45 million in order to establish a domestic company. 14 Since the IRDA first enacted these rules, 13 new life insurance companies have entered the market. On the other hand, no global reinsurer has established a domestic company. Instead, most of the top international reinsuranc e companies operate from their

overseas offic es by sharing the reinsurance risks picked up by the GIC. A recent proposal ha s been put forward to increase foreign direct investment to 49 percent. In addition, global companies are pushing for the right to establish branc h offices in India. These changes are likely to substantially increase the presence of international insurers, reinsurers, and brokers in India. The IRDA Insurance Brokers Act in India 2002 permitted overseas insurance and reinsurance brokers to enter the market, but with the same equity cap as that governing the operations of foreign insurers and reinsurers. Thus, foreign brokers must also form a joint venture with an Indian partner in order to establish an Indian broking house. The 2002 IRDA legislation established four broker categories, one of which brokers must select when applying for a license: 1. Category 1A : Direct General Insurance Broker 2. Category 1B : Direct Life Insurance Broker 3. Category 2 : Reinsurance Broker 4. Category 3: Composite Broker 5. Category4: Others, for example Insurance Consultants a nd Risk Management Consultants. Each category has different solvenc y mar gins and capital adequacy ratios, and all categories need to carry professional indemnity insurance at different minimum levels. In the years since market libe ralization wa s initiated, the insurance sector has witnessed some impressive changes. The needs of insurance and reinsurance buyers have grown; the market is introducing new products to address these needs; and the services of brokers are now seen as critic al to making informed insurance and reinsurance decisions. OVERVIEW OF THE CURRENT INSURANCE MARKET In the years since the IRDA Act initiated market reforms, the insurance sector has experie nced some remarkable cha nges. The entry of a large number of Indian a nd Foreign private companies in life insurance business has to lead greater choice in terms of products and services. Incre ased consumer awareness of the be nefits a nd importance of insura nce and reinsurance has generated many more buyers; and new distribution channels_ among them brokers, bank assurance, the Internet, and corporate agents_ have provided additional wa ys of getting products and services to customers. 15 Private insurance companies have to date written a small percentage of business in this secto r during the last three years, but they have ushered in a competitive environment that has accelerated market growth. State owned insurers still write the bulk of insurance business, and they have the net worth required to underwrite large corporate risks without depending almost entirely on reinsurance support. However, their focus on re structuring is beginning to put them at a disadvantage against private competitors. Over the next few years, the share of the market held by the public insurers is expected to drop substantially, with private companie s assuming a growing percentage of the business written. At present there are 15 private insurers with two standalone private players and remaining private-foreign joint ve nture. Purpose and Need of Insurance : Assets are insured, because they are likely to be destroyed through accidental occurrences.

Such possible occurrences are called perils. Fire, floods, breakdowns, lightening, earthquakes, etc, are perils. If such perils can cause damage to the asset, we say that the asset is exposed to that risk. Perils are the events. Risks are the consequential losses or damages. The risk to a owner of a building, because of the peril of an earthquake, may be a few lakhs or a few crores of rupees, depending on the cost of the building and the contents in it. The risk only means that there is a possibility of loss or damage. The damage may or may not happen. Insurance is done against the contingenc y that it may happen. There has to be an uncertainty about the risk. Insurance is relevant only if there are uncertainties. If there is no uncertainty about the occurrence of an eve nt, it cannot be insured against. In the case of human being, death is certain, but the time of death is uncertain. In the case of person who is terminally ill, the time of death is not uncertain, though not exactly known. He c annot be insured. Insured does not protect the asset. It does not prevent its loss due to peril. The peril cannot be avoide d through insurance. The peril can sometimes be avoided through bette r safety and damage control management. Insurance only tries to reduce the impact of the risk on the owner of the asset and those who depend on that asset. It only compensates the losses ± and that too, not fully. Only economic consequences can be insured. If the loss is not financial, insurance ma y not be possible. Example of non-economic losses are love a nd affe ction of parents, leadership of managers, sentimenta l attachme nts to family heirlooms, innovative a nd creative abilities, etc. 16 How Insurance Works? The mechanism of insurance is very simple. People who are exposed to the same risks come together and agree that, if any one of them suffers a loss, the others will share the loss and make good to the person who lost. All people who send goods by ship are exposed to the same risks, whic h are related to water damage, ship sinking, piracy, etc. Those owning factories are not exposed to these risks, but they are exposed to different kinds of risks like, fire, hailstorms, earthquake, lightning, burglary, etc. Like this, different kinds of risks can be identified and separate groups made, including those exposed to such risks. By this method, the heavy loss that any one of them may suffer (all of them may not suffer such losses at the same time) is divided into bearable small losses by all. In other words, the risk is spread

among the community and the likely big impact on one is reduced to smaller manageable impacts on all. If a Jumbo Jet with more than 350 passengers cra shes, the loss would run into several crores of rupees. No airline would be able to bear such a loss. It is unlikely that many Jumbo Jets will crash at same time. If 100 airline companies flying Jumbo Jets, come together into an insuranc e pool, whenever one of the Jumbo Jets in the pool crashes, the loss to be borne b y each airline would come down to a few la khs of rupees. T hus, insurance is a business of µsharing ¶. There are certain principles, which make it possible for insurance to remain a fair arrangement. The first is that it is difficult for any one individual to bear the consequences of the risks that he is exposed to. It will become bearable whe n the community shares the burden. The second is that the perils should occur in an acc idental manner. Nobody should be in a position to make the risk happen. In other words, none in the group should set fire to his assets and ask others to share the costs of damage. This would be taking unfair advantage of an arrangement put into place to protect people from risks they are exposed to. The occurrence has to be random, accidenta l, and not the deliberate cre ation of the insured pe rson. The ma nner in which the loss is to be shared can be determined before-hand. It ma y be proportional to the risk that each person is e xposed to. This would be indicative of the benefit he would receive if the peril befe ll him. The share could be collected from the members after the loss has occurred or the likely shares ma y be collected in advance, at the time of admission to the group. Insurance companies collect in advance and create a fund from which the losses are paid. The collection to be made from each person in advance is determined on assumptions. While it may not be possible to tell beforehand, which person will suffer, it ma y be possible to tell, on the basis of past experiences, how many persons, on an avera ge, ma y suffer losses. The following two examples explain the abo ve concept of insurance: 17 Example 1 In a villa ge, there are 400 houses, each valued at Rs. 20000. Each ye ar, on the average, 4 houses get burnt, resulting into a total loss of Rs. 80000. If all the 400 owners come together and contribute Rs. 200 each, the common fund would be Rs. 80000. this is enough to pay Rs. 20000 to each of the 4 owners whose houses got burnt. Thus, the risk of 4 owners

is spread over 400 house-owners of the village. Example 2 There are 1000 persons who are all aged 50 and are healthy. It is expected that of these, 10 persons may die during the year. If the economic value of the loss suffered by the family of each dying person is taken to b e Rs. 20000, the total loss would work out to Rs. 200000. If each person in a group contributed Rs. 200 a year, the common fund would be Rs. 200000. This would be enough to pa r Rs. 20000 to the family of each of the ten persons who die. Thus, the risks in the case of 10 persons, are shared by 1000 persons. Insurance of ‘Human Asset’ A human being is an income generating asset. One ¶s manual labour, professional skills and business acumen are the assets. This asset also can be lost through unexpectedly early death or through sickness and disabilities caused by accidents. Accidents may or may not happen. Death will happen, but the timing is uncertain. If it happe ns aro und the time of one ¶s retirement, when it could be expe cted that the income will normally cease, the person concerned could have made some other arrangements to meet the continuing needs. But if it happens much earlier when the alternate arrangements are not in place, there can be losses to the person and dependents. Insurance is necessary to help those dependent on the income. A person, who may have made arrangements for his needs after his retireme nt, also would need insurance. This is because the arrangements would have been made on the basis of some expectations like, likely to live for a nother 15 years, or that childre n will look after him. If any of these expectations do not become true, the original arrangement would become inadequate and there could be difficulties. Living too long can be as much a problem as dying too young. Both are risks, which need to be safeguarded against. Insurance takes care. 18 Insurance of Intangibles : The concept of insurance has been exte nded beyond the coverage of tangible assets. Exporters run risk of losses if the importers in the other country default in pa yments or in collecting the goods. They will also suffer heavily du e to sudden changes in currency exchange rates, economic policies or political disturbances in the other country. These risks are insured. Doctors run the risk of being c harged with negligence and subsequent liability for damages. The amounts in question can be fairly large, beyond the capacity of individuals

to be ar. These are insured. Thus, insurance is e xtended to intangibles. In some countries, the voice of a singer or the legs of a dancer may be insured. Types of Insurance : Any risk that ca n be quantified c an potentially be insured. Specific kinds of risk that ma y give rise to claims are known as "perils". An insurance polic y will set ou t in detail which perils are covered by the policy and which are not. Below is a (non-exhaustive) list of the many different types of insurance that e xist. A single policy ma y cover risks in one or more of the categories set forth below. For e xample, auto insuranc e would typica lly cover both property risk (covering the risk of theft or damage to the car) and liability risk (covering legal claims from causing an accident). A homeowner's insuranc e policy in the U.S. typically includes property insurance covering damage to the home and the owner's belongings, liability insurance covering certain legal claims against the owner, and even a small amount of health insurance for medical expenses of guests who are injured on the owner's property. ‡ Automobile insuranc e known in the UK as motor insurance, is pr obably the most common form of insurance and ma y cover both legal liability claims aga inst the driver a nd loss of or damage to the insured's vehicle itself. Throughout most of the United States an auto insurance policy is required to le gally op erate a motor vehicle on public roads. In some jurisdictions, bodily injury compensation for automobile accident victims has been changed to a no-fault system, which re duces or eliminate s the ability to sue for compensation but provides automatic eligibility for benefits. ‡ Aviation insurance insures against hull, spares, deductible, hull war and liability risks. ‡ Boiler insurance (also known as boiler and machiner y insurance or equipment breakdown insuranc e) insures against acc idental physical damage to equipment or machiner y. ‡ Builder's risk insurance insures against the risk of physical loss or damage to property during construction. Builder's risk insurance is typica lly written on an "all risk" basis covering damage due to any cause (including the negligence of the insure d) not otherwise expressly excluded. 19 Business insurance can be any kind of insurance that protects businesses against risks. Some ‡ principal subtypes of business insurance are (a) the various kinds of professional liability insurance, also called professional indemnity insurance, which are discussed below

under that name; and (b) the business owners polic y (BOP), which bundles into one policy ma ny of the kinds of coverage that a business owner needs, in a way a nalogous to how homeowners insuranc e bundles the coverage that a homeowner needs. ‡ Casualty insurance insure s against accidents, not necessarily tied to any specific property. ‡ Credit insurance repays some or all of a loan back when certa in things happen to the borrower such as unemployment, disability, or death. Mortga ge insurance (which see below) is a form of credit insurance, although the name credit insurance more often is used to refer to policies that cover other kinds of debt. ‡ Crime insurance insures the policyholder against losses arising from the criminal acts of third parties. For example, a company can ob tain crime insurance to cover losses arising from theft or embezzlement. ‡ Crop insura nce "Farmers use crop insurance to reduce or mana ge various risks associated with growing crops. Such risks include crop loss or damage caused b y weather, hail, drought, frost damage, insects, or disease, for insta nce." ‡ Defense Base Act Workers' compensation or DBA Insurance provides coverage for civilian workers hired by the government to perform contracts outside the US and Canada. DBA is required for all US citizens, US residents, US Green Card holders, and all employees or subcontractors hired on overseas government contracts. Depending on the countr y, Foreign Nationals must also be covered under DBA. This coverage typically inc ludes expenses related to medical treatment and loss of wages, as well as disability and death benefits. ‡ Directors and officers liability insurance protects an organization (usually a corporation) from costs associated with litigation resulting from mistakes incurred b y directors and officers for which they are liable. In the industry, it is usually called "D&O" for short. ‡ Disability insurance policies provide financial suppo rt in the event the polic yholder is unable to work because of disabling illness or injury. It provides monthly support to help pa y such obligations as mortgages and credit cards. o Total permanent disability insurance provides benefits when a person is permanently disabled and can no longer work in their profession, often taken as an adjunct to life insurance. ‡ Errors and omissions insurance : See "Professional liability insurance" under "Liability insurance". ‡ Expatriate insurance provides individuals and organizations operating outside of their home

country with protection for automobiles, property, health, liability and business pursuits. ‡ Financ ial loss insurance protects individuals and companies a gainst various financial risks. For example, a business might purchase cover to protect it from loss of sales if a fire in a factory prevented it from carrying out its business for a time. Insurance might also cover the failure of a creditor to pay money it owes to the insured. This type of insurance is frequently 20 referred to as "business interruption insuranc e." Fidelity bonds and surety bonds are inc luded in this categor y, although these products provide a benefit to a third party (the "obligee") in the event the insured party (usually referred to as the "obligor") fa ils to perform its obligations under a contract with the oblige. ‡ Health insurance policies will often cover the cost of private medical treatments if the National Health Service in the UK (NHS) or other publicly-funded health programs do not pa y for them. It will often result in quicker health care where better facilities are available. ‡ Home insurance or homeowners insurance: See "Property insurance". ‡ Liability insurance is a very broad superset that covers legal claims against the insured. Many types of insurance include an aspect of liability coverage. For example, a homeowner's insurance policy will normally include liability coverage which protects the insured in the event of a claim brought by someone who slips and falls on the property; automobile insuranc e also includes an aspect of liability insurance that indemnifies against the harm that a crashing car can cause to others' lives, health, or property. The protection offered by a liability insurance polic y is twofold: a legal defense in the event of a lawsuit commenced against the polic yho lder and indemnific ation (payment on behalf of the insured) with respect to a settlement or court verdict. Liability policies typically cover only the ne gligence of the insured, and will not apply to results of willful or intentional acts by the insured. o Environmenta l liability insurance protects the insured from bodily injur y, property damage and cleanup costs as a result of the dispersal, release or escape of pollutants. o Professional liability insurance a lso called professional indemnity insurance, protects professional practitioners such as architects, lawyers, doctors, and accountants aga inst potential negligence claims made by their patients/clients. Professional liability insuranc e may take on different names depending on the profession. For example, professional liability insuranc e in refere nce to the medical profession may be called malpractice

insurance. Notaries public may take out errors and omissions insurance (E &O). Other potentia l E&O policyholders include, for example, real estate brokers, home inspectors, appraisers, and website developers. ‡ Life insurance provides a monetar y benefit to a decedent's family or other designated beneficiary, and may specifically provide for burial, funeral and other final expenses. Life insuranc e policie s often allow the option of having the proceeds paid to the benefic iar y either in a lump sum cash payme nt or an annuity. o Annuities provide a stream of payments and are generally cla ssified as insurance be cause the y are issued b y insurance companies and regulated as insurance a nd require the same kinds of actuarial a nd inve stment management expertise that life insura nce requires. Annuities and pensions that pay a benefit for life are sometimes regard ed as insurance against the possibility that a retiree will outlive his or her financia l resources. In that sense, they are the complement of life insurance a nd, from an underwriting perspective, are the mirror image of life insurance. ‡ Locked funds insurance is a little-known hybrid insurance policy jointly issued by governments and b anks. It is used to protect public funds from tamper b y unauthorized parties. In special cases, a government may authorize its use in protecting semiprivate funds 21 which are liable to tamper. The terms of this type of insurance are usually very strict. Therefore it is used only in extre me cases where maximum security of funds is required. ‡ Marine insurance and marine cargo insurance cover the loss or da mage of ships at sea or on inla nd waterways, and of the cargo that may be on them. When the owner of the cargo and the carrier are separate corporations, marine cargo insurance typically compensates the owner of cargo for losses sustained from fire, shipwreck, etc., but excludes losses that can be recovered from the carrier or the carrier's insurance. Many marine insurance underwriters will include "time element" coverage in suc h policies, which extends the indemnity to cover loss of profit and other business expenses attributable to the delay caused b y a covere d loss. ‡ Mortgage insurance insures the lender against default by the borrower. ‡ National Insurance is the UK's version of social insurance (which see below). ‡ No-fault insurance is a type of insura nce policy (typically automobile insurance) where insurers are indemnified by their own insurer regardless of fault in the incident. ‡ Nuclear incident insurance covers damages resulting from an incident involving

radio active materials and is generally arranged at the national level. (For the United States, see the PriceAnderson Nuclear Industries Indemnity Act.) ‡ Pet insurance insures pe ts aga inst accide nts and illnesses - some companies cover routine/wellness care and burial, as well. ‡ Political risk insurance can be ta ken out b y businesse s with operations in countries in which there is a risk that revolution or other political conditions will result in a loss. ‡ Pollution Insurance A first-party coverage for contamination of insured property either b y external or on-site sources. Coverage for liability to third parties arising from contamination of air, water or land due to the sudden and accidental release of hazardous materials from the insured site. The policy usually covers the costs of cleanup a nd may include coverage for releases from underground storage tanks. Intentional acts are spe cifically exc luded ‡ Property insurance provides protection against risks to property, such as fire, theft or weather damage. This includes specialized forms of insurance such as fire insura nce, flood insuranc e, earthquake insurance, home insurance, inland marine insurance or boiler insurance. ‡ Purchase insurance is aimed at providing protection on the products people purchase. Purchase insurance can cover individual purchase protection, warranties, guarante es, care plans and even mobile phone insurance. Such insurance is normally very limited in the scope of problems that are covered by the polic y. ‡ Retrospectively Rated Insurance is a method of establishing a premium on large commercial accounts. The fina l premium is based on the insured's actual loss experience during the policy term, sometimes subject to a minimum and maximum premium, with the final premium determined by a formula. Under this plan, the current year's premium is based partially (or wholly) on the current year's losses, although the premium adjustments ma y take months or years beyond the current year's expiration date. The rating formula is guaranteed in the insurance contrac t. Formula: retrospective premium = converted loss + basic premium × tax multiplier. Numerous variations of this formula ha ve be en developed and are in use. ‡ Social insurance can be many things to many pe ople in many countries. But a summary of 22 its essence is that it is a collection of insurance coverage (including components of life insuranc e, disability income insurance, unemplo yme nt insurance, health insurance, and

others), plus retirement savings, that mandates participation by a ll citizens. By forcing everyone in society to be a policyholder and pay premiums, it ensures that everyone can become a claimant when or if he/she needs to. Along the way this inevitably becomes related to other concepts such a s the justice system a nd the we lfare state. This is a large, complicated topic that engenders tremendous debate, which can be further studied in the following articles (and others): o Social welfare provision o Social security o Social safety net o National Insurance o Social Security (United States) o Social Security debate (United States) ‡ Terrorism insurance provides protection against any loss or damage caused by terrorist act ivit ies. ‡ Title insurance provides a gua rantee that title to real property is vested in the purchaser and/or mortgagee, free and clear of liens or encumbrances. It is usually issued in conjunction with a search of the public records performed at the time of a real estate transaction. ‡ Travel insurance is an insurance cover taken by those who travel abroad, which covers certain losses such as medica l expenses, lost of personal belongings, travel de lay, personal liabilities, etc. ‡ Workers' compensation insuranc e replaces all or part of a worker's wage s lost and accompanying medical expense incurred because of a job-related injur y. Advantage s of Life Insur ance : Life insurance ha s no competition from any other bu siness. Many people think that life insuranc e is an investment or a means of saving. This is not a correct view. When a person saves, the amount of funds available at any time is equal to the amount of money set aside in the past, plus interest. This is so in a fixed deposit in the bank, in national savings certificates, in mutual funds and all other savings instruments. If the money is invested in buying shares and stocks, there is the risk of the money being lost in the fluctuations of the stock market. Even if there is no loss, the available money at any time is the amou nt invested plus appreciation. In life insuranc e, however, the fund available is not the total of the savings already made (pre miums paid), but the amount one wished to have at the end of the savings period (which is the next 20 or 30 years). The final fund is secured from the very beginning. 23 One is paying for it later, out of the savings. One has to pay for it only as long

as one lives or for a lesser period if so chosen. There is no other scheme which provides this kind of benefit. Therefore life insurance has no substitute. Even so, a comparison with other forms of savings will show that life insurance has the following adva ntages. ‡ In the event of death, the settlement is easy. The heirs can collect the mone ys quicker, because of the facility of nomination and assignme nt. The fac ility of nomination is now available for some bank accounts. ‡ There is a certain amount of compulsion to go though the plan of savings. In other forms, if one changes the original plan of savings, there is no loss. In insurance, there is a loss. ‡ Certain c annot claim the life insurance moneys. They can be protected against attachme nts by courts. ‡ There are tax benefits, both in income tax and in capita l gains. ‡ M arketability and liquidity are better. A life insurance polic y is property and can be transferred or mortgaged. Loans can be raised aga inst the policy. The following tenets he lp agents to believe in the benefits of life insurance. Such faith will enhanc e their determination to sell and their perseverance. ‡ Life insurance is not only the best possible wa y for family protection. There is no other way. ‡ Insurance is the only way to safeguard against the unpredictable risks of the future. It is unavoidable. ‡ The terms of life are hard. The terms of insurance are easy. ‡ The value of human life is far greater than the value of prope rty. Only insurance can preserve it. ‡ Life insurance is not surpassed by many other savings or investment instrument, in terms of security, marketability, stability of value or liquidity. ‡ Insurance, including life insurance, is essentia l for the conservation of many bu sinesses, just as it is in the preservation of homes. ‡ Life insurance enhances the existing standards of living. ‡ Life insurance helps people live financ ia lly solvent live s. ‡ Life insurance perpetuates life, libe rty and the persu it of happiness. ‡ Life insurance is a wa y of life. 24 The Business of Insurance : Insurance companie s are called insurers. The business of insurance is to (a) bring together persons with common insurance interests (sharing the same risks), (b) collect the share or contribution (called premium) from all of them, and (c) pay out compensation (called c la ims) to those who suffer. The premium is determined on the same lines as indicated in the

examples above, but with some further refinements. In India, insurance business is c lassified primarily as life and non-life or general. Life insuranc e inc ludes all risks related to the lives of human beings and Ge neral insurance covers the rest. General insurance has three classifications viz., Fire (dealing with all fire re lated risks), Marine (dealing with all tra nsport related risks a nd ships) and Miscellaneo us (dealing with all others like liability, fidelity, motor crop, personal accide nt, etc.). Personal accident and sic kness insuranc e, which are related to human beings, is classified as µ non-life ¶ in India, but is classified as µlife ¶, in many other countries. What is µNon-life ¶ in India is termed as µProperty and Casualty ¶ in some other countries. The premium is based on expectations of the losses. These expectations are b ased on studies of occurrences in the past and the use of statistical principles. There is, in statistics, a ³ law of lar ge numbers ´ . When you toss a coin, the chance of a head or tail coming up is half. If the coin is tossed 10 times, one cannot be sure that the head will come up 5 times. If the coin is tossed 1 million times, the number of heads will be closer to half a million proportionately than in the ca se of 10. The variation will be less as a perce ntage. So also, the larger the numbers (of risks) included in the pool, the better the chances that the assumptions regarding the probability of the risk occurring, which is the basis of premium calculation, will be realized in practice. In order to be amenable to statistical predictions, insurers have to insure lar ge numbers of risks. Larger the spread of business better is the experience in relation to expectations. The business of insurance is nothing but one of sharing. It spreads losses of an individual over the group of individuals who are exposed to similar risks. People who suffer loss get relief because their loss is made good. People who do not suffer loss are relieved because the y were spared the loss. The insurer is in the position of a trustee as it is mana ging the common fund, for and on behalf of the community of polic yholders. It has to e nsure that nobody is a llowed to take undue advantage of the arrangement. That means that the management of the insurance business requires care to prevent entr y (into the group) of people whose risks are not o f the same kind a s well as paying claims on losses that are not accidental. The decision to allow entry is the process of underwriting of risk. Underwriting includes assessing the risk, which means, making an evaluation of how much is the exposure to risk. The premium to be charged depends on this assessment of the risk. Both underwriting and claim

settlements have to be done with great care. 25 Criticism of Insurance Companies : Some people believe that modern insurance companie s are mone y-making businesses which have little interest in insurance. They argue that the purpose of insurance is to spread risk so the reluctance of insurance companies to take on high-risk cases (e.g. houses in areas subject to flooding, or young drivers) runs counter to the princ iple of insurance. Other criticism s include: ‡ Insuranc e polic ies contain too many exclusion clauses. For example, some house insuranc e policies do not cover damage to garden walls. ‡ Most insurance compa nies now use call centre and staff atte mpt to answer questions b y reading from a script. It is difficult to speak to anybod y with expe rt knowledge. Role of Insurance in Economic Development : For economic develop ment, investments are necessary. Investments are made out of savings. A life insurance company is a major instrument for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channeled into investments for economic growth. As on 31.3.2002, the total investments of the LIC exceeded Rs. 245000 crores, of which more than Rs. 130000 crores were directly in Government (both State and Centre) related securitie s, more than Rs. 12000 crores in the State Electricity Boards, nearly Rs. 20000 crores in housing loa ns and Rs. 4000 crores in water supply and sewerage systems. Other investments included road transport, setting up industrial estates and directly financing industr y. Inve stments in the corporate sector (shares, debentures and term loans) exceeded Rs. 30000 crores. These directly affect the lives of the people and their economic well-being. A life insurance company will have large funds. These amounts are collected by way of premiums. Every premium represents a risk that is covered by that premium. In effect, therefore, these vast amounts represent pooling of risks. The funds are colle cted and held in tru st for the benefit of the polic yholders. The ma nageme nt of life insurance companies are required to keep this aspects in mind and make all its decisions in ways that benefit the community. This applies also to its investments. That is why successful insurance companies would not be found investing in speculative ventures. Their investments, as in the case of the LIC, benefit the society at large. Apart from investments, business and trade benefit through insurance. Without insurance, trade and commerce will find it difficult to face the impact to major perils like

fire, earthquake, floods, etc. Financiers, like banks, collapse if the factory, fina nced by it, is reduces to ashes by terrible fire. Insurers cover also the loss to financ iers, if their debtors default. 26 2. GLOBAL INSURANCE INDUSTRY : The global insurance industry is one of the largest sectors of finance. It ranges from consumer to corporate and industrial insurance, and even reinsurance, or insurance of insurance. The major insurance markets of the world are obviously the US, Europe, Japan, and South Korea. Emerging markets are found throughout Asia, specifically in India and China, and are also in Latin America. With the internet a nd other forms of high-spee d communication, companies and individuals are now able to purchase insurance and related financial products from almost anywhere in the world. Increasing affluence, especially in developing countries, and a rising unde rstanding of the need to protect wealth and human capita l has led to significant growth in the insurance industry. Given the evolving and growing socio-economic conditions worldwide, insurance companies are increasingly reaching out across borders and are offering more competitive and customized products than ever before. Over the past ten years, global insurance premiums have risen by more than 50%, with annual growth rates ranging between 2 and 10%.In 2004, global insurance premiums amounted to $3.3 trillion. The majority of insurance comes from developed nations such as most of Europe, the US, and Japan. In 2004, premiums in North American amounted to $1,217 billion, while the European Union generated $1,198 billion, and Ja pan produced $492 billion. The UK amounted to $295 billion. The four biggest generators of insurance premiums comprised almost two-thirds of premiums for 2004, the US and Japan amount to half, while they only ma ke up 7% of the world ¶s population. In contrast, the emerging markets that make up 85% of the world ¶s population produced only 10% of the premiums. The leading global insurance companies are: Zurich Financial Services, • AXA • Berkshire Hathawa y/ Berkshire Hathawa y Re • Allianz •

A viva • ING Group • Munich RE Group • American International Group (AIG) • Nippon Life Insurance • Assicurazioni Generali • 27 GLOBAL LIFE INSURANCE DENSITY : Cont i n en t /Cou nt ry 2 0 0 2 ** 20 0 4 * * 2 0 0 6* * Nor t h A m e ri ca 1 5 6 3 . 8 1 6 17 . 2 1 7 3 1 .8 Uni t e d S t a t es 16 6 2 .6 1 6 92 . 5 1 7 8 9 .5 C a na da 5 .9 7 2 2 .9 10 7 1 .9 La t i n Am e ri ca 2 9 .1 3 7 . 2 5 1 .3 Bra z i l 10 . 8 3 5. 8 5 6 . 8 Me x ic o 3 .2 4 1. 3 4 9 . 9 Uru gua y 1 7 .8 N /A 16 . 6 Arge nt i na 1 9 .7 3 4 . 5 43 . 8 Pa na m a 3 4 2. 4 4 7 . 2 C hi le 2 2 .1 1 3 8 .3 2 0 0 1 * *

2 0 0 3 ** 2 0 0 5 **

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3. PERFORMANCE OF INDIAN INSURANCE INDUSTRY : Performance up to October 2006 The performance growth rate that was 22.8 percent as at September 2006 has mo ved up to 23.3 percent at the end of October 2006, an improvement of significance. The total premium at the end of October is Rs.14,628 crore as against Rs.11,855 crore. The established players have added Rs.807 crore at a growth rate of 8.3 percent with the new players adding Rs.1966 crore at a growth rate of 62 percent. Here a gain, ICICI Lombard has achieved a n accretion of Rs.887 crore; whereas the total accretion of all the established players is Rs 807 crores, a truly impressive record. New India with Rs.286 crore, closely followed by Oriental with Rs.277 crore are the major contributors for the established players. Re liance, a late starter in the race for premium acquisition has recorded an accretion of Rs.357 crore as against a meager last year renewal of Rs.89 crore. The growth path is now led by several players: with eight out of the twelve pla yers ha ving ac hieved accretions in exc ess of Rs.100 crore and more at the end of October 2006. With the im minent detariffing aro und the corner in January 2007, the next two months should witness even more fierce battles for supremacy of the market turf. A few of the new players are inching towards breaking into the big league premium players of yesteryears and this may happen sooner than one thought. Interesting and cha llenging times are certainly ahead for all the pla yers. Premiums Rise 163.68% over October, 2006 Individual premium: The life insurance industry underwrote Individual Single Premium of Rs.1336610.10 lakh for the period ended October, 2006 of which the private insurers garnered Rs.118242.78 lakh a nd LIC garnered Rs.1218367.32 lakh. The corresponding numbers for the previous year were Rs.443296.40 lakh for the industry, with private insurers underwriting Rs.64530.68 lakh and LIC Rs.378765.72 la kh. The Individual Non-Single Premium underwritten during April-Oc tober, 2006 was Rs.1771903.71 lakh of which the private insurers underwrote Rs.536863.16 lakh and LIC Rs.1235040.55 lakh. The corresponding numbers for the previous year were Rs.743586.24 lakh, Rs.260432.63 lakh and Rs.483153.61 lakh respectively. Group premium: The industry underwrote Group Single Premium of Rs.467348.58 lakh of which the private insurers underwrote Rs.30147.74 lakh and LIC Rs.437200.84 lakh. The lives covered being 7678192, 456696 and 7221496 respectively. The corresponding numbers for the previous year were Rs.171382.70 lakh with private insurers underwriting Rs.17261.98 lakh and LIC Rs.154120.72 lakh and the lives covered being 8547743, 397721 and 8150022 respective ly. The Group Non-Single Premium underwritten during April-October, 2006 was Rs.53221.05 lakh which was underwritten entirely by the private insurers, covering 2366084 lives. The

corresponding numbers for the previous year were Rs. 18031.15 lakh and covering 1277400 lives. 29 Segment-wise segregation: A further segregation of the premium underwritten during the period indicates that Life, Annuity, Pension and Hea lth contributed Rs.2329869.52 lakh (64.24%), Rs.74006.48 lakh (2.04%), Rs.1221904.91 lakh (33.69%) and Rs.897.90 lakh (0.02%) respectively. In respect of LIC, the bre ak up of life, annuity a nd pension categories was Rs.1677831.45 lakh (58.04%), Rs.69437.82 la kh (2.40%) and Rs.1143339.44 lakh (39.55%) respectively. In case of the private insurers, Rs.652038.07 lakh (88.58%), Rs.4568.66 lakh (0.62%), Rs.78565.47 lakh (10.67%) and Rs.897.90 lakh (0.12%) respectively was underwritten in the four segments. Unit linked and conventional premium: Analysis of the statistics in terms of linked and non-linked premium indicates that 49.46% of the business was underwritten in the non-linked category, and 50.54% in the linked category, i.e., Rs.1793702.35 lakh and Rs.1832976.45 la kh respective ly. In case of LIC, the linked and non-linked premium was 41.38% and 58.62% respectively, as against whic h for the private insurers taken together this stood at 86.53% and 13.47% respectively. During the corresponding period of the previous year, linked and non- linked premium indicates that 54.74% of the busine ss was underwritten in the non-linked category, and 45.26% in the linked category, i.e., Rs.752509.54 lakh and Rs.622185.30 lakh respective ly. In case of LIC, the linked and non-linked premium was 33.96% and 66.04% respectively, as a gainst which for the private insurers taken together this stood at 77.02% and 22.98% respe ctively. Growth momentum continues in October 2006 with 25.3 percent All-round growth : The month of October 2006 has been the month of extraordinar y growth for the nonlife insurers with the growth rate high at 25.3 percent. This ac hie ved rate is only slightly below that of September of 25.8 percent. As against the monthly renewals of Rs.1772 crore in Octobe r last year, the premium income scaled in 2006 is Rs.2220 crore. The established players have recorded an accretion of Rs.151 crore at a growth rate of 11.3 percent. The new players have had an accretion of Rs.297 crore at a growth rate of 63 percent. Among the former, New India leads with an accretion of Rs.60 crore followed by Orie ntal with Rs.56 crore. But the stellar performances in the month have come from ICICI Lombard that has p roduced a massive accretion of Rs.167 crore with Reliance adding Rs.56 crore to its meager renewal premium of Rs.12 crore. The new pla yers ha ve continued to maintain a strong grip on the ir market share that stands at 35 percent. Two points of interest to the market have emerged. One is that the monthly accretion of ICICI Lombard at Rs.167 crore is higher than the combined accretion achieved by a ll the established players of Rs.151 crore. This performance should stand out as of interest to the market. The second point of market interest is that for the first time, the October monthly premium of ICICI Lombard at Rs.310

crore has exceeded the monthly premium performances of National Insurance and UIIC that have accomplished premiums of Rs.305 crores and Rs.257 crore respective ly. The established players do seem to be coming under increasing pressure by the new pla yers with their re lentless high growth rates and premium productions. 30 41 per cent growth in life insurance industry in 2006 : New Delhi: Life insurance sector grew by 41 per cent in 2005-06 due to better performance of countr y's largest life insurer, LIC, and private players like Baja j Allianz and ICICI Prudential. The 15 life insurance companies together collected Rs 35,898 crore in the fisc al ended March this year, compared to Rs 25,343 crore in the previous fiscal, according to data compiled by regulator IRDA. Life Insurance Corporation's premium income rose more than 28 per cent to Rs 25,645 crore after it sold 3 .16 crore policies as against Rs 19,972 crore collected a year a go. However, LIC's market share dipped by 6.63 per cent to 71.44 per cent from 78.07 per cent in the year ago period due to stiff competition and aggressive marketing of private life insurers. The 14 private pla yers were able to steadily increase their market share from 21.93 per cent to 28.56 per cent in a year's time by collecting Rs 10,252 crore during the pe riod under review. Private sector life insurance business jumps 90% : In a tough battle to expand market shares the private sector life insurance industry consisting 14 life insurance companies at 26% have lost 3% of market share to the state owned Life Insurance Corporation (LIC) in the domestic life insurance industry in 200607. According to the figures released by Insurance Regulatory & Development Authority the total premium these 14 companies have shot up b y 90% to Rs 19,471.83 crore in 2006-07 from Rs 10, 252 crore. LIC with a total pr emium mobilization of Rs 55,934 crore has been able retain a market sha re of 74.26 % during the reporting period. In total the life insurance industry in first year premium has grown by 110% to Rs 75, 406 crore during 2006-07. The 2006-07 performance has thrown a few surprises in the ranking among the private sector life insurance companies. New entrants like Re liance Life a nd SBI Life had shown a huge growth of over 381% and 210% respectively during the year. Reliance Life which has become one of the top five companies ended the year with a premium of Rs 930 crore during the year. Though ICICI Prude ntial Life Insurance remained as the No 1 private se ctor life

insurance company during the year Bajaj Allia nz overtook ICICI Prudentia l in terms of monthly market share in March, for the first time ever. Bajaj's market share among private players in non-single premium for March stood at 29.1% vs. ICICI Prudential's 23.8%. Bajaj ga ined 4.6 percentage point market share among private sector players for FY07. Among other private pla yers, SBI Life and Re liance Life continued to do well, each gaining 4% market share in FY07. SBI Life's growth was driven by increasing contribution from ULIP premiums. Another notable development of the 2006-07 performance has been the expansion of reta il markets by the life insurance comapnies. Bajaj Allianz Life insurance has added 20 lakh policies while ICICI Pru dential has expanded over 19 lakh policies during the year. 31 Building a Vibrant Insurance Mar ket in India : India's insurance industry is a n example of the positive effects of competition and new investors in the ma rketplace. As we know, India opened its insurance market to the private sector in 1999 when parliament passed a new law establishing an indepe ndent regulatory body to oversee the insurance market. The law opened the door for participation of private insura nce companies and a limited participation of foreign insurance companies through joint ventures with Indian companies. The law also charged insurance companies to ma ke available insurance products and services to the huge segment of the population that are vulnerable and not necessarily part of the formal economy. The results of the liberalization are there for everyone to see. The insurance markets -both life and non-life -- have grown impressively. IRDA is working on a regulator y framework that helps level the pla ying fie ld for all type s of insurance companies, irrespective of their ownership. Since 1999, IRDA has licensed 22 new private Indian insurance companies, an overwhe lming number of which have globa l insurance companies as their partners. To date, the industry has attracted foreign direct investment of $235 million. In 2006, Indian insuranc e companies mobiliz ed over $29 billion, nearly four times as much as in 1999 ($8 billion). In other countries, this kind of capital mobilization provides crucial resources for investment in infrastructure, corporate businesses, longterm bonds, and municipal projects. Once India does more to free insurance companies to invest in such important sectors, it too can gain benefit from this long-term financial resource. Other improvements are occurring as we ll. New insurance products such as product

liability insurance, professional liability insurance, small/medium size enterprise insurance, weather insurance, and group health insurance for the poor have been launched. Private insura nce companies are also using banks, microfinance institutions and cooperatives to increase their market share and compete with well-entrenched stateowned insurance companies. The marketplace is getting competitive, but the market share of private insurance companies remains very low in the 10-15 percent range. The heavy hand of government still dominates the market, with price controls, limits on ownership, and other re straints. We have see n what happens in India when a market is truly opened up. We saw it in the IT sector, we saw it in the telecom sector, and we are seeing it in the aviation sector. Why can't insurance be next? India's insurance market remains ver y small compared with some of the major emerging markets. South Africa and South Korea, with a fraction (onetwentieth) of India's population, do at least twice as much insurance business as Indian companies did in 2004. This is a major missed opportunity for India's economy. A vibrant insurance market can support the economy by providing long-term capital -- equity and debt -- to the private sector. For example, in the U.S. over two-thirds of financial assets of insurance companies are in corporate bonds and equities, municipal securities and commercial mortgages. Insurance also shields hou seholds and businesses from irrecoverable loss, such as from major natural disasters, illness and death. In India, 80 percent of health care is privately provided, yet only 10 percent of the population has access to health insurance. Therefore, many individua l households ha ve to pay the full out-of-pocket costs for health treatment. What will expand the insurance industry and help it contribute to the economy? Major policy a nd institutional issues have to be addressed and changed. 32 Insurance is a capital-intensive industry. It is also a long-gestation business. India's insurance industry needs capital, and a major source of capital would be from foreign investors, who are now limited to 26 perce nt ownership. India needs to raise the cap on Foreign Direct Investment (FDI) to attract capital for the industry. For some time there has been an understanding that the FDI cap will be ra ised to 49 percent, and many companies entered the Indian market with this e xpectation. Fa ilure to follow through in raising the cap is increasingly seen by investors as a bre ach of faith. This promise needs to be delivere d, not 5 years from now, but soon, if India wishes to regain its cre dibility in the eyes of foreign investors. Increasing the cap on

FDI will both enha nce the growth of the insurance indu stry and improve global confidence in India as a business and investment destination. The cap should be raised above 50 percent within a short period so that fore ign investors would have manageme nt control commensurate with their investment and the flow of FDI to the sector will increa se. Leading foreign companies bring more than capital to the insurance industry. They also bring generations of successful experience in mana ging and growing the industry. The benefit of the long-term capital that the insurance industry mobilizes is also being lost as a source of long-term capital. In India, ove r 60 percent of the insurance industry's financ ial a ssets are locked in government securities. Investment guide lines for insurance companies prescribed b y the regulator must be changed to allow and promote access to insurance funds by the corporate sector and infrastructure projects. There is also a strong case for raising the FDI cap for reinsurance and auxiliary insurance services, such as brokerage and actuarial services. Major lines of non-life insurance business such as fire and car continue to be governed b y a pricing re gime that is administered and not risk-based. This distorts the market and makes it inefficient. It has prevented the emergence of a culture of underwriting in insurance companies. The IRDA needs to dismantle this regime to make these segme nts of the market truly competitive. The IRDA should also seek to create a regulatory regime that promotes the most efficient use of capital, eliminates avoidable micro-manageme nt of business practices, allows companies to price their products prudentia lly, and levels the playing fie ld between private and state-owned insurance companie s. When mar kets are competitive and responsive to consumer demand and preference, it is the consumer that benefits in terms of lower cost and incre ased ability to manage r isks. Hea lth is an area that is underserved by the insurance industry. India as an economy has high health spending but poor health outcomes. With no pooled risk sha ring from insurance policies and a health care system that is primarily private, the cost to individuals becomes a major economic bu rden. For this rea son, many microfinance institutions are finding that a primary use of micro loans to the poor is to pay medical bills. The current minimum capital requirement of $22 million capital for setting up a health insurance company is a significant barrier to entry, particularly when FDI is restricted to 26 percent. The lack of data from both health providers and from e xisting claims makes

risk-based pricing of hea lth insurance products difficult. The absenc e of an appropriate regulatory framework that enforces a minimum level of service and hygiene standards is 33 an important reason the health insurance market in India is so underdeveloped. It is not surprising that not a single health insurance company is among the 22 new private insurance companies lice nsed since 1999. Clearly, the IRDA a nd the Ministr y of Health need to work in tandem to solve these problems. Another area where the insurance industry is not doing its job is he lping mitigate the risks for personal and business loss from natural catastrophes. In the past decade, India and China a ccounted for one-fourth of the global economic losses from natural disasters. Insurance availability in India for natura l catastrophes is almost ne gligible. As we have seen with the Indian Ocean tsunami, the absence of a "safety net" for property lost in a disaster has led to substantial personal loss and slowed economic recovery. Insurance Sector Reforms in India: Challenges and Opportunities : Insurance in India starte d without any regulations in the nineteenth ce ntury. It was a typical story of a colonial era: a few British insurance companies dominating the market serving mostly large urban centers. After the independence, the Life Insurance Company was nationalized in 1956, and then the general insurance business was nationalized in 1972. Only in 1999 private insurance compa nies were allowed back into the business of insurance with a ma ximum of 26 per cent of foreign holding (World Bank Economic Review 2000). The entr y of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. On July 14, 2000 Insurance Regulatory and Development Authority bill was passed to protect the interest of the policyholders from private and fore ign players. The following companies are entitled to do insurance business in India. The private insuranc e joint ventures have collected the premium of Rs.1019.09 crore with the investment of just Rs.3,000 crore in three ye ars of liberalization. The private insurance pla yers have significantly improving their market share when compared to 50 years Old Corporation (i.e. LIC). As per the figures compiled by IRDA, the Life Insurance Industry recorded a total premium underwritten of Rs. 10,707.96 crore for the period under review. Of this, private players contributed to Rs.1, 019.09 crore, accounting for 10 percent. Life Insurance Corporation of India (LIC), the public sector giant, continued to lead with a premium collection of Rs.9,688.87 crore, translating into a market share of 90 pe r cent. In terms of number of policie s and scheme s sold,

private sector accounted for only 3.77per cent as compared to 96.23 per cent share of LIC (The Economic Times, 21March ¶04). he ICICI Prudential topped among the private playe rs in terms of premium collection. It recorded a premium of Rs. 364.9 crore and a market share of 25 per cent, followed b y Birla Sun Life with a premium under- written Rs.170 crore and a market share of 15 percent, HDFC Standard with 132.7 crore and Max New York Life with Rs.76.8 crore with a market share of approximately 15 per cent each. Unlike their counterpart in the life insurance business, private non-life insurance companies have not yet started addressing the retail market. All is set to change in the coming years. Like in the banking sector, nonlife insurance companies will soon ha ve no choice but to focus on individual bu yers. The latest series of bomb attacks, attack on parliament, attack on Ayodhya, attacks of the Maoists, nature calamities like tsunami, floods and drought, ragging are prevailed in the country and need not to sa y about the farmer who has been insecure about rains, seeds, crops and suitable price for his crop. In developed countrie s, the owners have insured 34 even pet dogs. Whereas in India about 80 percent of human beings a nd major natural resources have not been insured in globalization er a. It is, therefore , an urgent need to explore the challenges and opportunities faced b y the insurance sector in India. India’s Insurance Industry Likely To Jump By 500% In 2010: ASSOCHAM : The Associated Chambers of Commerce and Industry of India (ASSOCHAM) has projected about 500% hike in the size of domestic insurance business which will grow to US$ 60 billion b y 2010 from the current size of around US$ 10 billion as the growing competitive age is developing a larger appetite among people for wider insurance coverage. The projections of the Chamber are based on fee dback that it received from its various constituents, engaged in the insurance business, highlighting that India ¶s life insurance premium as a percentage of GDP is currently estimated at 1.8% against 5. 2% in US, 6.5% in UK and about 8% in South Korea. Releasing the analysis, ASSOCHAM President, Mr. Venugopal N. Dhoot said that rural and semi-urban India will contribute US $35 billion to the Indian insurance industry b y 2010, inc luding US $20 billion by way of life insurance and the rest US $15 billion through non-life insurance schemes. ³ A large part of rural India is still untapped due to poor distribution, large dista nces and

high costs relative to returns. Urban sector insurance is estimated to reach US $25 billion by 2010, life insurance US $15 billion and non- life insurance US $10 billion ´ , added Mr. Dhoot. ASSOCHAM findings reveals that in the coming years the corporate segment, as a whole will not be a big growth area for insurance companies. This is because pe netration is already good and c ompanies receive good services. In both volumes a nd profitability therefore, the scope for expansion is modest. ASSOCHAM has suggested that insurer ¶s strategy should be to stimulate demand in areas that are currently not served at all. Insurance companies mostly focus on manufacturing sector; however, the services sector is taking a large a nd growing share of India ¶s GDP. This offers immense opportunities for expansion opportunities. To understand the prospects for insurance companies in rural India, it is very important to understand the requirements of India's villa gers, their daily lives, their peculiar needs and their occupational structures. There are farmers, craftsme n, milkmen, wea vers, casua l labours, construction workers and shopkeepers and so on. More often than not, they are into more than one profession. The rural market offers tremendous growth opportunities for insurance companies and insurers should develop viable and cost-effective distribution channels; build consumer awareness and c onfidence. The Paper found that there are a total 124 million rural households. Nearly 20% of all farmers in rural India own a Kissa n Credit cards. The 25 million credit cards used till date offer a huge data base and opportunity for insurance companies. An extensive rural age nt network for sale of insurance products could be 35 established. The agent can play a major role in creating awarene ss, motivating purchase and rendering insurance services. There should be nothing to stop insurance companies from trying to pursue their own unique policies and target whatever needs that they want to target in rural India. ASSOCHAM suggests that insurance needs to be pa ckaged in such a form that it appears as an acceptable investment to the rural people. In the near future, when we ¶ ll see more innovations in agriculture in the form of corporatization or a more professiona l approach from the farmers ¶ side, insurance will definitely be one option that the rural Indian is going to accept.

ASSOCHAM believes that insurers should enter into tie-ups or understandings with governme nt age ncies to ensure the success of the insurance schemes. The ne ed of the hour is to have innovative policie s that have explicit benefits for the people to observe, understand and measure. Indian Insurance Industry: New Avenues for Growth 2012 : Description: With an annua l 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) was 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 whic h the gross premium collection forms a significant part. The funds availab le with the stateowned Life Insurance Corporation (LIC) for investme nts are 8% of GDP. Till date, only 20% of the total insurable population of India is covered under various life insurance schemes, the penetration ra tes of health a nd other non-life insurances in India is also well below the international level. These facts indicate the of im mense growth potential of the insurance sector. The year 1999 saw a revolution in the Indian insurance sector, as major structural changes took place with the ending of government monopoly and the passage of the Insurance Regulator y and Develop ment Au thority (IRDA) Bill, lifting all entry restrictions for private pla yers and allowing foreign players to enter the market with some limits on direct foreign ownership. Though, the existing rule says that a foreign partner can hold 26% equity in a n insurance company, a proposal to inc rease this limit to 49% is pending with the governme nt. Since opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 21 private companies have been granted licenses. Innovative products, smart marketing, and aggressive distribution ha ve e nabled fledgling private insurance companies to sign up Indian c ustomers faster than anyone expected. Indians, who had a lways seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. The life insurance industry in India grew b y 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. This report, ³ Indian Insurance Industry: New Avenues for Growth 2012 ´ , finds that 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 policie s in 36 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 bu siness 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 ye ar'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 researc h re port is on the pote ntial growth on the Indian Insurance Sector, it also talks about the market size, market segme ntation, and key de velopments in the market after 1999. 37 CHAPTER 2 RESEARCH METHODOLOGY 38 RESEARCH OBJECTIVES: 1. To compare the performance of LIC and private insurance companies in India. 2. To find out the performances of LIC and private insurance companies in each category (size. growth, productivity a nd efficie ncy) 3. To compare grievance management of LIC and private insurance companies. RESEARCH DESIGN : a. Type of research design : Analytical Research b. Data collection : Secondary Sources c. Statistica l T ools : Ratio Ana lysis Bar Graph RESEARCH PROCESS In this research my research objective was to compa re the pe rformance of LIC and Private insuranc e companies. For this purpose I decided the four broad categories under which I have compared the LIC and Private insurance companies. These are: 1. Size 2. Growth 3. Productivity 4. Grie vance Handling Under these Broad Categories I have analyzed 13 factors which are: 1. Size

• Total Premium • Total Income • Size of Balance Sheet • Total number of Policies • Total number of Branches 2. Growth • Growth in Premium • Growth in Income 39 • Growth in number of Policies • Growth in Market share 3. Produ ctivity • Business per Branch • Income per Branch • New Premium per Branch 4. Grie vance Handling I have used the Se condary data of last five financial years. I ha ve collected data from the various balance sheet of LIC and other private insurance companies, web sites and in some cases I personally met some emplo yees of some insurance companies. I tried to find out most of the information required to compare the LIC and private insurance companies. In Analysis I have found all the required data and on the basis of performance ga ve the rank to LIC and Private Insurance Companies on each factor and then points. Now these Points have been multiplied with the we ightage of that factor. And then after the a nalysis of each factor a consolidated point tab le has been prepared to know that which sector is performing better than other. The Weightage for different categories are: Factors Weightage Size 25% A. Total Premium 5% B. Total Income 5% C. Balance Sheet Size 5% D. Total No. of Policies 5% E. Total No. of Branches 5% Growth 40% A. First Premium 10% B. Growth in Income 10%

C. Increase in No. of Policies 10% D. Growth in Market Share 10% Productivity 15% A. Business per Branch 5% B. Income Per Branch 5% C. First Premium per Branch Grievance Handling 20% 40

5%

LIMITATIONS: 1. Could reach to a limited number of documents of different insurance companies in regard to the management and other policies and resultant figures so as to identify the exact cause of their lag in performance. 2. Due to th e limited time could not study all the insurance companies original documents individually. 3. Non-Proficiency in technical aspects of insurance companies might have hindered the best analysis of the findings. SIGNIFICANCE OF THE STUDY: The Detailed Study has been done with the purpose of finding out the relative share of LIC and Private Insurance in India. It is useful for the people associated with the Insurance Industry and the research associates related to the Insurance Sector in India. This study will acquaint them with the data of all the banks complied at one place along with the findings, conclusion and recommendations. 41 CHAPTER 3 ANALYSIS AND INTERPRETATION 42 1. SIZE : (A) TOTAL PREMIUM : (Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 63533 75127 90792 127822 149789 LIC 3120 7727 15083 28253 51561 Private Insurers TOTAL 66653 82854 105875 156075 201350 PREMIUM OF LIC 149789 160000 127822 140000 120000 90792 100000 80000 63533 75127

60000 40000 20000 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 PREMIUM OF PVT INSURERS 60000 51561 50000 40000 28253 30000 20000 15083 7727 10000 3120 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 43 points after multiplying by Avg. Pre mium weightage ( In Crore s) Rank points (7.5%) LIC 101412.20 1 1 7.5 Private Insurance Co. 21148.80 2 0.5 3.75 Average premium of LIC is much more than that of all insurance companies altogether. LIC ¶s avera ge premium of the last five ye ars is nearly five time s the average premium of the all other private insurance companies. It can be said that up to that time their were less number of private players in the fie ld of insurance but then also undoubtedly LIC is the king. (B) TOTAL INCOME : (Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 93089 112393 132147 174425 206363 LIC 4323 9049 18863 24242 52648 Private Insurers TOTAL 97412 121442 151010 198667 259011 INCOME OF LIC 250000 206363 200000 174425 132147 150000 93089 112393 100000 50000 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08

44 INCOME OF PVT INSURERS 60000 51561 50000 40000 30000 24242 18863 20000 9049 10000 4323 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 points after multiplying by Avg. Income weightage ( In Crores) Rank points (7.5%) LIC 143683.40 1 1 7.5 Private Insurance Co. 21825.00 2 0.5 3.75 All over income of LIC is much more than than of private players. It is due to the fact that LIC being a government agency is being trusted by lot of companies and has large number of shares in big corporates. 45 (C) SIZE OF BALANCE SHEET : (Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 346022 416910 531390 625956 776904 LIC 6585 13653 28910 53048 100774 Private Insurers TOTAL 352607 430563 560300 679004 877678 BALANCE SHEET SIZE OF LIC 1000000 776904 800000 625956 531390 600000 346022 416910 400000 200000 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 BALANCE SHEET SIZE OF PVT INSURERS 120000 100774

100000 80000 53048 60000 40000 28910 20000 6585 13653 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 46 Avg. Balance Sheet points after Size multiplying by ( In Crores) Rank points weightage (7.5%) LIC 539436.40 1 1 7.5 Private Insurance co. 40594.00 2 0.5 3.75 Total average size of balance sheet of LIC in the last five years is certainly higher than that of private insurance companies. There is a huge gap in this value. It is obvious that LIC has bigger balance sheet as being working in the insurance field for quite large time. As compared to average balance sheet size of 40,594 crores of private insurance companies, LIC ¶s average balance sheet size goes to much high as that of 5,39,436.4 crores. (D) TOTAL NUMBER OF POLICIES : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 26968069 23978123 31590515 38229292 37612599 LIC 1658847 2233075 3871410 7922294 13261558 Private Insurers TOTAL 28626916 26211198 35462117 46151586 50874157 47 TOTAL NUMBER OF POLICIES 60000000 50874157 50000000 46151586 40000000 35462117 LIC 28626916 30000000 26211198 PVT.INSURERS INDUSTRY 20000000 10000000 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 points after

multiplying by Avg. number of weightage policies Rank points (7.5%) LIC 31675670 1 1 7.5 Private Insurance Co. 5789437 2 0.5 3.75 LIC is an undoubted leader in the field of average number of policies per year in the last five years. It is seen that private insurance companies are gaining momentum and are trying to defeat LIC in case of new insurances. Main reason behind LIC having such a large number of policies is the trust of a common man. LIC being a government agency has got a faith of indian mass. People are not yet prepared to give their savings in the hands of private players. 48 (E) NUMBER OF BRANCHES : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 2196 2197 2220 2301 2522 LIC 416 804 1645 3072 6391 P rivate Insurers TOTAL 2612 3001 3865 5373 8913 10000 8913 9000 8000 7000 6391 6000 5373 LIC 5000 PVT INSURERS 3865 4000 3072 INDUSTRY 2612 3001 3000 2196 2197 2220 2301 2522 1645 2000 1000 416 804 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 points after %growth in multiplying by number of weightage branches Rank points (7.5%)

LIC 14.8 2 0.5 3.75 Private Insurance Co. 1436 1 1 7.5 When the matter of total number of branches comes its very much obvious that LIC, being the oldest existing insurance company in India, has the large number of offices in the countryby any single insurance company. Since the number of private insurance companies is increasing, with continuous expansion in their business, now the number of branches of all private players has crossed the number of branches of LIC. 49 2. GROWTH : o (A) FIRST PREMIUM : ß ( ) Rs. In crores FY 03-04 FY 04-05 FY 05-06 FY 17347 20653 28515 55934 59996 LIC 2440 5564 10270 19425 33715 Private Insurers TOTAL 19787 26217 38785 75359 FIRST PREMIUM OF LIC 70000 55934 59996 60000 50000 40000 28515 30000 17347 20653 20000 10000 0 FY 03-04 FY 04-05 FY 05-06 FY FIRST PREMIUM OF PVT INSURERS 40000 33715 35000 30000 25000 19425 20000 15000 10270 10000 2440 5564 5000 0 FY 03-04 FY 04-05 FY 05-06 FY 50

06-07 FY 07-08

93711

06-07 FY 07-08

06-07 FY 07-08

Growth in First points after Growth in Premium multiplying First Premium (in Absoute by (in Percentage Terms) (in weightage Terms) crores) Rank points (10%) LIC 245.85 42649 2 0.5 5 Private Insurance Co. 1281.76 31275 1 1 10 Though LIC has attained more growth in absolute terms i.e. Rs.42649 crores but private players being so less in number five years back has achieved a dream come true growth of 1281.76 % which is certainly a matter of pride for them. (B) GROWTH IN INCOME : ( ) Rs. In crores FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 12101 19303 19754 42277 31988 LIC 2692 4725 9814 5379 28406 Private Insurers TOTAL 14793 24028 29568 47656 60394 % GROWTH IN INCOME : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 14.9 20.7 17.5 32 18.3 LIC 165 109.3 108.4 28.5 117 Private Insurers TOTAL 17.8 24.6 24.3 31.5 30.3 51 180 165 160 140 117 109.3 108.4 120 100 LIC 80 PVT INSURERS 60 INDUSTRY 32 40

28.5 17.8 24.6 24.3 31.5 30.3 18.3 14.9 20.7 17.5 20 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 Growth in points after Growth in Income multiplying Income (in Absoute by (in Percentage Terms) (in weightage Terms) crores) Rank points (10%) LIC 164.34 19887 2 0.5 5 Private Insurance Co. 955.20 25714 1 1 10 Here LIC has neither attained more growth in absolute terms i.e. Rs.19887 crores as compared to 25714 crores of private pla yers nor has got more growth in terms of percentage.this shows that private players are doing great job in enhancing their business. (C) INCREASE IN NUMBER OF POLICIES : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 1475992 -2989946 7632584 6638585 -616693 LIC 804696 574228 1638335 4050884 5339264 Private Insurers TOTAL 2280688 9270919 10689469 4722571 2415718 52 % INCREASE IN NUMBER OF POLICIES : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 5.79 -11.09 31.75 21.01 -1.6 LIC 94.21 34.62 73.37 104.64 67.4 Private Insurers TOTAL 8.6 -8.4 35.3 30.1 10.2 % GROWTH IN NO. OF POLICIES 120 104.64 100 94.21 80 73.37 67.4 LIC

60 PVT INSURERS 35.3 30.1 34.62 40 INDUSTRY 31.75 21.01 20 10.2 8.6 5.79 0 -1.6 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 -8.4 -11.09 -20 Growth in Growth in points after number of number of multiplying policies policies by (in Percentage (in Absoute weightage Terms) Terms) Rank points (10%) LIC 39.47 10644530 2 0.5 5 Private Insurance Co. 699.44 11602711 1 1 10 Private players are doing extremely well a s they a re increasing their customer base rapidly. 53

(D) MARKET SHARE : 26.1 FY 07-08 73.9 25.8 FY 06-07 74.2

26.5 PVT. INSURERS FY 05-06 73.5 LIC 21.2 FY 04-05 78.8 12.3 FY 03-04 87.7 0 20 40 60 80 100 LIC is still the market leader in insurance industry with 73.9 % share. But we cannot forget that in last five years market share of LIC has decreased. It was 87.7 % in year 2003-04 which came down to 73.9 % in 2007-08. 54 3. PRODUCTIVITY : (A) BUSINESS PER BRANCH : (Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 28.93 34.20 40.9 55.55 59.20 LIC 7.5 9.61 9.17 9.2 8.07 Private Insurers BUSINESS PER BRANCH 70 59.2 60 55.55 50 40.9 40 34.2 LIC 28.93 30 PVT INSURERS 20 7.5 9.61 9.17 9.2 8.07 10 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 points after Av g. Business multiplying by Per Branch (In weightage crores) Rank points (5%) LIC 43.756 1 1 5 Private Insurance Co. 8.71 2 0.5 2.5 Avg business per branch of LIC is much higher than that of whole private

insurance 55

companies.

(B) INCOME PER BRANCH : (Rs. In crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 42.39 51.16 59.52 75.80 81.80 LIC 10.41 11.25 11.47 7.89 8.23 Private Insurers INCOME PER BRANCH 90 81.8 75.8 80 70 59.52 60 51.16 50 42.39 LIC 40 PVT INSURERS 30 20 10.41 11.25 11.47 7.89 8.23 10 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 Avg. Income Per points after Branch (In multiplying by crores) Rank points weightage (5%) LIC 62.134 1 1 5 Private Insurance Co. 9.864 2 0.5 2.5 Average income per branch of LIC is much more than that of private insurance companies. Its almost six times the total value of all the private companies. 56 (C) NEW PREMIUM PER BRANCH : (Rs.in crores) FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 7.90 9.40 12.84 24.30 23.78 LIC 5.86 6.92 6.24 6.32 5.28 Private Insurers NEW PREMIUM PER BRANCH 30 24.3 23.78

25 20 15 LIC 12.84 PVT INSURERS 9.4 10 7.9 5.86 6.92 6.24 6.32 5.28 5 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 Avg. New Premium Per points after Branch (In multiplying by crores) Rank points weightage (5%) LIC 15.644 1 1 5 Private Insurance Co. 6.124 2 0.5 2.5 This value tells us about increase in the business of an insurance compa ny in a period. Here we see that LIC is ahead of private insurance companies in case of increasing their business. 57 4. GRIEVANCE HANDLING : TOTAL NUMBER OF GRIEVANCES : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 474 704 851 354 651 LIC 45 195 540 507 1406 Private Insurers NUMBER OF GRIEVANCES RESOLVED : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 39 123 215 313 80 LIC 26 83 216 450 1103 Private Insurers % OF GRIEVANCES RESOLVED : FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 8.2 17.5 25.3 88.4 12.2 LIC 57.7 42.6 40.0 88.7 78.4 Private Insurers 58 GRIEVANCES IN LIC 800 704 651

700 540 507 600 474 450 500 400 TOTAL 300 216 RESOLVED 200 123 80 39 100 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 GRIEVANCES IN PVT. COMPANIES 1600 1406 1400 1103 1200 1000 800 TOTAL 540 507 600 450 RESOLVED 400 216 195 200 45 26 83 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 % OF GRIEVANCES RESOLVED 100 88.4 88.7 90 78.4 80 70 57.7 60 50 LIC 42.6 40 40 PVT INSURERS 25.3 30 17.5 20

12.2 8.2 10 0 FY 03-04 FY 04-05 FY 05-06 FY 06-07 FY 07-08 59 points after multiplying by % Grievances weightage resolved Rank points (7.5%) LIC 25.37 2 0.5 3.75 Private Insurance Co. 69.70 1 1 7.5 Grievance Ha ndling is one of the major issues in any organization. It plays an important role in Insurance sector. People do attract towards companies who handles their grievances. Here we see that private players are much ahead of LIC when the matter comes to grievance management. In the last five years LIC has resolved only 25.37 % of cases brought in front of them while the percentage of cases resolved in case of private players is 69.7 % . This shows that private players are very serious about their image and are working hard to provide the solution of the problems of the people as early as possible. 60 TOTAL POINTS TABLE: Private Insurance Factors LIC Companies Size A. Total Premium 7.5 3.75 7.5 3.75 B. Total Income 7.5 3.75 C. Balance Sheet Size 7.5 3.75 D. Total No. of Policies 3.75 7.5 E. Total No. of Branches Growth A. First Premium 5 10 5 10 B. Growth in Income C. Increase in No. of Policies 5 10 D. Market Share 10 5 Productivity 5 2.5 A. Business per Branch

5 2.5 B. Income Per Branch C. First Premium per Branch 5 2.5 Grievance Handling 3.75 7.5 Total Score 77.75 72.75 61 CHAPTER 4 FINDINGS & CONCLUSIONS 62 FINDINGS & CONCLUSIONS: • LIC is the giant of the insurance sector. The overall size of LIC is much more than that of all private insurance companies. Private insurers are in expansion mode and are increasing their size but are still much behind LIC. Total premium deposits in LIC is much higher than the private insurance companies. Total premium of LIC in FY 07-08 was 149789 crores which three time s more than that of private insurance companies. • Income of LIC is much greater than private insurance companies. Last year total income fro m investments of LIC was 48244.14 crores which was nearly equal to the total income of the all private insurance companies. By this we can imagine how big the LIC is. • Size of balance sheet of private insurance companies are lagging much behind LIC. Balance sheet of LIC is se ven times bigger than that of private insurance companies. • If we see the total number of policies issued by LIC and private insurance companies, we find that there is a huge gap between them. No doubt that LIC is a well established player in the field of insurance and many private companies have just started the ir business. Hence it is obvious that LIC is having large number of policyholde rs. • Number of branches of private insurance companies is increasing as the new players are entering in this market. Also the established players are in expansion phase and hence are expanding there business. There are ma ny private insurance companies and hence there tota l number of branches has gone past LIC in the la st fina nc ia l year. But offices of private insurance companies are mostly in urban are as and still it is LIC which covers most of the area. Hence we see that LIC is leading when it comes to size. It is giant in insurance sector having huge network and customer base. •

We see that due to excellent service quality and attractive offers private insurance compa nies have started getting a number of customers. They are growing rapidly. Though LIC is also increasing its customer base but private insurance companies are moving at a fast pace. • Though the income of private insurance companies is negligible when compared with LIC but then also the pace with which they are increasing their income is tremendous. Private insurance companies are expanding their business and will c ertainly going to give a tough competition to LIC in the coming days. • LIC is certa inly having a large customer base. Private insurance companies are not having that much numb er of customer base but they are increasing it rapidly. T he y have re gistered a decent growth of 104.64 % in number of new policies in the year 2006-07. Last ye ar also their growth rate was 67.4 %. 63 • LIC, being the oldest pla yer in the existing insurance market, has the biggest market share of 73.9 % whic h was 87.3% five years earlier. We see that private insurance companies are penetrating in the customer base of LIC. Overall we can see that private insurance companies are giving a tough competition to the LIC and will certainly create a good business for themselves in the coming days. • There are many new e ntrants in this sector. There are many private insuranc e companies who have reported loss in this a nd previous years. This is the main reason why private insurance companies la g behind LIC in case of business per branch. There is a big differenc e betwe en them. • Same is the case when it comes to income pe r branch. LIC is much ahead of private insuranc e companies in this field. They are undoubted champions in insurance when it comes to profit earning. • New busine ss is increasingly going towards private insurance companies but still the customer base of LIC is ver y strong. In issuing new policies per branch also, they are ahead of private insurance companies though not by very large margin. Customer base of LIC is very strong and still business per branch, profit per branch or premium per branch, they are leading much ahead of private insurance companies. • LIC ha s not shown their good concern when the matter of grieva nce handling comes. Private insurance companies are far ahead in this matter. LIC has just resolved 25% cases in the last five years while private insurance companies have resolved nearly 70% cases. This is a matter from where customer shift starts. We have seen the

rapid increase in customer base of private insurance companies which ca n be very much affected b y this factor. Overall we have seen tha t still LIC is very famous but private insurance companies are growing at exceptionally fast pace. Private companies show due concern in grievance management and brings innovative schemes to attract the customers. Right now they are giving good competition to LIC and very soon they will give very tough competition to Life Corporation of India. 64 REFRENCES : ÿ Data on Indian Insurance from http://www.irdaindia.org ÿ Different statistics from http://www.rbi.org.in ÿ Journals published by Insurance Regulatory & Development Authority. ÿ Ma nageme nt of financial institutions by R.M. Srivastava ÿ http://www.businesstoday.com ÿ http://www.businessworld.com ÿ http://www.economictime s.com ÿ Different Survey on Insurance sector conducted by IIRC. ÿ Profile of Indian Insurance Companies by IRDA. ÿ www.licindia.co.in ÿ www.sbilife.co.in/ ÿ www.tata-aig-life.com ÿ www.bharti-axalife.com/ ÿ www.hdfcinsurance.com/ ÿ www.reliancelife.co.in/ ÿ www.bajaja llianz.com/ ÿ www.metlife.co.in/ ÿ www.birlasunlife.co m/ ÿ http://www.finance. indiamart.com 65