Indian Insurance Sector

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INDIAN INSURANCE SECTOR

University of Mumbai
A Project Report on

INDIAN INSURANCE SECTOR
Submitted by Gudhka Priya Pravin Roll no.29

In Partial fulfillment of the requirements of the award of the Degree of Bachelor of Commerce (Banking & Insurance)sem-VI

Padmashri Annasaheb Jadhav Bharatiya Samaj Unnati Mandal’s B.N.N.College, (A.,S., & C.) Bhiwandi, Dist. Thane Pin Code: - 421 305

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INDIAN INSURANCE SECTOR Padmashri Annasaheb Jadhav Bharatiya Samaj Unnati Mandal’s B.N.N.College, (A.,S., & C.) Bhiwandi, Dist. Thane Pin Code: - 421 305

CERTIFICATE
This is to certify that Ms.Gudhka Priya Pravin of Bachelor of Commerce
(Banking & Insurance) Semester – VI (2010-2011) has successfully completed the Project on INDIAN INSURANCE SECTOR Under the guidance of Prof. Mahesh mahajan.

1) Course Co-ordinator : -

Prof. Prabha pardeshi

2)Project Guide

:-

Prof. Mahesh mahajan

3) I/C Principal

:-

Prof. U.D.Kadam

4) External Examiner

:-

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INDIAN INSURANCE SECTOR

DECLARATION

I, Gudhka Priya Pravin student of Bachelor of Commerce (Banking &
Insurance) Semester – VI (2010-2011) hereby declare that, I have completed the Project titled INDIAN INSURANCE SECTOR

The information submitted is true and original to the best of my knowledge.

Name of the Student (Priya Gudhka)

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ACKNOWLEGEMENT

I am indebted to my project guide Prof. MAHESH MAHAJAN SECTOR ”. I am thankful to my other teachers for providing me the information as and when required. I am extremely thankful to my family members for their constant support. Last, but not the least, come my friends who discussed with me the various issues in my project. Finally, I want to thank one and all who helped me directly or indirectly through the project work. for helping me out in the successful completion of my Project Report on “INDIAN INSURANCE

Signature of the Student Name of the Student (Gudhka Priya Pravin)

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INDIAN INSURANCE SECTOR

OBJECTIVES
• To know the Effective Utilization of Resources • Economic Growth • To Encourages Capital Formation • Dispose of Loss-Making Govt. Unit

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TABLE OF CONTENT
Introduction. • Concept of insurance • Basic Insurance Terminologies. • Requirements of an Insurable Risk. • Concept of Insurable Interest. • Concept of Insurance Industry. • Why do People in India take Insurance? • Consumer Needs And Prefrence • Types of Insurance. • Brief History of Insurance Sector in India. • Reasons for Opening of Insurance Sector. • Potential For Insurance Sector in India. • Regulatory Authority. • Duties, Powers and Functions of IRDA. • Current Players. • Focus on Financial Inclusion • Indian Companies with Foreign Partnership. • Marketing Mix Policies. • Distribution Channels. • Challenges Before the Industry. • Emerging Trends. • Future Scenario of Insurance Industry.


Bibliography

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PREFACE
Whether the insurer is old or new, private or public, expanding the market will present multitude of challenges and opportunities. But the key issues, possible trends, opportunities and challenges that insurance sector will have still remains under the realms of the possibilities and speculation. What is the likely impact of opening up India’s insurance sector? The large scale of operations, public sector bureaucracies and cumbersome procedures hampers nationalized insurers. Therefore, potential private entrants expect to score in the areas of customer service, speed and flexibility. They point out that their entry will mean better products and choice for the consumer. The critics counter that the benefit will be slim, because new players will concentrate on affluent, urban customers as foreign banks did until recently. This seems to be a logical strategy. Start-up costs-such as those of setting up a conventional distribution network-are large and high-end niches offer better returns. However, the middle-market segment too has great potential. Since insurance is a volumes game. Therefore, private insurers would be best served by a middle-market approach, targeting customer segments that are currently untapped.

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INDIAN INSURANCE SECTOR

THE CONCEPT OF INSURANCE

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Introduction
Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. The risks which can be insured against incline fire, the perils of sea, death and accidents and bulglary. Any risk untingent upon these may be insured against at a premium commensurate with the risk involved. Thus collective earing of risk is called insurance. In the words of John Magee, " Insurance is a plan by which large number f people associate themselves and transfer to the shoulders of all, risks that attach to individuals." "Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premiums, to pay the other party called insured a fixed amount of money on the happening of a certain event." Insurance is a protection against financial loss arising on the happening of an unexpected event. Insurance companies collect premiums to provide for this protection. A loss is paid out of the premiums collected from the insuring public and the Insurance Companies act as trustees to the amount collected. For Example, in a Life Policy, by paying a premium to the Insurer, the family of the insured person receives a fixed compensation on the death of the insured. Similarly, in a car insurance, in the event of the car meeting with an accident, the insured receives the compensation to the extent of damage. It is a system by which the losses suffered by a few are spread over many, exposed to similar risks. Insurance is a mechanism for transferring risk and reducing risk by having a large number of individuals who share in the financial losses of the group. Risk inhibits action and is highly subjective on an individual basis. Insurance objectifies risk. People trade the possibility of

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financial loss for the relative certainty of the premium paid and reimbursement for loss. Some people believe insurance is similar to gambling or opening a savings account. Neither is true. When you place a bet, you create a risk and you have the chance of losing all or making more than your wager. Insurance companies write policies for pure not speculative risks and indemnify you when you have a covered loss. In the insurance industry, the word "indemnify" means you cannot be put in a better position than you were before the loss.

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BASIC INSURANCE TERMINOLOGIES
• Insured The person known as the policyholder, a person with insurance coverage. • Insurer A company licensed to transact the business of insurance and issue insurance policies. • Policy It's the written contract between an insurance company and its insured. It defines what the company agrees to cover for what period of time and describes the obligations and responsibilities of the insured. • Premium It's the amount of money a policyholder pays for insurance protection. • Claim It's the notice to the insurance company that under the terms of a policy, a loss maybe covered. • Indemnity Legal principle that specifies an insured should not collect more than the actual cash value of a loss but should be restored to approximately the same financial position as existed before the loss.

• Agent A licensed person or organization who sells insurance and represents the insurance company to the policyholder. • Broker
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An organization or person paid by the policy holder to look for insurance on their behalf. • Deductible It's the amount of the loss which the insured is responsible to pay before the insurance company pays the benefits. • Expiration Date This is the date on which the policy ends. • Grace Period A period (usually 30 or 31 days) following each insurance premium due date, other than the first due date, during which an overdue premium may be paid. All provisions of the policy remain in force throughout this period. • Limit It's the maximum amount paid by the insurance company under the terms of a policy. • Underwriting The process of classifying applicants for insurance by identifying characteristics such as age, gender, health, occupation and hobbies. People with similar characteristics are grouped together and are charged a premium based on the group's level of risk.

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REQUIREMENTS OF AN INSURABLE RISK
1) From the perspective of the insured:


The risk must be high. Losses with extremely high odds and extremely low odds might best be handled in other ways. The premium must be affordable or, at least, low in comparison with the possible loss.



• The loss must be unaffordable.


2. From the perspective of the insurer:


The loss must be fortuitous (unexpected in terms of timing and magnitude). The loss must non-catastrophic with neither the possibility of many losses at one time or any one loss of overwhelming magnitude.The losses must be personal because only people can suffer losses.





The loss must be definite in time, place and amount. This allows for a reasonably accurate prediction of loss and thus calculation of premium.

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CONCEPT OF INSURABLE INTEREST


The insured party must have an insurable interest in the person or property covered.This means that he or she must stand to suffer a loss should the peril occur.

• •

Generally, insurable interest must exist at the time that the loss occurs. Requiring insurance supports the principle of indemnity, which states that an insured should collect no more than the actual loss.

CONCEPT OF INSURANCE INDUSTRY
The important feature of insurance industry is the fact that not much capital is required to start and develop the business the equity base is always much smaller than the liabilities undertaken and the resources generated. The resources accumulation in the form of reserves Investment and other assets are much more enormous than the equity base. The need for additional capital infusion in response to inflation and consequent increase in management expenses and other input is very little and non-existence. The premium income generated and proper husbanding of the resources take care of this aspect.

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WHY DO PEOPLE IN INDIA TAKE INSURANCE?
People in India have been viewing Insurance, especially life insurance as a form of Investment . These are the common reasons why people in India take up insurance: Insurance safeguards a person /his family /his business against possible losses on account of risks and perils. It provides financial compensation for the losses suffered due to the happening of any unforeseen events.


Under Section 88 of Income Tax Act , a portion of premiums paid for life insurance policies (LIC) are deducted from tax liability. Similarly, exemption is available for Health Insurance Policy premiums.



Money paid as claim including Bonus under a life policy is exempted from payment of Income Tax. Encourages Savings : An insurance scheme encourages thrift among individuals. It inculcates the habit of saving compulsorily, unlike other saving instruments,wherein the saved money can be easily withdrawn.





The beneficiaries to an insurance claim amount are protected from the claims of creditors by affecting a valid assignment.

Consumer needs and preferences
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The growth in insurance industry has been spurred byproduct innovation, vibrant distribution channels, coupled with targeted publicity and promotional campaigns by the insurers. Innovation has come not only in the form of benefits attached to the products, but also in the delivery mechanism through various marketing tie-ups both within the realm of financial services and outside. All these efforts have brought insurance closer to the customer as well as made it more relevant. One of the crucial areas in the insurance sector is the adoption of new technology in the industry. It is an accepted fact that the insurance business is technology-driven. It has the potential to save costs, and hence, the scope for reducing the price of product. The coming years will witness a total revolution in the ways of doing business. E-commerce will be increasingly used in all the sectors, including banks and insurance and products will be sold on the internet. Insurance plans for children are fast becoming popular, as they not only offer payouts that can be timed to coincide with certain milestones in a child’s life, but also financial security if the parent dies. All the life insurance companies are now expressing a keen inclination toward children’s insurance plans and are willing to come out with new innovative product lines in the future. According to industry estimates, 20%–30% of the business of many companiescurrently comes from children-specific insurance policies alone. Emerging lifestyle trends amid a changing fabric of the Indian society have also modified social and financial behavior. For instance, an increase in the number of working women has led to a demand for life insurance policies, which in turn has helped women through a micro-entrepreneurship initiative. Project insurance is another area, which is increasingly gaining significant traction. This type of insurance has been prevalent for decades for those who undertake diverse and risky projects, whether government, public sector orprivate sector. With the new developments, particularly.

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INDIAN INSURANCE SECTOR Indian insurance sector: stepping into the next decade of growth in the
economic and industrial areas, apart from projects such manufacturing units, sales units and medium-sized factories, a large number of infrastructure projects such as constructing roads, canals, flyovers and bridges, and industrial units are coming up in significant numbers. There is, therefore, immense potential for this class of insurance. ULIP is one of the most successful innovative products in India. As a product, ULIP gained popularity post 2003, with an evolving market opportunity on the back of a booming equity market, low household equity penetration and heavy channel incentivization. Product innovation is likely to continue and traditional policies are set to gain some foothold in an otherwise ULIP-driven market. Insurance companies are now coming up with usage-based insurance, also known as pay-as-you-drive, which is a type of automobile insurance, whereby the costs of auto insurance depend upon the type of vehicle used, measured against “time, distance and place.” This differs from traditional insurance, which attempts to differentiate and reward “safe” drivers, giving them lower premiums and/or a no-claims bonus.The evolving customer preferences and the need fordeveloping customized products is the new mantra of growth, which most companies are following. In line with the product philosophy to introduce an innovative range of products that are most suitable to different customer needs, companies are introducing more customer-friendly products. The role of customized products is also seen in providing a competitive advantage.

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TYPES OF INSURANCE

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Insurance has been classified into: • Life Insurance • General Insurance or Non-Life insurance

LIFE INSURANCE
Life insurance is a written contract between the insured and the insurer, that provides for the payment of the insured sum on the date of the maturity of the contract or on the unfortunate death of the insured, whichever occurs earlier. The different types of life insurance are: • Whole Life Assurance Plans • Term Assurance Plans • Annuities

NON LIFE INSURANCE
There are various broad categories of non-life or general Insurance as follows:

Health Insurance:
Just like one looks to safeguard ones wealth, these policies ensure guarding the insurer's health against any calamities that may cause long term harm to ones life and even hamper ones earning ability for a lifetime. Some examples of this type of policy are mediclaim policy, personal accident, group accident, traffic accident, etc.

Business Insurance:
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Risks of loss of profits/business, goods, plant and machinery are most profound in case of business. Under this head they cover the most widely used policies that cover a business from any loss of the above kind. Some of these policies are burglary insurance, shopkeepers insurance, key-man insurance, marine insurance, public liability insurance, workmen compensation insurance, air transit insurance, fidelity guarantee insurance etc.

Automobile Insurance:
Auto Policy is required to be taken to cover the risks that arise to the owner, vehicle and third party. This includes the Compulsory Vehicle Policy (In India, by the Motor Vehicles Act, every car owner is required to covered against Act risks) and the Comprehensive Vehicle Policy.

Fire Insurance:
This policy is required to be taken to prevent any loss of profits property from incidental fire. Eg: fire insurance and fire consequential loss policy.

Travel Insurance:
Every year number of tourists die while travelling. They lose their baggages, passports etc are left stranded in unfamiliar environments. Medical attention in a foreign land while very expensive is also very difficult to find in foreign land. Travel policies are designed to take care of all the problems that generally occur while travelling, whether domestic or foreign.

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BRIEF HISTORY OF THE INSURANCE SECTOR IN INDIA
The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries. Till the end of 1999-2000, two government insurance companies, namely, Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) were the monopoly insurance (both life and non-life) providers in India. In the year 2000-01, the Indian Government lifted all entry restrictions for private sector investors. Foreign investment insurance market was also allowed in the Indian market and the face of the Indian Insurance sector changed dramatically. We will first take a brief look at the old players in the market and understand the position they were in before the opening up of the Insurance Sector.

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LIFE INSURANCE CORPORATION OF INDIA (LIC)
In 1956, 245 Indian and foreign insurers and provident societies that were prevalent in India were taken over by the central government and nationalised to form the Life Insurance Corporation of India (LIC) with a contribution of Rs. 5 crore from the Government of India. LIC was formed to spread the message of life insurance in the country and mobilise people's savings for nationbuilding activities. A monolith then, the corporation, enjoyed a monopoly status and became synonymous with life insurance. Today LIC has its central office in Mumbai and seven zonal offices at Mumbai, Calcutta, Delhi, Chennai, Hyderabad, Kanpur and Bhopal and operates through 100 divisional offices in important cities and 2,048 branch offices. LIC has 5.59 lakh active agents spread over the country. The Corporation also transacts business abroad and has offices in Fiji, Mauritius and United Kingdom. LIC is associated with joint ventures abroad in the field of insurance, namely, KenIndia Assurance Company Limited, Nairobi; United Oriental Assurance Company Limited, Kuala Lumpur; and Life Insurance Corporation (International), E.C. Bahrain. It has also entered into an agreement with the Sun Life (UK) for marketing unit linked life insurance and pension policies in U.K
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LIC sold 2,32,50,078 individual policies and earned a first premium income of Rs.14,844.05 crore during the financial year 2001-02. Post liberalisation, the company is bound to face stiff competition from the newer players in the market. However, LIC has the first mover advantage and today the common man relates life insurance with LIC and this will be the companies biggest advantage.

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GENERAL INSURANCE CORPORATION OF INDIA (GIC)
The General Insurance business in India was nationalized with effect from 1.1.1973 by the General Insurance Business (Nationalization) Act, 1972 and a Government company known as General Insurance Corporation of India was formed. 107 Indian and foreign insurers which were operating in the country prior to nationalisation, were grouped into four operating companies namely : 1. National Insurance Company Ltd. 2. Oriental Insurance Company Ltd. 3. New India Assurance Company Ltd. 4. United India Insurance Company Ltd. The Government of India subscribed to the capital of GIC. GIC, in turn, subscribed to the capital of the above four companies. All the four companies are government companies registered under the Companies Act. All the above four subsidiaries of GIC operate all over the country competing with one another and underwriting various classes of general insurance business except for aviation insurance of national airlines and crop insurance which is handled
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by the GIC and its subsidiaries have representation either directly or through branches in 18 countries and through associate/ locally incorporated subsidiaries in 14 other countries. A subsidiary company of GIC India International Pvt. Ltd. is operating in Singapore and their joint venture company, Kenindia Assurance Company Ltd. in Kenya. On the whole, the foreign operations of the general insurance industry have been profitable. GIC was converted into India's national reinsurer from December, 2000 and all the subsidiaries working under the GIC umbrella were restructured as independent insurance companies. Indian Parliament has cleared a Bill on July 30,2002 delinking the four subsidiaries from GIC. A separate Bill has been approved by Parliament to allow brokers, cooperatives and intermediaries in the sector. Currently insurance companies- both private and public-- has to cede 20 percent of its reinsurance with GIC. GIC is planning to increase reinsurance premium by 20 percent which works out at Rs. 3000 cr. GIC is actively considering entry into overseas markets including West Asia, South-east Asia and SAARC region.

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REASONS FOR OPENING UP OF THE SECTOR
INDUCE COMPETITION
It was seen that though the waves of competition were sweeping across the economy, LIC and GIC remain overstaffed, hierarchial monolithic monopolies with little competition even between the subsidiaries. As a result, the consumers are deprived of benefits such as wider range of products, efficient service and lower price of insurance covers.

LIBERALISATION EFFORT
The opening up of Insurance sector was a part of the on going liberalization in the financial sector of India. The changing face of the financial sector and the entry of several companies in the field of life and non life Insurance segment are one of the key results of these liberalization efforts. Insurance business by way of generating premium income adds significantly to the GDP.

HIGH PREMIUM AND LOW RETURNS
Pointing out that the insurance industry's funds are preempted through government-mandated investments with low yield, the report said this affects the financial results of the insurance companies. This is why rates of insurance premia are so high and returns on savings invested in life insurance are so low. In the absence of competition, LIC's vast marketing and services network was inadequately responsive to customer needs and there was excessive lapsation of policies.

INSURANCE MOBILISATION
The entry of several private insurance companies, particularly international insurance companies, through joint ventures, will speed up the process of
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insurance mobilisation. The competition will unleash new schemes and benefits, which will give consumers a better chance to save as well as insure. The penetration of Insurance in India is extremely low and the opening up of the sector was seen as a way increasing penetration.

FLOW OF FDI
The policy of the government to open up the financial sector and the Insurance sector is expected to bring greater FDI inflow in to the country.

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POTENTIAL OF THE INSURANCE SECTOR IN INDIA
LIFE INSURANCE STATISTICS
Indian Population 1 bn GDP as on 2000 (Rs billion) 20000 Gross Domestic Savings as a % of GDP 23% Estimated Market by 2005 650 million India has an enormous middle-class that can afford to buy life, health, and disability and pension plan products. The low level of penetration of life insurance in India compared to other developed nations can be judged by a comparison of per capita life premium. Despite the fact that the market is vast in India for the Insurance business, the coverage is far less compared with the international standards. Estimates show that a meagre 35-40 million, out of a population of 950 million, have come so far under the umbrella of the insurance industry. India has traditionally been a high savings oriented. Insurance sector in the Unites States is as big in size as the banking industry there. This gives us an idea of how important the sector is. Insurance sector channelises the savings of the people to long term investments. In India where infrastructure is said to be of critical importance, this sector will bring the nations own money for the nation. Life Insurance sector is one of the key areas where enormous business potential exists. In India currently the life insurance premium as a percentage of GDP is 1.3 percentage against 5.2 per cent in the US. But in the liberalized scenario, the life insurance premiums were projected to grow at around 18% to 20% from Rs. 215 billion in 1998- 99 to Rs.592 billion in 2004-05 and to Rs.1450 billion by 2009-10. Corporate non-life premium was projected to grow from Rs.84 billion in 1998-99 to Rs.386 billion in 2009-10 and personal line non-life from Rs.4 billion to Rs.51 billion.
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The potential market is so huge that it can grow by 15 to 17 per cent per annum. Now with the entry of private insurance companies, the Indian Insurance Market may finally be able to make deeper penetration into newer segments and expand the market size manifold.

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REGULATORY AUTHORITY
INSURANCE REGULATORY AND DEVELOPMENT

AUTHORITY


IRDA is formed as an authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry. With the Insurance Regulatory and Development Act, the focus shifted to the following:



The Insurance Regulatory and Development Authority (IRDA) should give priority to health insurance while issuing certificates of registration. Policyholders' funds will be invested in the social sector and infrastructure. The percentage may be specified by the IRDA and such regulations will apply to all insurers operating in the Country.





Insurers will be expected to undertake a certain percentage of business in the rural or social sector and provide policies to persons residing in rural areas, workers in the unorganised and informal economically back.



In case the insurers fail to meet the social sector obligation a fine of Rs.2.5 mn would be imposed the first time. Subsequent failures would result in cancellation of licenses.

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Duties, powers and functions of IRDA
The following are the powers and the functions of the IRDA are as follows:


The IRDA issues, modifies, renews, suspends, withdraws and cancels all certificate of registration for all parties that apply. They are also responsible for the protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance.





The IRDA specifies requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents. It also specifies the code of conduct for surveyors and loss assessors. The IRDA has been given the responsibility of promoting efficiency in the conduct of insurance business. It is in charge of promoting and regulating professional organisations connected with the insurance and reinsurance business. It has been entrusted with the control of the Insurance sector by calling for information from,undertaking inspection of, conducting inquires and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business.

• •







It will also be responsible for the control and regulation of the rates, advantages, terms and conditions that may be offered by insurers. The IRDA will specify the form and manner in which books of account shall bemaintained and statement of accounts shall be rendered by insurers and other insurance intermediaries.





One of the most important functions is that of regulating investment of funds by insurance companies and the maintenance of margin of solvency.

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The other function is that of adjudication of disputes between insurers and intermediaries or insurance intermediaries.

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CURRENT PLAYERS

In the first year of insurance market liberalisation (April 2-December 31, 2001) as much as 16 private sector companies including joint ventures with leading foreign insurance companies have entered the Indian insurance sector. Of this, 10 were under the life insurance category and six under general insurance. Since then, till June, 2002 two more joined the life insurance sector. Thus in all there are 18 players (12 life insurance and 6 general insurance) in the Indian insurance industry till date.

Life Insurance Companies:
• Life Insurance Corporation of India • ICICI Prudential • HDFC Standard Life Insurance • Max New York Life • Birla Sun Life Insurance • SBI Life • Tata AIG Insurance • ING Vysya Life Insurance • Allianz Bajaj • Amp Sanmar
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• Old Kotak Mahindra Life • MetLife India Insurance

General Insurance Companies:
• Bajaj Allianz General Insurance Co. Ltd • ICICI Limited • IFFCO-TOKIO General Insurance • National Insurance • New India Insurance • United Insurance • Oriental Insurance • Royal Sundaram • TATA AIG Insurance

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Focus on financial inclusion
The approach to insurance must be in sync with the evolving times. The mission of the insurance sector in India should be to extend the insurance coverage over a larger section of the population and a wider segment of activities. Around 40% of the population does not have access to the organized financial services sector in India. There is a significant demand for these services in excluded regions where it is difficult to provide these financial services. Therefore, a large section of the excluded population has to rely on the informal sector (moneylenders etc) for availing finance that is usually available at exorbitant rates. Apart from the obvious and apparent benefits of improving living standards, financial inclusion has a multiplier effect. By increasing the number of people in the umbrella, the value of the entire national financial system increases. The consequent fuller participation by all in the financial system makes monetary policy more effective, and thus provides an enabling environment for non-inflationary sustainable economic growth. Despite a robust growth of 30%–40% in premiums during 2003–2008, the per capita insurance premium is also low due to a large population base and the financial exclusion of a large section of this population.

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Need to increase financial inclusion in India
Since economic liberalization started in 1990s in India, financial inclusion has been at the forefront of policy makers to ensure that the benefit of economic growth percolates down to the poorest of the poor. The Eleventh Five Year Plan puts special emphasis to promote more inclusive growth in the financial services sector. The need for the delivery of financial services at an affordable cost to vast sections of disadvantaged and low-income groups is on the rise. Financial inclusion is likely to increase in the light of limited social security by the government. In India, the government provides very limited social security to its citizens as reflected in the fact that less than 4% of the population is covered under any of the social security schemes. Further, the self-employed or those working for small enterprises are exempt from contributing to the employees’ provident fund and need to make their own arrangements for savings and a protection cover. In the light of the need of protection instruments, there may be an expected increase in the demand for financial products in the years to come. Source: “India Life Insurance Sector,” Credit Suisse, 29 July 2009, via Thomson Research

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Public protection and health expenditure as a % of government expenditure (2004)

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Indian insurance sector:
Measures to increase financial inclusion in India
There are various measures that have been taken to increase insurance penetration in India, although, with varied success. Some of these are listed below: Increase financial literacy Given the low literacy level of around 65%, it is imperative to have even lower financial literacy among the populace. The situation is worse in semi-urban and rural areas, where many people are not even aware of the concept of insurance. Therefore, various stakeholders in the industry need to promote financial literacy and educate populace about insurance. Unlike other disciplines of finance, insurance is introduced to a person at a much later stage of life, which results in limited knowledge. Hence, the level of awareness about insurance products and services is very low. The low level of financial literacy has been an issue in not only developing countries, but also in many of the developed countries. Countries such as the US, Australia, New Zealand and the UK, among others, have taken considerable steps in ensuring higher levels of financial literacy. Some of these are: • Establishment of ”The Adult Financial Literacy Advisory Group” by the UK Government in 2000 to recommend
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ways to improve financial literacy of the adult population with a specific emphasis on those who are disadvantaged • Joint effort of the US Federal Government, state governments and other stakeholders in the insurance sector to teach family economics and finance • Measures taken by the Insurance Council of New Zealand as a part of ”The Enterprise New Zealand Trust’s Financial Literacy Programme” to educate on risk and insurance in more than 100 schools Closer home, IRDA had undertaken a publicity campaign to improve awareness and knowledge about insurance products to enable customers to take informed decisions. As India has a wide population, a consistent and harmonized approach by all the stakeholders may prove to be more effective and bring in the desired results. The primary objective of all stakeholders (regulator and insurance companies) should not only be limited to encourage people to buy insurance policies, but also to ensure that all the individuals or families should be reasonably familiar with the concepts of insurance, products, means of delivery, grievance handling process, customers’ rights, etc. They should feel comfortable in transacting with the insurance companies and their representatives. • Motivating Indian households transfer savings from physical assets to financial assets Household savings comprises both financial and physical savings. Although financial inclusion is a mantra for the RBI and the government, it is estimated that the financial savings of the household sector have been declining over the years.
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In the coming years, banks, insurance companies and other financial institutions should focus on channelizing savings from physical assets to financial assets.

Source: “National Income Statistics,” July 2010, CMIE

Distribution of physical and financial savings in India (as a % of household savings

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Indian insurance sector: Traditionally, a sizable percentage of the Indian population has been more risk-averse, investing most of their savings in physical assets rather than financial instruments. Therefore, the government should incentivize investments in financial instruments. Combined with an increasing savings rate, this trend is expected to be extremely beneficial to the life insurance industry. This change has started to happen over the years; however, increasing financial literacy and awareness are likely to boost this further. Improve access and reach vast sections of theunderprivileged and low-income groups In a diverse and large country such as India, various factors such as a vast geographical spread, lack of technology and affordability of insurance products have been a hindrance to financial inclusion. Hence, the use of different distribution channels, developing products for the poor, cheaper access to financial products, etc., would help increase financial inclusion. Insurance as a tax saving instrument In India, insurance has so far been viewed primarily as a tax-saving instrument. This is evident in the fact that the majority of the insurance policies are purchased in the last two months of the financial year (February and March). As a result, many Indians buy insurance policies without regard to their actual insurance needs. Further, many policyholders do not reassess their insurance cover, as their income level increases and the standard of living improves. Thus, a large
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number of policyholders are underinsured. India has an approximately 3.5% tax-paying population, which is very small. But with the increase in disposable income and the inclusion of more people in the tax bracket, the sale of tax-saving products, especially investment in insurance products is likely to increase. Financial inclusion will be achieved by creating a supportive socio-economic environment to build and sustain it.

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INDIAN

COMPANIES

WITH

FOREIGN

PARTNERSHIP
Indian Partner---------------- International Partner
Alpic Finance ----------------- Allianz Holding, Germany Tata ----------------------------- American Int. Group, US CK Birla Group --------------- Zurich Insurance, Switzerland ICICI ---------------------------- Prudential, UK Sundaram Finance ----------- Winterthur Insurance, Switzerland Hindustan Times ------------- Commercial Union, UK Ranbaxy ------------------------ Cigna, US HDFC ---------------------------- Standard Life, UK Bombay Dyeing -----------General Accident, UK DCM Shriram ------------------- Royal Sun Alliance, UK Dabur Group -------------------- Allstate, US Kotak Mahindra ---------------- Chubb, US Godrej ---------------------------- J Rothschild, UK Sanmar Group ----------------- Gio, Australia Cholamandalam --------------- Guardian Royal Exchange, UK SK Modi -------------------------- Group Legal & General, Australia 20th Century Finance --------- Canada Life M A Chidambaram ------------- Met Life Vysya Bank ---------------------- ING

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Marketing Mix Policies
Different companies can choose to position themselves differently and hence the Marketing Mix is different. However, there are certain common characteristics that one can cull out from the possible strategies that companies adopt.

Product:
The development of flexible products to suit individual requirements is what will differentiate the winners from the also-rans. The key to success is in providing insurance solutions, not standardized insurance products. The concept of riders/optional benefits has already been a huge innovation brought about by the new players, which has led to customization of products for individual needs. However, companies may differentiate themselves on the basis of product segments that they choose to focus on and excel in.

Place:
Different companies may however choose different channels and different geographies to focus on. The channel options are - tied agency force, corporate agents and brokers and this is an area where different companies will make different choices. Many companies like HDFC Standard Life are focusing on all channels whereas companies like Max New York Life are focusing on the tied agency force only.Customer interface will be a key challenge for life insurance companies and includes every that interaction that the customer has with the company, such as sales, new business underwriting, policy servicing, premium payments, claim processing and so on. Technology can play a crucial role in delivering the highest standards of service set by the company and it will be imperative for any serious player to excel in all of these.

Price:
Price is a relevant differentiator only in two segments - pure term insurance and in pure annuities. Here too, service delivery and financial strength will need to
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be present at a minimum acceptable level for price to be a relevant differentiator. In case of savings oriented products, long-term returns generated are more relevant than just the price of the product. A focus on generating good investment performance and keeping a tight control on costs help in generating good long-term maturity value for customers. Norms have been laid down on all of these by IRDA and adhering to these while delivering good returns will be a challenge.

Promotion and Advertising:
The level of demand is latent and will have to be activated considerably. The market needs to be developed. Greater awareness of insurance and the need to have it as a protection tool rather than as a tax planning measure needs to be appreciated by the Indian people. Various communication tools including advertising, direct marketing and road shows contribute to all this and different companies take different approaches on these Process

Cashless settlement:
One of the most defining and customer-friendly changes that we’ve seen in recent years relates to the way claims settlements are made. The advent of the third-party administrator (TPA) regime has facilitated the transition to the hugely convenient era of cashless settlement of health and auto insurance claims. TPAs are entities who process claims on behalf of insurers: the IRDA licenses them after it is satisfied that they have the financial strength, the trained manpower, the infrastructure and the skills to undertake this activity. Likewise, with auto insurance, the TPA ties up with garages and authorized service centers for cashless settlement of auto insurance claims.

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INDIAN INSURANCE SECTOR Lower premiums:
The spirit of competition and the broadening of the risk experience of insurance companies have contributed to a fall in premiums over the years. That’s because, other things being equal, an insurer who covers the lives just of 10 people bears a higher risk than an insurer who covers the lives of, say, 100 people. Further, a broader base will provide greater efficiencies on costs such as distribution, management and claims. A broad basing of the mortality experience, therefore, gives insurers the elbowroom to compete by lowering premiums, and that trend is expected to continue.

Premium payment flexibility:
Insurers have imparted certain flexibility to premium payment options in order to address this concern. For instance, one now have the option to pay your premiums upfront, which is then carried forward for the tenure of the policy. Insurers have also introduced the concept of ‘automatic cover maintenance’ to protect your policy from lapsing owing to your omission to pay your premium on time. Under this, in the event of your not paying the premium, the insurer dips into your investment account to the extent of the premium. This can play a significant role for marketing in the Indian scenario. Since Internet users are comparatively lesser than countries such as US, the offline mode will be preferred in India. Although the distribution model is largely agent-based, wherever the customer is in contact with the company, this factor can play a significant role in luring the customer.

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The most important factor that materializes sales and maintains customer relationships on a long-term basis is this factor. No matter what distribution strategy a company adopts, customer relationship has to be taken care of in order to maintain the customer base on a long-term basis.

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DISTRIBUTION CHANNELS
In the liberalized insurance market, there will be multiple distribution channels, which will include agents, brokers, corporate intermediaries, bank branches, affinity groups and direct marketing through telesales and Internet. Some channels will be cheaper than others. Hence there will be competition among the channels. The new insurers will operate with the help of multiple distribution channels but the existing insurers may be forced to operate only with the help of agents. Hence, intense competition will grow among the old and new insurers in the market to win the consumers. Firms will need to forge relationships with the partners for strategic advantage. They need to have strong partner relationship management. For example, local partners may have strong distribution channel in their line of business. That can be used to sell insurance also in a cost-effective manner. All these will pose a great challenge to the insurers in the liberalized insurance market.

DISTRIBUTION THROUGH BANKS
Distribution of insurance products through banks are considered to be the most popular banks are considered to be the most popular medium as the private players prefer to utilise the wide network of banks for the distribution of insurance policies in India. Like in the European market, bancassurance can be an effective channel. In countries like Italy, France and Spain, insurance companies have taken advantage of customers' typical loyalty to single banks and pattern of long-term banking relationships by successfully selling their products through these banks. Here banks can leverage their existing resources and earn supplementary fees while widening their range of available services. In the face of strong profitability pressures in their traditional banking services,
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banks will likely seize upon opportunities to expand their offerings by including insurance products.

DISTRIBUTION THROUGH INSURANCE AGENTS
Insurance agents and development officers provide another vital link in insurance selling and various surveys have proven this aspect. These intermediaries help the insurance companies to keep in touch with policyholders, assist claimants, and act as advisors to those who invest their claim proceeds.

NEW CHANNELS
Other approaches, like call-center, direct marketing, and the Internet will grow dramatically in importance over the next several years. These ensure direct contact with the customers. It will enable firms to acquire, retain and build loyalty among customers while lowering transaction costs. To make multiple channel delivery work, all channels must be integrated tightly to deliver on the promise of service anytime, anywhere. Information gathered by each channel must be combined to provide a consolidated view of the customer relationship and identify likely financial needs. The online media is definitely considered to be one of the most effective modes of distribution as a number of websites have already started offering policies online. At present, 12 per cent of the world's insurance products are sold through the Internet, a figure likely to grow exponentially with a likely increase in customer usage of the Internet for their own research and product comparisons. Extensive use of information technology can make the role of these intermediaries more effective and buyer-friendly.

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CHALLENGES BEFORE THE INDUSTRY
The new as well as the old insurers will have to face a number of challenges in the liberalized market.

New Insurers
The new insurers will have to invest a minimum capital of Rs. 100 crores. The normal gestation period is of five years. The generation of profit normally starts in the sixth year. Hence the new insurers will have to be ready for locking up their capital for at least 5 years before earning any profits. Besides they will face problems of shortage of trained manpower for the insurance industry. The setting up of various offices and distribution network is a time consuming process. Further the new insurers will have to compete with the established insurance companies like LIC and GIC which have a corporate image and market presence for several years.

Expectation of the consumers
Today LIC has more than 60 products and GIC has more than 180 products to offer in the market. But most of them are outdated, as they are not suitable to the needs of the consumers. Hence old as well as new insurers will have to offer innovative products to the consumers. The consumers are particularly expecting good pension plans, health insurance, term insurance and investment products like unit-linked insurance, from the life insurers. Similarly the consumers expect innovative products from the general insurers for managing healthcare, property insurance, accident insurance and other products related to the personal line of insurance. The consumers also expect reduction in the premium of the insurance products as the mortality rate in India has come down by three times in the last 50 years.

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INDIAN INSURANCE SECTOR Distribution Channel
In the liberalized insurance market, there will be multiple distribution channels, which will include agents, brokers, corporate intermediaries, bank branches, affinity groups and direct marketing through telesales and Internet. Some channels will be cheaper than others. Hence there will be competition among the channels. The new insurers will operate with the help of multiple distribution channels but the existing insurers may be forced to operate only with the help of agents. Hence, intense competition will grow among the old and new insurers in the market to win the consumers. This will pose a great challenge to the insurers in the liberalized insurance market.

Consumer Education
Very soon the market will be flooded by a large number of products by a fairly large number of insurers operating in the Indian market. Even with limited range of products offered by LIC and GIC, the consumers are confused in the market. Their confusion will further increase in the face of a large number of products in the market. The existing level of awareness of the consumers for insurance products is very low, it is so because only 62% of the population of India is literate and less than 10% well educated. Even the educated consumers are ignorant about the various products of insurance. Hence it is necessary that all the insurers should undertake the extensive plan for education of consumers. The consumer organizations and the media also can play very important role in education of the consumers. This will result in expansion of the insurance market and will also enable the needy consumer to purchase appropriate products.

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INDIAN INSURANCE SECTOR Consumer Grievance Redressal
The insurers will have to face an acute problem of the redressal of the consumers, grievances for deficiency in products and services. The Insurance Regulatory Development Authority (IRDA), the regulatory body has already appointed Ombudsman for looking into the grievances of the policyholders, his judgement will be binding on insurers. Further, under Consumer Protection Act 1986, the consumer courts are operating at district, state and the national level.

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Emerging trends
To increase market penetration, insurance companies need to expand their distribution network. In the recent past, the industry has witnessed the emergence of alternate distribution channels, which include bancassurance, direct selling agents, brokers, online distribution, corporate agents such as nonbanking financial companies (NBFCs) and tie-ups of parabanking companies with local corporate agencies (e.g.NGOs) in remote areas. Agencies have been the most important and effective channel of distribution hitherto. The industry is viewing the movement of intermediaries from mere agents to advisors.

Product innovation
With customers asking for higher levels of customization, product innovation is one of the best strategies for companies to increase their market share.This also creates greater efficiency as companies can maintain lower unit costs, offer improved services and distributors can increase flexibility to pay higher commissions and generate higher sales.The pension sector, due to its inadequate penetration (only 10% of the working population is covered) offers tremendous potential for insurance companies to bemore innovative.

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Consolidation in future
The past few years have witnessed the entry of many companies in the domestic insurance industry, attracted by the significant potential of insurance sector.However, increasing competition in easily accessible urban areas, the FDI limit of 26% and the recent downturn in equity markets have impacted the growth prospects of some small private insurance companies.Such players may have to rethink about their future growth plans. Hence, consolidation with large and established players may prove to be a better solution for such small insurers. Larger companies would also prefer to take over or merge with other companies with established networks and avoid spending money inmarketing and promotion. Therefore, consolidation will result in fewer but stronger players in the country as well as generate healthy competition. Mounting focus on EV over profitability Many companies are achieving profitability by controlling expenses; releasing funds for future appropriations as well as through a strong renewal premium build up. As a few larger insurers continue to expand, most are focused on cost rationalization and the alignment of business models to ground level realities. This will better equip insurers to realize reported embedded value (EV) and generate value from future new business.In the short term, companies are likely to face challenges to achieve the desired levels of profitability. As companies are also planning to get listed and raise funds, the higher profitability will help companies to get a better valuation of shares. However, in the longterm, companies would need to focus on increasing .EV, as almost 70% of a company’s EV is influenced by renewal business and profitability is not as much of an indicator for valuation. Hence, players are now focusing

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on increasing their EV than profitability figures.Indian insurance sector: stepping into the next decade of growth 12 Rising capital requirements Since insurance is a capital-intensive industry, capital requirements are likely to increase in the coming period. The capital requirement in the life insurance business is a function of the three factors: (1) sum at risk; (2) policyholders’ assets; (3) new business strain and expense overruns. With new guidelines in place,capital requirements across the sector are likely to go up due to: Higher sum assured driving higher sum at risk .Greater allocation to policyholders’ assets due to lower charges Back loading of charges is resulting in high new business strain, and expense overruns due to low productivity of the newly set distribution network (and inability to recover corresponding costs upfront)For non-life insurance companies, the growing demand for health insurance products as well as motor insurance products is likely to boost the capital requirement.With the capital market picking up and valuations on the rise, insurance companies are exploring various ways of increasing their capital base to invest in product innovation, introducing new distribution channels, educating customers, developing the brand, etc.

This is due to the following reasons: A major portion of the costs in insurance companies is fixed (though it should be variable or semi-variable in nature). Hence, the reduction in sales will not result in the lowering of operational expenses, thus adversely impacting margins. As such, reduced margins would impact profitability, and insurers would need to invest additional funds. The sustained bearishness in capital

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markets could further pressurize the investment margins and increase the capital strain, especially in the case of capital/return guarantee product.Besides, companies are likely to witness a slowdown in new business growth. Companies may also opt for product restructuring to lower their costs and optimally utilize capital.According to IRDA ratio of 1.5 at all times Regulations 2000, all insurance companies are required to maintain a solvency . But this solvency margin is not sustainable. With the growing market risks, the level of required capital will be linked to the risks inherent in the underlying business. India is likely to start implementing Solvency II norms in the next three to four years.

FUTURE SCENARIO OF INSURANCE INDUSTRY
The size of the existing insurance market is very large and is growing at the rate of 10% per year. The estimated potential of the Indian insurance market in terms of premium was around Rs. 3,44,000 crores in the year 1999. Only 10% of the market share has been tapped by LIC and GIC and the balance 90% of the market still remains untapped. This vast potential can be tapped only by a large number of insurers. To serve 100 crores of population, Indian insurance market offers tremendous opportunities to rospective insurers. Hence, the regulator
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should issue licenses to a large number of insurers if the insurance market has to grow at a fast rate. With the increase in the life span of individuals and disintegration of the joint family system, each Individual now has arranged insurance cover for himself and for his family. Hence, coverage of insurers, which was around 7% of the population in 1999, has to grow very fast. In fact all the citizens in the middle class, estimated around 314 million can afford insurance from their own financial resources. The remaining population has to be given subsidized insurance with the help of the government as well as the insurers. The huge fund from insurance investments can be utilized for financing the infrastructure industry as well as a support to other industries in the country. Hence insurance industry is likely to play a key role in changing the economic landscape of the country. However the success of the insurance industry will primarily depend upon meeting the rising expectations of the consumers who will be the real king in the liberalized insurance market in future.

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CONCLUSION
The reforms in the insurance sector leading finally to the opening of the insurance sector for private participation have brought in its wake major changes not only in the design of the products available in the market but also the manner in which they are marketed. We have today a host of products coupled with a large number of intermediaries who market them. The market structure dominated by a few stabilized public sector players and the 'new' players in the market (some of whom claim their lineage from established international insurance behemoths) is in a state of flux- in terms of figure out market shares but is full of potential. All in all, interesting things are happening in the Indian insurance scene. Insurance undergone rapid and massive changes in all aspects of their business: product and services, sectoral structure, market segmentation, competitive environment.It is believed that the information sharing has not taken its expected shape in the insurance industry for the purposes of practices, research and education. However, data is one of the most needed ingredients in the insurance business development as well as for research and consultancy. There have been regular efforts by IRDA for collection and sharing of the data and other information of public interest. We believe that progress of the industry should not be constrained by any extraneous conditions in the interest of research and development in the area.

WEBLIOGRAPHY
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 www.irdaindia.org
 www.licindia.in  www.scribd.com  www.wikipedia.org  www.answers.com  www.google.com


www.wiki.answers.com www.insuranceguru.com

 www.docstoc.com


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