Insurance Industry
Content
code of Conduct Larsen & Toubro Limited is a professionally managed Company, having its own vision statement committed to total customer satisfaction and enhancing stakeholders' value. The Company's philosophy on corporate governance is built on a rich legacy of fair and transparent governance and disclosure practices. This includes respect for human values, individual dignity, and adherence to honest, ethical and professional conduct. This Code of Conduct ensures compliance with the provisions of the revised Clause 49 of the Listing Agreement with Stock Exchanges.
This Code of Conduct is applicable to the
• •
Members of the Board of Directors of the Company Senior Management, defined as members of Core Management Team excluding Board of Directors and one level below the Executive Directors including Functional Heads
The above Senior Managerial Personnel are hereinafter referred to in this Code of Conduct as "Senior Officers". The Senior Officers shall confirm that they have received, read and understood the Code of Conduct, and agree to comply with the Code in the format specified on an annual basis. The Senior Officers are expected to comply with all applicable laws, rules and regulations and all applicable policies and procedures adopted by the Company. The Senior Officers should adhere to and facilitate effective functioning of the Company's mechanism for redressal of complaints of sexual harassment. Senior Officers will ensure proper usage of authority as delegated to them as per the Company's rules. Every Senior Officer has to secure, preserve, safeguard and use discreetly, confidential information in the best interest of the Company. He should not divulge or communicate such information to third parties except when authorized for the business reasons. In this regard, Corporate Communication Department has identified spokespersons authorized to deal with the media. Senior Officers are expected to devote their full attention with integrity and honesty to the business interests of the Company and are prohibited from engaging in any activity that interferes with their proper discharge of responsibilities of the Company, or is in conflict with or prejudicial to the interests of the Company. Senior Officers should avoid conducting Company business in any significant way with a relative (as defined in the Companies Act, 1956), or with a business in which a close relative is associated. The Senior Officers are responsible for effective control and appropriate use of all Company's resources entrusted to them in the official discharge of their duty.
The Senior Officers should abide by 'L&T Securities Dealing Code' in compliance with the SEBI (Prohibition of Insider Trading) Regulations 1992, as adopted by the Board of Directors of the Company.
L&T Finance is one of the leading NBFCs in the country and offers a wide spectrum of financial products and services for trade, industry and agriculture. Find all the information and resources about L&T Finance you need as an informed investor. Explore » Discover the wide range of products from L&T Finance to fulfill all your financing needs.
ndustry Conglomerate Founded Mumbai, India (1938) Founder(s) Henning HolckLarsen Søren Kristian Toubro Headquarters Mumbai, Maharashtra, India Area served Worldwide Key people A. M. Naik (Chairman & MD) Products Engineering & Construction Projects, Heavy Engineering, Construction, Power, Electrical & Electronics, Machinery & Industrial Products, IT & Engineering Services, Development Projects and Financial Services, Shipbuilding, Railway Projects Services Engineering Services Turnkey Projects IT Services Shipbuilding Revenue income 52,089.14 crore (US$11.62 billion) (2011)[1] Operating 4,456.17 crore
6,438.65 crore (US$1.44 billion) (2011) Net income
(US$993.73 million) (2011) Total assets US$ 15.760 billion (2010) Employees 38,000 (2010) Divisions Technology Sector, Engineering Sector, Construction Sector, Manufacturing Sector Subsidiaries Larsen & Toubro Infotech L & T Mutual Fund Larsen and Toubro Infrastructure Finance Company Limited Website www.larsentoubro.com
Corporate law (also "company" or "corporations" law) is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and
the environment interact with one another under the internal rules of the firm. Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnerships (in the UK governed by the Partnership Act 1890), or trusts (like a pension fund), or companies limited by guarantee (like some universities or charities). Corporate law is about big business, which has separate legal personality, with limited liability or unlimited liability for its members or shareholders, who buy and sell their stocks depending on the performance of the board of directors. It deals with the firms that are incorporated or registered under the corporate or company law of a sovereign state or their subnational states. The four defining characteristics of the modern corporation are:[1]
• • • •
Separate Legal Personality of the corporation (the right to sue and be sued in its own name i.e. the law treats the company as a human being) Limited Liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares) Shares (usually on a stock exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris) Delegated Management, in other words, control of the company placed in the hands of a board of directors
Insurance sector in INDIA is booming up but not to level
comparative with the developed economies such as Japan, Singapore etc. Also with the opening of the insurance sector to the private players have provided stiff competition resulting into quality products. Also there is a need to restructure the Indian Government owned “ Life insurance Corporation of India “ so as to maximize revenue and in turn profits. IRDA regulations and norms for the allocation of funds need to have a comprehensive look. In the phase of declining interest rates and rising inflation the funds need to be applied in productive areas so as to generate high returns. Also in terms of clients servicing areas such as premium payments, after sales service, policy dispatch, redressal of grievances has to be amended. In the current scenario, LIC has to provide flexible products suited to the customers requirements. Also a proper and systematic risk management strategy needs to be adopted. After the increase in terrorism and destructive events around the global world such as September 11 attack on World Trade Centre, US – Taliban war, US – Iraq war etc.. an alternative to reinsurance such as asset backed securities is emerging out in the developed economies. Catastrophe bonds is one of the alternatives for reinsurance. Finally some policies such as pure term and pension schemes needs to be addressed
NLDIMSR 1
The Emerging Insurance sector of India.
massively at both the urban and the rural segment so as to generate high premium income which will help in the development and growth of the economy.
INDEX :
SR CONTENTS PAGE NO. NO .
1. INTRODUCTION 1 2. INSURANCE SECTOR - A PREVIEW 3 3. LIFE INSURANCE INDEX ( COUNTRYWISE ) 6 4. WHY OPEN UP THE INSURANCE SECTOR ? 7 5. GOVERNMENT / RBI REGULATIONS 11 6. INDIAN PARTNER – FOREIGN TIE UP 16 7. WHY LIBERALISE, WHAT MARKET STRUCTURE 18 & ROLE FOR THE REGULATOR 8. AN ALTERNATIVE TO REINSURANCE 38 9. INVESTMENT AND CAPITAL NORMS 44 10. ROLE OF THE PORTFOLIO MANAGER
46 11. RESTRUCTURING OF LIC & GIC 53 12. POINTERS FOR THE INDIAN POLICYMAKERS 56 13. CURRENT SCENARIO 60 14. BIBLIOGRAPHY 64
NLDIMSR 2
The Emerging Insurance sector of India.
INTRODUCTION :
Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The risks which can be insured against, include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance.
DEFINITION :
General definition:
In the words of John Magee, “Insurance is a plan by which large number of people associate themselves and transfer to the shoulders of all, risks that attach to individuals.”
Fundamental definition:
NLDIMSR 3
The Emerging Insurance sector of India.
In the words of D.S. Hansell, “Insurance may be defined as a social device providing financial compensation for the effects of misfortune, the payment being made from the accumulated contributions of all parties participating in the scheme.”
Contractual definition:
In the words of justice Tindall, “ Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”
Characteristics of insurance :
Sharing of risks Cooperative device Evaluation of risk Payment on happening of a special event
The amount of payment depends on the nature of losses incurred.
NLDIMSR 4
INSURANCE SECTOR – A PREVIEW :
The insurance sector in India dates back to 1818, when Oriental Life Insurance Company was incorporated at Calcutta. Thereafter, few other companies like Bombay Life Assurance Company, in 1823 and Triton Insurance Company, for General Insurance, in 1850 were incorporated. Insurance Act was passed in 1928 but it was subsequently reviewed and comprehensive legislation was enacted in 1938. The nationalisation of life insurance business took place in 1956 when 245 Indian and Foreign Insurance provident societies were first merged and then nationalized. It paved the way towards the establishment of Life Insurance Corporation (LIC) and since then it has enjoyed a monopoly over the life insurance business in India. General Insurance followed suit and in 1968, the insurance act was amended to allow for social control over the general insurance business. Subsequently in 1973, non-life insurance business was nationalised and the General Insurance Business (Nationalisation) Act, 1972 was promulgated. The General Insurance Corporation (GIC) in its present form was incorporated in
NLDIMSR 5
The Emerging Insurance sector of India.
1972 and maintains a very strong hold over the non-life insurance business in India. Due to concerns of (a) Relatively low spread of insurance in the country. (b) The efficient and quality functioning of the Public Sector insurance companies (c) The untapped potential for mobilizing long-term contractual savings funds for infrastructure the (Congress) government set up an Insurance Reforms committee in April 1993.
The Committee submitted its report in January 1994, recommended a phased program of liberalization, and called for private sector entry and restructuring of the LIC and GIC. But now the parliament has given a nod to the Insurance Regulatory and Development Authority (IRDA) bill with some changes in the original structure.
How big is the insurance market ?
Insurance is a Rs.400 billion business in India, and together with banking services adds about 7% to India’s GDP. Gross premium collection is about 2% of GDP and has been growing by 15-20% per annum. India also has the highest number of life insurance policies in force in the world, and total investible funds with the LIC are almost 8% of GDP. Yet more than three-fourths of India’s insurable
NLDIMSR 6
The Emerging Insurance sector of India.
population has no life insurance or pension cover. Health insurance of any kind is negligible and other forms of non-life insurance are much below international standards. To tap the vast insurance potential and to mobilize long-term savings we need reforms which include revitalizing and restructuring of the public sector companies, and opening up the sector to private players. A statutory body needs to be made to regulate the market and promote a healthy market structure. Insurance Regulatory Authority (IRA) is one such body, which checks on these tendencies.
NLDIMSR 7
The Emerging Insurance sector of India.
INDIVIDUAL LIFE INSURANCE COVERAGE INDEX, 1994
COUNTRY NO. OF POLICIES PER 100 PERSONS
Indonesia
2.0 Philippines 5.6 India 12.4 Thailand 14.7 Malaysia 35.5 Hong Kong 69.4 South Korea 70.5 Taiwan 75.2 Singapore 112.6 Japan 198.4 Source:Charted Financial Analyst May 1999. (Insurance in Asia: The financial times, quoted from Tillinghast study)
NLDIMSR 8
The Emerging Insurance sector of India.
WHY OPEN UP THE INSURANCE INDUSTRY ?
An insurance policy protects the buyer at some cost against the financial loss arising from a specified risk. Different situations and different people require a different mix of risk-cost combinations. Insurance companies provide these by offering schemes of different kinds. Unfortunately the concept of insurance is not popular in our country. As per the latest estimates, the total premium income generated by life and general insurance in India is estimated at around a meagre 1.95% of GDP. However India’s share of world insurance market has shown an increase of 10% from 0.31% in 1996- 97 to 0.34% in 1997-98. India’s market share in the life insurance business showed a real growth of 11% thereby outperforming the global average of 7.7%. Non-life business grew by 3.1% against global average of 0.20%. In India insurance spending per capita was among the lowest in the world at $7.6 compared to $7 in the previous year. Amongst the emerging
economies, India is one of the least insured countries but the potential for further growth is phenomenal, as a significant portion of its population is in services and the life expectancy has also increased over the years. The nationalized insurance industry has not offered consumers a variety of products. Opening of the sector to private firms will foster competition,
NLDIMSR 9
The Emerging Insurance sector of India.
WHY OPEN UP THE INSURANCE INDUSTRY ?
An insurance policy protects the buyer at some cost against the financial loss arising from a specified risk. Different situations and different people require a different mix of risk-cost combinations. Insurance companies provide these by offering schemes of different kinds. Unfortunately the concept of insurance is not popular in our country. As per the latest estimates, the total premium income generated by life and general insurance in India is estimated at around a meagre 1.95% of GDP. However India’s share of world insurance market has shown an increase of 10% from 0.31% in 1996- 97 to 0.34% in 1997-98. India’s market share in the life insurance business showed a real growth of 11% thereby outperforming the global average of 7.7%. Non-life business grew by 3.1% against global average of 0.20%. In India insurance spending per capita was among the lowest in the world at $7.6 compared to $7 in the previous year. Amongst the emerging economies, India is one of the least insured countries but the potential for further growth is phenomenal, as a significant portion of its population is in services and the life expectancy has also increased over the years. The nationalized insurance industry has not offered consumers a variety of products. Opening of the sector to private firms will foster competition,
NLDIMSR 9
The Emerging Insurance sector of India.
innovation, and variety of products. It would also generate greater
awareness on the need for buying insurance as a service and not merely for tax exemption, which is currently done. On the demand side, a strong correlation between demand for insurance and per capita income level suggests that high economic growth can spur growth in demand for insurance. Also there exists a strong correlation between insurance density and social indicators such as literacy. With social development, insurance demand will grow.
Future course of Insurance Business :
One of the main differences between the developed economies and the emerging economies is that insurance products are bought in the former while these are sold in latter. Focus of insurance industry is changing towards providing a mix of both protection / risk over and long-term investment opportunities. Some of the major international players in the insurance business, which might try to enter the Indian market, are – Sun Life of Canada, Prudential of the United Kingdom, Standard Life, and Allianz etc. Although the insurance sector is officially open to private players, they still need a license from the IRDA, which will announce its guidelines in May 2000. Following might be the future strategies of insurance companies. (1) The new entrants cannot compete with the state owned LIC on price alone. Due to its size, LIC operates at very low costs
NLDIMSR 10
The Emerging Insurance sector of India.
and their premia on policies that offer pure protection are on a par with comparable schemes across the globe. What the new insurance companies will probably offer is higher returns than the annualized 9-10% one can hope to earn from LIC’s policies. This will put pressure on LIC to offer more attractive returns. (2) Consumers can also expect product innovations. For instance, at present, LIC provides cover for permanent disability and what the new companies could offer is temporary disability insurance as well.
(3) Apart from the basic term insurance, most insurance products worldwide are sold as longterm investment opportunities with the protection component being clearly spelt out in the scheme. (4) LIC’s policies are not flexible according to the customer’s needs. New entrants have planned to offer universal life and variable life insurance products that allow the holder flexibility in deciding how his premia are split between protection and savings. New products would also enable product combinations that allow greater customisation. (5) Private insurers would compete furiously on the service platform. These would not only include faster claims settlement and other after-sales service but there agents would be trained in pre-sales interaction to usher in a customer-oriented Foreign companies would also use superior software (like APEX) that will give them an edge over the in-house LIC software. This technology will help private insurers in product development and customising products to suit individual needs. (7)The foreign players will probably introduce a lot of innovation and competition on Surrender value. LIC pays surrender value only after three years but private insurance companies are likely to offer sops by way of better and timely surrender value to clients. (8)Access to insurance too will probably become more widespread. Role of intermediaries would decrease and sale of insurance through direct channels and banks would increase. Simple products like term insurance might be sold through the telephone or direct mail to high net worth clients. (9)In reaction to foreign player’s strategies one might expect LIC to react and drop its premia and upgrade its services.
NLDIMSR 12
The Emerging Insurance sector of India.
BOTTLENECKS – GOVERNMENT / RBI REGULATIONS :
The IRDA bill proposes tough solvency margins for private insurance firms, a 26% cap on foreign equity and a minimum capital of Rs.100 crores for life and general insurers and Rs. 200 crores for reinsurance firms. Section 27A of the Insurance Act stipulates that LIC is required to invest 75% of its accretions through a controlled fund in mandated government securities. LIC may invest the remaining 25% in private corporate sector, construction, and acquisition of immovable assets besides sanctioning of loans to policyholders. These stipulations imposed
on the insurance companies had resulted in lack of flexibility in the optimisation of risk and profit portfolio. If this inflexibility continues, the insurance companies will have very little leverage to earn more on their investments and they might not be able to offer as flexible products as offered abroad. The government might provide more autonomy to insurance companies by allowing them to invest 50 % of their funds as per their own discretions. Recently RBI has issued stiff guidelines, which had dealt a severe blow to the plans of banks and financial institutions to enter the insurance sector. It says that non-performing assets (NPA)
NLDIMSR 13
The Emerging Insurance sector of India.
levels of the prospective players will have to be 1% point lower than the industry average (presently 7.5%). RBI has also stipulated that all prospective entrants need to have a net worth of Rs. 500 crores. These guidelines have made it virtually impossible for many banks to get into the insurance business. Also banks and FI’s who are planning to enter the business cannot float subsidiaries for insurance. RBI has taken too much caution to make sure that the new sector does not experience the kind of ups and downs that the non-bank financial sector has experienced in the recent past. They had to rethink about these guidelines if India’s strong banks and financial institutions have to enter the new business. The insurance employees’ union is offering stiff resistance to any private entry. Their objections are
(a) that there is no major untapped potential in insurance business in India; (b) that there would be massive retrenchment and job losses due to computerization and modernization; and (c) that private and foreign firms would indulge in reckless profiteering and skim the ‘urban cream’ market, and ignore the rural areas. But all these fears are unfounded. The real reason behind the protests is that the dismantling of government monopoly would provide a benchmark to evaluate the government’s insurance services.
NLDIMSR 14
The Emerging Insurance sector of India.
levels of the prospective players will have to be 1% point lower than the industry average (presently 7.5%). RBI has also stipulated that all prospective entrants need to have a net worth of Rs. 500 crores. These guidelines have made it virtually impossible for many banks to get into the insurance business. Also banks and FI’s who are planning to enter the business cannot float subsidiaries for insurance. RBI has taken too much caution to make sure that the new sector does not experience the kind of ups and downs that the non-bank financial sector has experienced in the recent past. They had to rethink about these guidelines if India’s strong banks and financial institutions have to enter the new business. The insurance employees’ union is offering stiff resistance to any private entry. Their objections are (a) that there is no major untapped potential in insurance business in India; (b) that there would be massive retrenchment and job losses due to computerization and modernization; and (c) that private and foreign firms would indulge in reckless profiteering and skim the ‘urban cream’ market, and ignore the rural areas.
But all these fears are unfounded. The real reason behind the protests is that the dismantling of government monopoly would provide a benchmark to evaluate the government’s insurance services.
NLDIMSR 14
The Emerging Insurance sector of India.
OPENING UP OF INSURANCE SECTOR :
Indian History: Time to turn the clock back-and open up insurance. For two years, around 30 foreign insurers have eagerly explored the nationalized Indian insurance market, preparing to leap in when private participation is allowed. But it seems they have an endless wait before the sector is opened up. That's ironical: in 1947, many of these insurers were firmly established here. BAT subsidiary Eagle Star, for example, opened offices in Calcutta in 1894. By 1921, it was doing business with Brooke Bond and the Birlas. Prudential's first Asia office was opened In India in 1923. Fifty years ago, India had a bustling, if somewhat chaotic, entirely private insurance industry. The year after Independence, 209 life Insurance companies were doing business worth Rs712.76 crore (which grew to an amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market share 40 per cent for general insurance but there were also plenty of Indian companies, many promoted by business houses like the Tatas and Dalmias. The first Indian-owned life insurance company, the Bombay Mutual Life Assurance Society, was set up in 1870 by six friends. It Insured Indian lives at the normal rates instead of charging a premium of 15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian Mercantile Insurance Company Ltd., opened in Bombay in 1907. A plethora of insufficiently regulated
NLDIMSR 15
The Emerging Insurance sector of India.
players was a sure recipe for abuse, especially because there was no separation between business houses and the insurance companies they promoted. The Insurance Act, 1938,
introduced state controls on insurance, including mandatory investments in approved securities, but regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman of the Oriental Assurance Company, admitted: "We cannot deny that, today, there is a tendency on the part of insurance companies in general to make illicit gains.
Can we overlook the cutthroat competition for acquiring business? And still worse is the dishonest practice of adjusting of
accounts." After a 1951 inquiry, the government was dismayed that companies had high expense and premium rates, were speculating in shares, and giving loans regardless of security. No wonder that between 1945 and 1955, 25 insurers went into liquidation and 25 transferred their business to other companies. This reckless record stoked the pronationalisation fires. The 1956 life insurance Nationalisation was a top-secret intrigue; for fear that unscrupulous insurers would siphon funds off if warned. The government resolved to first take over the management of life insurance companies by ordinance, then their ownership. The ordinance transferred control of 245 insurers to the government. LIC, established eight months later, took over their ownership. General Insurance had its turn in 1972, when 107 insurers were amalgamated into four companies headquartered in the four metros, with GIC as a holding company.
Indian Company Foreign Partner
Kotak Mahindra Tata Group AIG, US Sundram Finance Chubb, US
Winterthur, SWITZERLAND Sanmar Group GIO of Australia M A Chidambaram MetLife Bombay Dyeing General Accident, UK DCM Shriram Royal Sum Alliance, UK Dabur Group Liberty Mutual Fund, USA Godrej J. Rothschild, UK ITC Eagle star, UK S K Modi Group Legal and General, Australia CK Birla Group Zurich Insurance, Switzerland Ranbaxy Cigna, US Alpic Finance Allianz, GERMANY 20th Century Finance Canada Life Vyasa Bank ING Cholmandalam Guardian Royal Exchange, UK SBI Alliance Capital HDFC Standard Life, UK ICICI Prudential, UK IDBI Principal Max India New York Life
NLDIMSR 18
The Emerging Insurance sector of India.
The privatisation of the insurance sector would open up exciting new career options and new jobs would be created. A few insurers estimated a figure of 1lakh, after comparing the work forces in India and the UK. At present, life products comprise a big chunk, or 98%, of LIC’s business. Pension comprises a mere 2%. Now with increase in life expectancy rate, people have to start planning their retirements. Hence pension business is expected to grow once the industry opens. The demand for healthcare is growing due to population increase, greater urban migration and alarming levels of pollution. Healthcare insurance is more important for families with smaller savings because they would not be able to absorb the financial impact of adverse events without insurance cover. Foreign insurance companies like Aetna (world’s largest healthcare insurance provider) and Cigna have been providing Managed Care services across the globe. Managed Care integrates the financing and delivery of appropriate health care services to covered individuals.
NLDIMSR 19
The Emerging Insurance sector of India.
WHY LIBERALIZE, WHAT MARKET STRUCTURE TO HAVE FINALLY, WHAT ROLE FOR REGULATOR ? Introduction :
The decision to allow private companies to sell insurance products in India rests with the lawmakers in Parliament. These are the passage of the Insurance Regulatory Authority (IRA) Bill, which will make IRA a statutory regulatory body, and amending
the LIC and GIC Acts, which will end their respective monopolies. In 1994 the government appointed a committee on insurance sector reforms (which is known as the Malhotra Committee) which recommended that insurance business be opened up to private players and laid down several guidelines for orchestrating the transition. In particular, we do not address many other related questions such as whether foreign (and not just private) players should be allowed, what cap should there be on foreign equity ownership, whether banks and other financial institutions should be allowed to operate in the insurance business, whether firms should be allowed to sell both life and -non-life insurance, and so on. The three questions that we address are (a) Why should insurance be opened up to private players? (b) If opened up, what should be the appropriate market structure (many unregulated players or a few regulated players); and finally,
NLDIMSR 20
The Emerging Insurance sector of India.
small fee on the premium income of the insurers thus putting zero cost on the government and giving itself autonomy. ( a ) Protection of Customer Interests: IRA’s first brief is to protect consumer interests. This means ensuring proper disclosure, keeping prices affordable but also insisting on some mandatory products, and most importantly making sure that consumers get paid by insurers. Ensuring proper disclosure is called Disclosure Regulation. Insurance contracts are basically contingency agreements. They can be full of inscrutable jargon and escape clauses. An average consumer is likely to be confused by them. IRA must require insurers to frame transparent contracts. Consumers should not have to wake up to unpleasant surprises, finding that certain contingencies are not covered. The IRA also has to ensure that prices of products stay reasonable and certain mandatory products are sold. The job of keeping prices reasonable is relatively easy, since competition among insurers will not allow any
one company to charge exorbitant rates. The danger often is that prices may be too low and might take the insurer dangerously close to bankruptcy. As for mandatory products, those that involve common and well-known risks, certain standardization can be enforced. Furthermore, IRA can insist that for such products the prices also be standardized. From the consumer’s point of view the most important function of IRA is ensuring claim settlement. Quick settlement without unnecessary litigation should be the norm. For example, in motor
NLDIMSR 27
The Emerging Insurance sector of India.
vehicle insurance, adopting no-fault principle can speed up many settlements. Currently, LIC in India has a claims settlement ratio of 97%, an impressive number by any standards. However, it hides the fact that this settlement is plagued by long delays, which reduce the value of settlement itself. If consumers have a complaint against an insurer they can go to a body formed by association of insurers. The decision of such a body would be binding on the insurers, but not on the complainant. If complainants are not satisfied, they can go to court. Some countries such as Singapore have such a system in place. This system offers a first and quicker choice of settling out of court. IRA can encourage the insurers to have such a grievance redressal mechanism. This system can serve the function of adjudication, arbitration and conciliation. The second area of IRA’s activity concerns monitoring insurer behavior to ensure fairness. It is especially here that IRA’s choice of being a bloodhound or a watchdog would have different implications. We think that an initial tough stance should give way to a more forbearing and prudential approach in regulating insurance firms. When the industry has a few firms there is some chance of collusion. IRA must be alert to collusive tendencies and make sure that prices charged remain reasonable. However, some cooperation among the insurance companies could be considered desirable. This is especially in lines where claim experience of any one company is not sufficient to make accurate forecasts. Collusion among companies on information sharing and rate setting is considered “fair’. IRA must have severe penalties in
NLDIMSR
28
The Emerging Insurance sector of India.
case of fraud or mismanagement. Since insurance business involves managing trust money, in some countries the appointment of senior managers and “key personnel” has to be approved by the insurance regulatory agency.
( b ) Ensuring Solvency of Insurers :
There are basically four ways of ensuring enough solvencies. Firstis the policy of a price floor. Secondis the restriction on capital and reserves, i.e., on what kind of investments and speculative activities firms can make. Thirdis putting in place entry barriers to restrict the number of competitors. Fourthis the creation of an industry financed guarantee fund to bail out firms hit by unexpectedly high liabilities. Entry restrictions of the IRA are implemented through a licensing requirement, which involves capital adequacy among other things. Since there are economies of scale and scope in insurance operations it might be better to have only a few large firms. There is however no magic number regarding the optimal number of firms. Restricting competition provides a scope for higher profits to the companies thereby strengthening their solvency position. After qualifying, the entrants are continuously subjected to restrictions on reserves and investments, which ensure ongoing solvency. Additionally, a guarantee fund, created by mandatory contributions from all insurance companies is used to bail out any insurance company, which might be in financial trouble. This guarantee fund does not imply that firms can charge whatever they
The Emerging Insurance sector of India.
to be allowed in the Indian insurance companies. In November 1998,
the central Cabinet approved the Bill which envisaged a ceiling of 40 per cent for Non Indian stakeholders: 26 per cent for Foreign collaborators of Indian promoters, and 14 per cent for Non resident Indians (NRI’s), Overseas corporate bodies (OCB’s) and Foreign institutional investors (FII’s).
However, in view of the widespread resentment about the 40 per cent ceiling among political parties, the Bill was referred to he standing committee on finance. The committee has since recommended at each private company be allowed to enter only one of the three areas of business life insurance, general or non life insurance, and reinsurance and that the overall ceiling for foreign stakeholders in these companies be reduced to 26 per cent from the proposed 40 per cent. The committee has also recommended that the minimum paid up share capital of the new insurance companies be raised to Rs. 200 crore, double the amount proposed by the Malhotra Committee.
Economic Rationale :
The insurance industry is a key component of the financial infra- structure of an economy, and its viability and strengths have far reaching consequences for not only its money and capital markets,' but also for its real sector. For example, if households are unable to
NLDIMSR 35
The Emerging Insurance sector of India.
hedge their potential losses of wealth, assets and labour and non labour endowments with insurance contracts, many or all of them will have to save much more to provide for events that might occur in the future, events that would be inimical to their interests. If a significant proportion of the households behave in such a fashion, the growth of demand for industrial products would be adversely affected. Similarly, if firms are unable to hedge against "bad" events like fire and the job injury of a large number of labourers, the expected payoffs from a number of their projects, after factoring in the expected losses on account such "bad" events, might be negative. In such an event, the private investment would be adversely affected, and certain potentially hazardous activities like mining and freight transfers might not attract any private investment. It is not surprising; therefore, that economists have long argued that insurance facility is necessary to ensure the completeness of a market.
ORGANISATIONAL STRUCTURES AND THEIR IMPLICATIONS :
Insurance companies can be broadly divided into four categories: stock companies, mutual companies, reciprocal exchanges, and Lloyd’s companies. The former two are the dominant forms of organisational structures in the US insurance industry. A stock company is one that initially raises capital by issue
NLDIMSR 36
The Emerging Insurance sector of India.
of shares, like a bank or a non bank financial institution, and subsequently generates more funds for investment by selling insurance contracts to policyholders. In other words, there are three sets of stakeholders in a stock insurance company, namely, the shareholders, managers and the policyholders. A mutual company, on the other hand, raises funds only by selling policies such that the policyholders are also partners of the companies. Hence, a mutual company has only two groups of stakeholders, namely, the policyholder cum part owners and the managers. As in any organisation, the objectives of the owners, managers and policyholders are significantly different, giving rise to conflicts of interest.
Specifically, owners and managers are often more keen to undertake risky activities than are the policyholders, largely because the former have limited liability such that, in the event of an unfavorable outcome, the policyholders will have to bear the lion's share of the loss. However, it is unlikely that in a company that the appetite of the owners and the managers will be similar, and this provides the owners with a rationale to monitor the managers. In principle, both the shareholders in a stock company and the policyholder owners in a mutual company have it in their interest to monitor, the managers. But whereas stockholders can exit a company easily by selling its shares in the secondary market, thereby paving the way for a take over, the policyholder owners find it more difficult to exit because they then have to incur the informational cost of associating themselves with another (viable) company. In other
NLDIMSR 37
The Emerging Insurance sector of India.
words, the threat of exit by owners, and the associated threat of overhaul of the incumbent management by the owners, is more credible for stock insurance companies than for mutual insurance companies. Hence, policyholder owners of mutual companies are likely to allow the managers of these companies less operational flexibility than the flexibility of the managers in stock insurance companies. As a consequence, the mutual insurance companies are likely to be more conservative with respect to risk taking than the stock companies. Alternatively, if an insurance company writes lines of business that do not require a significant amount of managerial discretion, then it might be profitable for the company to adopt the mutual ownership structure and thereby eliminate the agency conflicts that can potentially arise between the owners and the policyholders.
Some insurance products not available in India :
Associated Market Quest after a study of some of the international markets, points out the following areas for new product development: 1. Industry all risk policies 2. Large projects risk cover
3. Risk beyond a floor level
NLDIMSR 38
The Emerging Insurance sector of India.
4. Extended public and product liability cover 5. Broking and captivities. 6. Alternative risk financing 7. Disability insurance 8. Antique insurance 9. Mega show insurance 10. Celebrity visits to the country.
AN ALTERNATIVE TO REINSURANCE :NLDIMSR 39
The Emerging Insurance sector of India.
Reinsurance is a process by which private insurers transfer
some part of their risk to reinsurers. That is, the reinsurer reimburse
The Emerging Insurance sector of India.
INVESTMENT OF INSURANCE FUNDS :
Any reform of the insurance sector must necessarily consider aspects related to the investment of insurance funds. Under sec 27A of the insurance act and its application in the LIC act, the manner in which LIC can deploy its funds is stated. Under the current guidelines, the LIC is required to invest 75% of the accretions through a controlled fund in certain approved investments. 25% of accretions may be invested by LIC for investments in private corporate sectors, loans to policyholders, construction and acquisition of immovable assets. These stipulations have resulted in the lack of flexibility in the optimization of its risk and profit portfolio. It has been reported that the government is planning to offer greater autonomy to LIC through the following: It is proposed that the deployment of the balance of 50% of the funds will be left to discretion of LIC. Similarly, it is proposed that the GIC will be subject to the following guidelines:
CAPITAL NORMS FOR NEW INSURANCE COMPANIES :
One of the contentious issues raised by foreign companies seeking an entry into the insurance sector in India is the minimum paid up capital requirements. The Malhotra committee (1994) recommended
NLDIMSR 46
The Emerging Insurance sector of India.
Rs 100 crores as the norm. The multilateral insurance working group (an industry forum representing most of the interested foreign and Indian companies seeking an entry into the insurance sector) has recommended Rs. 50 crore. The IRA is also reported to considering a graded pattern for capitalization of the companies keeping in mind the volume of business likely to be handled by them.
The Insurance Potential :
The main reason why the leading insurance companies in the world and the leading corporate group in India have shown a keen interest in the insurance sector, is the vast potential for future business. Restricted, as the market has been, through the operations of
the two monopolies (LIC and GIC), it is generally felt that the sector can grow exponentially if it is opened up. The decade 1987-97 has witnessed a compounded growth rate of marginally more than 10% in life insurance business. LIC predicts for itself that its business has potential to grow by 16.27% p.a. in a decade 1997-2007 (LIC, 1997). If we take a look at insurance coverage index for the age group of 20- 59 years a considerable gap between India and other countries in Asia can be observed. In this scenario, naturally insurance companies see a vast potential.
NLDIMSR 47
The Emerging Insurance sector of India.
THE ROLE OF PORTFOLIO MANAGEMENT :
Portfolio and asset liability management are important for both life and property liability insurance companies. However, the latter face the problem that their liabilities are far more unpredictable than the liabilities of the life insurance companies. For example, given a stable mortality table and other historical data, it is easier to predict the approximate number of death claims, than the approximate number of claims on account of car accidents and fire. As a consequence of such uncertainty, and perhaps also moral hazard stemming from reinsurance facilities, asset liability management of property liability companies in the US has left much to be desired. Hence, a meaningful discussion about the changing nature and role of portfolio management for US's insurance companies is possible only in the context of the experience of its life insurance companies. Although the role of an insurance policy is significantly different from that of investments, economic agents like households have increasingly viewed insurance contracts as a part of their investment portfolio. This change in perception has not affected much the status of the property liability or non life insurance policies, which are still viewed as plain vanilla insurance contracts that can be used to hedge against unforeseen calamities. However, the perception about life insurance contracts has perhaps been irrevocably altered, and it has changed the nature of fund management of insurance companies significantly, forcing them to move away from passive portfolio
NLDIMSR 48
The Emerging Insurance sector of India.
adversely, and a systemic problem will be precipitated. In other words, the insurance industry in any country should be subjected to regulations that are at least as stringent as, and perhaps more stringent than those governing the activities of other financial organizations. It is evident from the above discussion that decisions about what constitutes acceptable portfolio quality, and the extent of price regulation hold the key to insurance regulation in a post liberalisation insurance market. As the US experience suggests, insurance companies are usually subjected to stringent asset quality norms. Indeed, while a part of their portfolio might comprise of equity, mortgages and other relatively risky securities, much of their portfolio is made up of bonds and. liquid (and highly rated) mortgage backed securities. An Indian insurance company, on ,the other hand, is constrained by the fact that the market for fixed income securities is very illiquid such that only gilts and AAA and AA+ rated corporate bonds have liquid markets. At the same time, absence of a market for liquid mortgage backed securities denies these companies the opportunity to enhance the yield on their investment without significantly adding to portfolio risk. This might not pose a problem in the absence of competition, especially if the government helps to increase the returns to the policyholders by way of tax breaks, but might pose a serious problem if liberalization leads to "price" competition among a large number of insurance companies It might be argued that if the insurance and pension fund industries are
NLDIMSR 59
The Emerging Insurance sector of India.
liberalised, and if the fund managers of all these companies indulge in active portfolio management, the liquidity of the bond market will increase significantly. Such increase in liquidity across the board would enable the fund managers to invest in investment grade bonds of lower rating and thereby add to the
average yield of their investment without adding significantly to their portfolio risk. The problem, however, is that till the imperfect character of the bond market is removed to a significant extent, the insurance companies might either have to operate with thinner margins or remain exposed to unacceptably high levels of liquidity risk. It might, therefore, be prudent for the policymakers to impose stringent capital and reserve norms on the insurance companies, in order to ensure their viability in the short to medium run." Subsequent to liberalization, the Indian insurance industry might also be at the receiving end of regulations governing insurance prices / premia. Specifically, there might be highly politicized interventions in the markets for workers' compensation and medical insurance. The government might also be under pressure to "regulate" the prices of infrastructure related lines like freight and marine insurance. In principle, the risks associated with such liability insurance policies may be hedged by way of reinsurance. But if the reinsurers price the risks' accurately and the Indian insurance companies are forced to underprice the risks, the margins of the insurance companies will be affected adversely, thereby reducing their long term viability. In view of these political and
NLDIMSR 60
The Emerging Insurance sector of India.
financial realities, it might be better to subsidies the policyholders of politically sensitive lines directly or indirectly through tax benefits, if at all, rather than distort the pricing of the risks themselves. At the end of the day, it has to be realised that while competition enhances the efficiency of market participants, the process of "creative destruction," which ensures the sustenance and enhancement of efficiency, is not strictly applicable to the financial markets. Hence, while exit is perhaps the most efficient option for insolvent firms in many markets, insolvency of financial intermediaries calls for government action and usually affects the governments' budgetary positions adversely. At the same time, other things remaining the same, the risk of insolvency is perhaps higher for insurance companies than for other financial intermediaries because of the option like nature of their liabilities. Therefore, competition in the insurance industry has to be tempered with appropriate prudential norms, regular monitoring and other regulations, thereby making the robustness of the industry critically
dependent on the efficiency of and regulatory powers accorded to the proposed Insurance Regulatory Authority.
BIBLIOGRAPHY
(1) Insurance : Ajit Ranade and Rajeev Ahuja; India Development Report 1999-2000 (2) Insure for life: Navjit Gill : Business World, 28 February 2000. (3) Complete Guide to Business Risk Management : Kit Sadgrove (4) Risk Management Excellence : Economist Int. Unit (5) The Insurance Sector : ICFAI ( Institute of Charter Financial Analyst of India. (6) Impossible guidelines editorials : Business India, February 7-20, 2000 (7) Economic Times clippings. (8)w ww.licindia.com
NLDIMSR 66
Insurance Sector of India
DownloadPrintMobileCollectionsReport Document
Info and Rating Education Follow vijayshinde108 Share & Embed Related Documents PreviousNext 1.
p.
p.
p. 2.
p.
p.
p. 3.
p.
p.
p.
4.
p.
p.
p. 5.
p.
p.
p. 6.
p.
p.
p. 7.
p.
p.
p. 8.
p.
p.
p.
9.
p.
p.
p. 10.
p.
p.
p. 11.
p.
p.
p. 12.
p.
p.
p. 13.
p.
p.
p.
14.
p.
p.
p.
More from this user PreviousNext 1.
39 p.
3 p.
9 p. 2.
9 p.
21 p.
37 p. 3.
22 p.
36 p.
23 p. 4.
66 p.
6 p.
20 p.
5.
1 p.
1 p.
1 p. 6.
2 p.
22 p.
66 p. 7.
9 p.
19 p.
6 p. 8.
24 p.
13 p.
73 p. 9.
18 p.
Recent Readcasters Add a Comment
Top of Form
Bottom of Form
akipiuleft a comment
plz send this project in my in [email protected] 05 / 26 / 2010
itsruchika18left a comment
[email protected] 04 / 23 / 2010
vironika2008left a comment
hi i request u to plz send me this project on my email id - [email protected] 04 / 06 / 2010
aaveshchaudharyleft a comment
is reading Insurance Sector of India. 04 / 01 / 2010
alok_rleft a comment
hi .. this is a great project...can u send me the project in my email ID [email protected] 03 / 23 / 2010
sjguitarboyleft a comment
hey cn u send me this project on my email [email protected] plz its really imp 03 / 22 / 2010
rajul836227left a comment
fine qarticle must be available for downloading why limted its spreading 01 / 25 / 2010
mehandileft a comment
hello sir will u pls send me a copy of this project insurance in india its very urgent pls [email protected] [email protected] 01 / 04 / 2010
mani_20left a comment
heya...can u plz send me a copy of dis project..plz..i really wnt it..n [email protected] 12 / 14 / 2009
hossam123left a comment
car-auto insurance http://carautoinsuranceforu.blogspot.com 12 / 03 / 2009
akjha007left a comment
hello sir can u pls send me the file of urs on life insurance project so that it would help me in gaining the data for my master thesis at [email protected] m in urgent need of it. 11 / 20 / 2009
dypimleft a comment
pls let me download this proj to help me in final project 11 / 08 / 2009
nifitianleft a comment
hello sir..i need this repot for my poject wrkk...plz send me this on [email protected] 11 / 07 / 2009
giriwar18left a comment
It is a piece of hard labor & efforts, so beautifully structured. I wonder would you share it with me on email: [email protected] Giriwar 10 / 08 / 2009
merjimmyleft a comment
can you please send me this report at [email protected] have read it and liked it.. good work keep it up.... 09 / 15 / 2009 Upload a Document
Top of Form
Search Documents
Bottom of Form
• • • • • • • • • • • • • • • • • •
Follow Us! scribd.com/scribd twitter.com/scribd facebook.com/scribd About Press Blog Partners Scribd 101 Web Stuff Scribd Store Support FAQ Developers / API Jobs Terms Copyright Privacy
n our daily lives we encounter lot of risks which results in fiscal losses. One of the excellent ways to safeguard these losses is through insurance. The insurance firms in India take entire charge of any such losses against the payment forfeited every month in the form of premium. Insurance is a commercial means for relocating risks and covering fiscal losses. Project Report on Insurance provides an insight on the various policies offered by the insurer to cover particular losses, the premium charged by the insurer and how much money an insurer forfeits the policyholder in case of losses. The Insurance Project Report offers experts, consultancies, government divisions, authoritative units and analysts with self-sufficient predictions and domestically viable intelligence on the insurance industry. The project report on Insurance deals with the 5-7 year insurance industry predictions, target business prospects, probable risks, SWOT analysis and explore the current competitive sectoral acumen. The reports offer key insight into the industry and impact on conglomerates in the market. Industry indicators in the report comprise of number of life and non-life insurance firms; total and per capita Casualty premiums and assertions; aggregate premium revenues, total expenditures, operating expenditures, total assets, sectoral density, Market penetration, etc The users of the information are usually the prospective investors, policyholders, top management for decision makers and stake holders.
Project Report on Insurance - Objectives
A project report on Insurance is carried out on the basis of few objectives. Some of them are: • • • • • • To encourage the expansion of capital markets; To accelerate the intermediation competence in the insurance sector, and to release latest out new schemes and services; To contribute to all-inclusive sectoral reforms To facilitate and improve the corporate administration and introduce sound commercial structure To sustain health modifications and private health insurance. To enable the investors to take a close view of the fund performance over the years
• • •
To motivate the selling of insurance schemes To monitor the insurance schemes transactions To trigger long term strategic planning
This Code of Conduct is applicable to the
• •
Members of the Board of Directors of the Company Senior Management, defined as members of Core Management Team excluding Board of Directors and one level below the Executive Directors including Functional Heads
The above Senior Managerial Personnel are hereinafter referred to in this Code of Conduct as "Senior Officers". The Senior Officers shall confirm that they have received, read and understood the Code of Conduct, and agree to comply with the Code in the format specified on an annual basis. The Senior Officers are expected to comply with all applicable laws, rules and regulations and all applicable policies and procedures adopted by the Company. The Senior Officers should adhere to and facilitate effective functioning of the Company's mechanism for redressal of complaints of sexual harassment. Senior Officers will ensure proper usage of authority as delegated to them as per the Company's rules. Every Senior Officer has to secure, preserve, safeguard and use discreetly, confidential information in the best interest of the Company. He should not divulge or communicate such information to third parties except when authorized for the business reasons. In this regard, Corporate Communication Department has identified spokespersons authorized to deal with the media. Senior Officers are expected to devote their full attention with integrity and honesty to the business interests of the Company and are prohibited from engaging in any activity that interferes with their proper discharge of responsibilities of the Company, or is in conflict with or prejudicial to the interests of the Company. Senior Officers should avoid conducting Company business in any significant way with a relative (as defined in the Companies Act, 1956), or with a business in which a close relative is associated. The Senior Officers are responsible for effective control and appropriate use of all Company's resources entrusted to them in the official discharge of their duty.
The Senior Officers should abide by 'L&T Securities Dealing Code' in compliance with the SEBI (Prohibition of Insider Trading) Regulations 1992, as adopted by the Board of Directors of the Company.
L&T Finance is one of the leading NBFCs in the country and offers a wide spectrum of financial products and services for trade, industry and agriculture. Find all the information and resources about L&T Finance you need as an informed investor. Explore » Discover the wide range of products from L&T Finance to fulfill all your financing needs.
ndustry Conglomerate Founded Mumbai, India (1938) Founder(s) Henning HolckLarsen Søren Kristian Toubro Headquarters Mumbai, Maharashtra, India Area served Worldwide Key people A. M. Naik (Chairman & MD) Products Engineering & Construction Projects, Heavy Engineering, Construction, Power, Electrical & Electronics, Machinery & Industrial Products, IT & Engineering Services, Development Projects and Financial Services, Shipbuilding, Railway Projects Services Engineering Services Turnkey Projects IT Services Shipbuilding Revenue income 52,089.14 crore (US$11.62 billion) (2011)[1] Operating 4,456.17 crore
6,438.65 crore (US$1.44 billion) (2011) Net income
(US$993.73 million) (2011) Total assets US$ 15.760 billion (2010) Employees 38,000 (2010) Divisions Technology Sector, Engineering Sector, Construction Sector, Manufacturing Sector Subsidiaries Larsen & Toubro Infotech L & T Mutual Fund Larsen and Toubro Infrastructure Finance Company Limited Website www.larsentoubro.com
Corporate law (also "company" or "corporations" law) is the study of how shareholders, directors, employees, creditors, and other stakeholders such as consumers, the community and
the environment interact with one another under the internal rules of the firm. Corporate law is a part of a broader companies law (or law of business associations). Other types of business associations can include partnerships (in the UK governed by the Partnership Act 1890), or trusts (like a pension fund), or companies limited by guarantee (like some universities or charities). Corporate law is about big business, which has separate legal personality, with limited liability or unlimited liability for its members or shareholders, who buy and sell their stocks depending on the performance of the board of directors. It deals with the firms that are incorporated or registered under the corporate or company law of a sovereign state or their subnational states. The four defining characteristics of the modern corporation are:[1]
• • • •
Separate Legal Personality of the corporation (the right to sue and be sued in its own name i.e. the law treats the company as a human being) Limited Liability of the shareholders (so that when the company is insolvent, they only owe the money that they subscribed for in shares) Shares (usually on a stock exchange, such as the London Stock Exchange, New York Stock Exchange or Euronext in Paris) Delegated Management, in other words, control of the company placed in the hands of a board of directors
Insurance sector in INDIA is booming up but not to level
comparative with the developed economies such as Japan, Singapore etc. Also with the opening of the insurance sector to the private players have provided stiff competition resulting into quality products. Also there is a need to restructure the Indian Government owned “ Life insurance Corporation of India “ so as to maximize revenue and in turn profits. IRDA regulations and norms for the allocation of funds need to have a comprehensive look. In the phase of declining interest rates and rising inflation the funds need to be applied in productive areas so as to generate high returns. Also in terms of clients servicing areas such as premium payments, after sales service, policy dispatch, redressal of grievances has to be amended. In the current scenario, LIC has to provide flexible products suited to the customers requirements. Also a proper and systematic risk management strategy needs to be adopted. After the increase in terrorism and destructive events around the global world such as September 11 attack on World Trade Centre, US – Taliban war, US – Iraq war etc.. an alternative to reinsurance such as asset backed securities is emerging out in the developed economies. Catastrophe bonds is one of the alternatives for reinsurance. Finally some policies such as pure term and pension schemes needs to be addressed
NLDIMSR 1
The Emerging Insurance sector of India.
massively at both the urban and the rural segment so as to generate high premium income which will help in the development and growth of the economy.
INDEX :
SR CONTENTS PAGE NO. NO .
1. INTRODUCTION 1 2. INSURANCE SECTOR - A PREVIEW 3 3. LIFE INSURANCE INDEX ( COUNTRYWISE ) 6 4. WHY OPEN UP THE INSURANCE SECTOR ? 7 5. GOVERNMENT / RBI REGULATIONS 11 6. INDIAN PARTNER – FOREIGN TIE UP 16 7. WHY LIBERALISE, WHAT MARKET STRUCTURE 18 & ROLE FOR THE REGULATOR 8. AN ALTERNATIVE TO REINSURANCE 38 9. INVESTMENT AND CAPITAL NORMS 44 10. ROLE OF THE PORTFOLIO MANAGER
46 11. RESTRUCTURING OF LIC & GIC 53 12. POINTERS FOR THE INDIAN POLICYMAKERS 56 13. CURRENT SCENARIO 60 14. BIBLIOGRAPHY 64
NLDIMSR 2
The Emerging Insurance sector of India.
INTRODUCTION :
Insurance may be described as a social device to reduce or eliminate risk of loss to life and property. Under the plan of insurance, a large number of people associate themselves by sharing risks attached to individuals. The risks which can be insured against, include fire, the perils of sea, death and accidents and burglary. Any risk contingent upon these, may be insured against at a premium commensurate with the risk involved. Thus collective bearing of risk is insurance.
DEFINITION :
General definition:
In the words of John Magee, “Insurance is a plan by which large number of people associate themselves and transfer to the shoulders of all, risks that attach to individuals.”
Fundamental definition:
NLDIMSR 3
The Emerging Insurance sector of India.
In the words of D.S. Hansell, “Insurance may be defined as a social device providing financial compensation for the effects of misfortune, the payment being made from the accumulated contributions of all parties participating in the scheme.”
Contractual definition:
In the words of justice Tindall, “ Insurance is a contract in which a sum of money is paid to the assured as consideration of insurer’s incurring the risk of paying a large sum upon a given contingency.”
Characteristics of insurance :
Sharing of risks Cooperative device Evaluation of risk Payment on happening of a special event
The amount of payment depends on the nature of losses incurred.
NLDIMSR 4
INSURANCE SECTOR – A PREVIEW :
The insurance sector in India dates back to 1818, when Oriental Life Insurance Company was incorporated at Calcutta. Thereafter, few other companies like Bombay Life Assurance Company, in 1823 and Triton Insurance Company, for General Insurance, in 1850 were incorporated. Insurance Act was passed in 1928 but it was subsequently reviewed and comprehensive legislation was enacted in 1938. The nationalisation of life insurance business took place in 1956 when 245 Indian and Foreign Insurance provident societies were first merged and then nationalized. It paved the way towards the establishment of Life Insurance Corporation (LIC) and since then it has enjoyed a monopoly over the life insurance business in India. General Insurance followed suit and in 1968, the insurance act was amended to allow for social control over the general insurance business. Subsequently in 1973, non-life insurance business was nationalised and the General Insurance Business (Nationalisation) Act, 1972 was promulgated. The General Insurance Corporation (GIC) in its present form was incorporated in
NLDIMSR 5
The Emerging Insurance sector of India.
1972 and maintains a very strong hold over the non-life insurance business in India. Due to concerns of (a) Relatively low spread of insurance in the country. (b) The efficient and quality functioning of the Public Sector insurance companies (c) The untapped potential for mobilizing long-term contractual savings funds for infrastructure the (Congress) government set up an Insurance Reforms committee in April 1993.
The Committee submitted its report in January 1994, recommended a phased program of liberalization, and called for private sector entry and restructuring of the LIC and GIC. But now the parliament has given a nod to the Insurance Regulatory and Development Authority (IRDA) bill with some changes in the original structure.
How big is the insurance market ?
Insurance is a Rs.400 billion business in India, and together with banking services adds about 7% to India’s GDP. Gross premium collection is about 2% of GDP and has been growing by 15-20% per annum. India also has the highest number of life insurance policies in force in the world, and total investible funds with the LIC are almost 8% of GDP. Yet more than three-fourths of India’s insurable
NLDIMSR 6
The Emerging Insurance sector of India.
population has no life insurance or pension cover. Health insurance of any kind is negligible and other forms of non-life insurance are much below international standards. To tap the vast insurance potential and to mobilize long-term savings we need reforms which include revitalizing and restructuring of the public sector companies, and opening up the sector to private players. A statutory body needs to be made to regulate the market and promote a healthy market structure. Insurance Regulatory Authority (IRA) is one such body, which checks on these tendencies.
NLDIMSR 7
The Emerging Insurance sector of India.
INDIVIDUAL LIFE INSURANCE COVERAGE INDEX, 1994
COUNTRY NO. OF POLICIES PER 100 PERSONS
Indonesia
2.0 Philippines 5.6 India 12.4 Thailand 14.7 Malaysia 35.5 Hong Kong 69.4 South Korea 70.5 Taiwan 75.2 Singapore 112.6 Japan 198.4 Source:Charted Financial Analyst May 1999. (Insurance in Asia: The financial times, quoted from Tillinghast study)
NLDIMSR 8
The Emerging Insurance sector of India.
WHY OPEN UP THE INSURANCE INDUSTRY ?
An insurance policy protects the buyer at some cost against the financial loss arising from a specified risk. Different situations and different people require a different mix of risk-cost combinations. Insurance companies provide these by offering schemes of different kinds. Unfortunately the concept of insurance is not popular in our country. As per the latest estimates, the total premium income generated by life and general insurance in India is estimated at around a meagre 1.95% of GDP. However India’s share of world insurance market has shown an increase of 10% from 0.31% in 1996- 97 to 0.34% in 1997-98. India’s market share in the life insurance business showed a real growth of 11% thereby outperforming the global average of 7.7%. Non-life business grew by 3.1% against global average of 0.20%. In India insurance spending per capita was among the lowest in the world at $7.6 compared to $7 in the previous year. Amongst the emerging
economies, India is one of the least insured countries but the potential for further growth is phenomenal, as a significant portion of its population is in services and the life expectancy has also increased over the years. The nationalized insurance industry has not offered consumers a variety of products. Opening of the sector to private firms will foster competition,
NLDIMSR 9
The Emerging Insurance sector of India.
WHY OPEN UP THE INSURANCE INDUSTRY ?
An insurance policy protects the buyer at some cost against the financial loss arising from a specified risk. Different situations and different people require a different mix of risk-cost combinations. Insurance companies provide these by offering schemes of different kinds. Unfortunately the concept of insurance is not popular in our country. As per the latest estimates, the total premium income generated by life and general insurance in India is estimated at around a meagre 1.95% of GDP. However India’s share of world insurance market has shown an increase of 10% from 0.31% in 1996- 97 to 0.34% in 1997-98. India’s market share in the life insurance business showed a real growth of 11% thereby outperforming the global average of 7.7%. Non-life business grew by 3.1% against global average of 0.20%. In India insurance spending per capita was among the lowest in the world at $7.6 compared to $7 in the previous year. Amongst the emerging economies, India is one of the least insured countries but the potential for further growth is phenomenal, as a significant portion of its population is in services and the life expectancy has also increased over the years. The nationalized insurance industry has not offered consumers a variety of products. Opening of the sector to private firms will foster competition,
NLDIMSR 9
The Emerging Insurance sector of India.
innovation, and variety of products. It would also generate greater
awareness on the need for buying insurance as a service and not merely for tax exemption, which is currently done. On the demand side, a strong correlation between demand for insurance and per capita income level suggests that high economic growth can spur growth in demand for insurance. Also there exists a strong correlation between insurance density and social indicators such as literacy. With social development, insurance demand will grow.
Future course of Insurance Business :
One of the main differences between the developed economies and the emerging economies is that insurance products are bought in the former while these are sold in latter. Focus of insurance industry is changing towards providing a mix of both protection / risk over and long-term investment opportunities. Some of the major international players in the insurance business, which might try to enter the Indian market, are – Sun Life of Canada, Prudential of the United Kingdom, Standard Life, and Allianz etc. Although the insurance sector is officially open to private players, they still need a license from the IRDA, which will announce its guidelines in May 2000. Following might be the future strategies of insurance companies. (1) The new entrants cannot compete with the state owned LIC on price alone. Due to its size, LIC operates at very low costs
NLDIMSR 10
The Emerging Insurance sector of India.
and their premia on policies that offer pure protection are on a par with comparable schemes across the globe. What the new insurance companies will probably offer is higher returns than the annualized 9-10% one can hope to earn from LIC’s policies. This will put pressure on LIC to offer more attractive returns. (2) Consumers can also expect product innovations. For instance, at present, LIC provides cover for permanent disability and what the new companies could offer is temporary disability insurance as well.
(3) Apart from the basic term insurance, most insurance products worldwide are sold as longterm investment opportunities with the protection component being clearly spelt out in the scheme. (4) LIC’s policies are not flexible according to the customer’s needs. New entrants have planned to offer universal life and variable life insurance products that allow the holder flexibility in deciding how his premia are split between protection and savings. New products would also enable product combinations that allow greater customisation. (5) Private insurers would compete furiously on the service platform. These would not only include faster claims settlement and other after-sales service but there agents would be trained in pre-sales interaction to usher in a customer-oriented Foreign companies would also use superior software (like APEX) that will give them an edge over the in-house LIC software. This technology will help private insurers in product development and customising products to suit individual needs. (7)The foreign players will probably introduce a lot of innovation and competition on Surrender value. LIC pays surrender value only after three years but private insurance companies are likely to offer sops by way of better and timely surrender value to clients. (8)Access to insurance too will probably become more widespread. Role of intermediaries would decrease and sale of insurance through direct channels and banks would increase. Simple products like term insurance might be sold through the telephone or direct mail to high net worth clients. (9)In reaction to foreign player’s strategies one might expect LIC to react and drop its premia and upgrade its services.
NLDIMSR 12
The Emerging Insurance sector of India.
BOTTLENECKS – GOVERNMENT / RBI REGULATIONS :
The IRDA bill proposes tough solvency margins for private insurance firms, a 26% cap on foreign equity and a minimum capital of Rs.100 crores for life and general insurers and Rs. 200 crores for reinsurance firms. Section 27A of the Insurance Act stipulates that LIC is required to invest 75% of its accretions through a controlled fund in mandated government securities. LIC may invest the remaining 25% in private corporate sector, construction, and acquisition of immovable assets besides sanctioning of loans to policyholders. These stipulations imposed
on the insurance companies had resulted in lack of flexibility in the optimisation of risk and profit portfolio. If this inflexibility continues, the insurance companies will have very little leverage to earn more on their investments and they might not be able to offer as flexible products as offered abroad. The government might provide more autonomy to insurance companies by allowing them to invest 50 % of their funds as per their own discretions. Recently RBI has issued stiff guidelines, which had dealt a severe blow to the plans of banks and financial institutions to enter the insurance sector. It says that non-performing assets (NPA)
NLDIMSR 13
The Emerging Insurance sector of India.
levels of the prospective players will have to be 1% point lower than the industry average (presently 7.5%). RBI has also stipulated that all prospective entrants need to have a net worth of Rs. 500 crores. These guidelines have made it virtually impossible for many banks to get into the insurance business. Also banks and FI’s who are planning to enter the business cannot float subsidiaries for insurance. RBI has taken too much caution to make sure that the new sector does not experience the kind of ups and downs that the non-bank financial sector has experienced in the recent past. They had to rethink about these guidelines if India’s strong banks and financial institutions have to enter the new business. The insurance employees’ union is offering stiff resistance to any private entry. Their objections are
(a) that there is no major untapped potential in insurance business in India; (b) that there would be massive retrenchment and job losses due to computerization and modernization; and (c) that private and foreign firms would indulge in reckless profiteering and skim the ‘urban cream’ market, and ignore the rural areas. But all these fears are unfounded. The real reason behind the protests is that the dismantling of government monopoly would provide a benchmark to evaluate the government’s insurance services.
NLDIMSR 14
The Emerging Insurance sector of India.
levels of the prospective players will have to be 1% point lower than the industry average (presently 7.5%). RBI has also stipulated that all prospective entrants need to have a net worth of Rs. 500 crores. These guidelines have made it virtually impossible for many banks to get into the insurance business. Also banks and FI’s who are planning to enter the business cannot float subsidiaries for insurance. RBI has taken too much caution to make sure that the new sector does not experience the kind of ups and downs that the non-bank financial sector has experienced in the recent past. They had to rethink about these guidelines if India’s strong banks and financial institutions have to enter the new business. The insurance employees’ union is offering stiff resistance to any private entry. Their objections are (a) that there is no major untapped potential in insurance business in India; (b) that there would be massive retrenchment and job losses due to computerization and modernization; and (c) that private and foreign firms would indulge in reckless profiteering and skim the ‘urban cream’ market, and ignore the rural areas.
But all these fears are unfounded. The real reason behind the protests is that the dismantling of government monopoly would provide a benchmark to evaluate the government’s insurance services.
NLDIMSR 14
The Emerging Insurance sector of India.
OPENING UP OF INSURANCE SECTOR :
Indian History: Time to turn the clock back-and open up insurance. For two years, around 30 foreign insurers have eagerly explored the nationalized Indian insurance market, preparing to leap in when private participation is allowed. But it seems they have an endless wait before the sector is opened up. That's ironical: in 1947, many of these insurers were firmly established here. BAT subsidiary Eagle Star, for example, opened offices in Calcutta in 1894. By 1921, it was doing business with Brooke Bond and the Birlas. Prudential's first Asia office was opened In India in 1923. Fifty years ago, India had a bustling, if somewhat chaotic, entirely private insurance industry. The year after Independence, 209 life Insurance companies were doing business worth Rs712.76 crore (which grew to an amazing Rs 295,758 crore in 1995-96). Foreign insurers had a large market share 40 per cent for general insurance but there were also plenty of Indian companies, many promoted by business houses like the Tatas and Dalmias. The first Indian-owned life insurance company, the Bombay Mutual Life Assurance Society, was set up in 1870 by six friends. It Insured Indian lives at the normal rates instead of charging a premium of 15 to 20 percent as foreign insurers did. Its general insurance counterpart, Indian Mercantile Insurance Company Ltd., opened in Bombay in 1907. A plethora of insufficiently regulated
NLDIMSR 15
The Emerging Insurance sector of India.
players was a sure recipe for abuse, especially because there was no separation between business houses and the insurance companies they promoted. The Insurance Act, 1938,
introduced state controls on insurance, including mandatory investments in approved securities, but regulation remained ineffective. In 1949, Purshottamdas Thakurdas, chairman of the Oriental Assurance Company, admitted: "We cannot deny that, today, there is a tendency on the part of insurance companies in general to make illicit gains.
Can we overlook the cutthroat competition for acquiring business? And still worse is the dishonest practice of adjusting of
accounts." After a 1951 inquiry, the government was dismayed that companies had high expense and premium rates, were speculating in shares, and giving loans regardless of security. No wonder that between 1945 and 1955, 25 insurers went into liquidation and 25 transferred their business to other companies. This reckless record stoked the pronationalisation fires. The 1956 life insurance Nationalisation was a top-secret intrigue; for fear that unscrupulous insurers would siphon funds off if warned. The government resolved to first take over the management of life insurance companies by ordinance, then their ownership. The ordinance transferred control of 245 insurers to the government. LIC, established eight months later, took over their ownership. General Insurance had its turn in 1972, when 107 insurers were amalgamated into four companies headquartered in the four metros, with GIC as a holding company.
Indian Company Foreign Partner
Kotak Mahindra Tata Group AIG, US Sundram Finance Chubb, US
Winterthur, SWITZERLAND Sanmar Group GIO of Australia M A Chidambaram MetLife Bombay Dyeing General Accident, UK DCM Shriram Royal Sum Alliance, UK Dabur Group Liberty Mutual Fund, USA Godrej J. Rothschild, UK ITC Eagle star, UK S K Modi Group Legal and General, Australia CK Birla Group Zurich Insurance, Switzerland Ranbaxy Cigna, US Alpic Finance Allianz, GERMANY 20th Century Finance Canada Life Vyasa Bank ING Cholmandalam Guardian Royal Exchange, UK SBI Alliance Capital HDFC Standard Life, UK ICICI Prudential, UK IDBI Principal Max India New York Life
NLDIMSR 18
The Emerging Insurance sector of India.
The privatisation of the insurance sector would open up exciting new career options and new jobs would be created. A few insurers estimated a figure of 1lakh, after comparing the work forces in India and the UK. At present, life products comprise a big chunk, or 98%, of LIC’s business. Pension comprises a mere 2%. Now with increase in life expectancy rate, people have to start planning their retirements. Hence pension business is expected to grow once the industry opens. The demand for healthcare is growing due to population increase, greater urban migration and alarming levels of pollution. Healthcare insurance is more important for families with smaller savings because they would not be able to absorb the financial impact of adverse events without insurance cover. Foreign insurance companies like Aetna (world’s largest healthcare insurance provider) and Cigna have been providing Managed Care services across the globe. Managed Care integrates the financing and delivery of appropriate health care services to covered individuals.
NLDIMSR 19
The Emerging Insurance sector of India.
WHY LIBERALIZE, WHAT MARKET STRUCTURE TO HAVE FINALLY, WHAT ROLE FOR REGULATOR ? Introduction :
The decision to allow private companies to sell insurance products in India rests with the lawmakers in Parliament. These are the passage of the Insurance Regulatory Authority (IRA) Bill, which will make IRA a statutory regulatory body, and amending
the LIC and GIC Acts, which will end their respective monopolies. In 1994 the government appointed a committee on insurance sector reforms (which is known as the Malhotra Committee) which recommended that insurance business be opened up to private players and laid down several guidelines for orchestrating the transition. In particular, we do not address many other related questions such as whether foreign (and not just private) players should be allowed, what cap should there be on foreign equity ownership, whether banks and other financial institutions should be allowed to operate in the insurance business, whether firms should be allowed to sell both life and -non-life insurance, and so on. The three questions that we address are (a) Why should insurance be opened up to private players? (b) If opened up, what should be the appropriate market structure (many unregulated players or a few regulated players); and finally,
NLDIMSR 20
The Emerging Insurance sector of India.
small fee on the premium income of the insurers thus putting zero cost on the government and giving itself autonomy. ( a ) Protection of Customer Interests: IRA’s first brief is to protect consumer interests. This means ensuring proper disclosure, keeping prices affordable but also insisting on some mandatory products, and most importantly making sure that consumers get paid by insurers. Ensuring proper disclosure is called Disclosure Regulation. Insurance contracts are basically contingency agreements. They can be full of inscrutable jargon and escape clauses. An average consumer is likely to be confused by them. IRA must require insurers to frame transparent contracts. Consumers should not have to wake up to unpleasant surprises, finding that certain contingencies are not covered. The IRA also has to ensure that prices of products stay reasonable and certain mandatory products are sold. The job of keeping prices reasonable is relatively easy, since competition among insurers will not allow any
one company to charge exorbitant rates. The danger often is that prices may be too low and might take the insurer dangerously close to bankruptcy. As for mandatory products, those that involve common and well-known risks, certain standardization can be enforced. Furthermore, IRA can insist that for such products the prices also be standardized. From the consumer’s point of view the most important function of IRA is ensuring claim settlement. Quick settlement without unnecessary litigation should be the norm. For example, in motor
NLDIMSR 27
The Emerging Insurance sector of India.
vehicle insurance, adopting no-fault principle can speed up many settlements. Currently, LIC in India has a claims settlement ratio of 97%, an impressive number by any standards. However, it hides the fact that this settlement is plagued by long delays, which reduce the value of settlement itself. If consumers have a complaint against an insurer they can go to a body formed by association of insurers. The decision of such a body would be binding on the insurers, but not on the complainant. If complainants are not satisfied, they can go to court. Some countries such as Singapore have such a system in place. This system offers a first and quicker choice of settling out of court. IRA can encourage the insurers to have such a grievance redressal mechanism. This system can serve the function of adjudication, arbitration and conciliation. The second area of IRA’s activity concerns monitoring insurer behavior to ensure fairness. It is especially here that IRA’s choice of being a bloodhound or a watchdog would have different implications. We think that an initial tough stance should give way to a more forbearing and prudential approach in regulating insurance firms. When the industry has a few firms there is some chance of collusion. IRA must be alert to collusive tendencies and make sure that prices charged remain reasonable. However, some cooperation among the insurance companies could be considered desirable. This is especially in lines where claim experience of any one company is not sufficient to make accurate forecasts. Collusion among companies on information sharing and rate setting is considered “fair’. IRA must have severe penalties in
NLDIMSR
28
The Emerging Insurance sector of India.
case of fraud or mismanagement. Since insurance business involves managing trust money, in some countries the appointment of senior managers and “key personnel” has to be approved by the insurance regulatory agency.
( b ) Ensuring Solvency of Insurers :
There are basically four ways of ensuring enough solvencies. Firstis the policy of a price floor. Secondis the restriction on capital and reserves, i.e., on what kind of investments and speculative activities firms can make. Thirdis putting in place entry barriers to restrict the number of competitors. Fourthis the creation of an industry financed guarantee fund to bail out firms hit by unexpectedly high liabilities. Entry restrictions of the IRA are implemented through a licensing requirement, which involves capital adequacy among other things. Since there are economies of scale and scope in insurance operations it might be better to have only a few large firms. There is however no magic number regarding the optimal number of firms. Restricting competition provides a scope for higher profits to the companies thereby strengthening their solvency position. After qualifying, the entrants are continuously subjected to restrictions on reserves and investments, which ensure ongoing solvency. Additionally, a guarantee fund, created by mandatory contributions from all insurance companies is used to bail out any insurance company, which might be in financial trouble. This guarantee fund does not imply that firms can charge whatever they
The Emerging Insurance sector of India.
to be allowed in the Indian insurance companies. In November 1998,
the central Cabinet approved the Bill which envisaged a ceiling of 40 per cent for Non Indian stakeholders: 26 per cent for Foreign collaborators of Indian promoters, and 14 per cent for Non resident Indians (NRI’s), Overseas corporate bodies (OCB’s) and Foreign institutional investors (FII’s).
However, in view of the widespread resentment about the 40 per cent ceiling among political parties, the Bill was referred to he standing committee on finance. The committee has since recommended at each private company be allowed to enter only one of the three areas of business life insurance, general or non life insurance, and reinsurance and that the overall ceiling for foreign stakeholders in these companies be reduced to 26 per cent from the proposed 40 per cent. The committee has also recommended that the minimum paid up share capital of the new insurance companies be raised to Rs. 200 crore, double the amount proposed by the Malhotra Committee.
Economic Rationale :
The insurance industry is a key component of the financial infra- structure of an economy, and its viability and strengths have far reaching consequences for not only its money and capital markets,' but also for its real sector. For example, if households are unable to
NLDIMSR 35
The Emerging Insurance sector of India.
hedge their potential losses of wealth, assets and labour and non labour endowments with insurance contracts, many or all of them will have to save much more to provide for events that might occur in the future, events that would be inimical to their interests. If a significant proportion of the households behave in such a fashion, the growth of demand for industrial products would be adversely affected. Similarly, if firms are unable to hedge against "bad" events like fire and the job injury of a large number of labourers, the expected payoffs from a number of their projects, after factoring in the expected losses on account such "bad" events, might be negative. In such an event, the private investment would be adversely affected, and certain potentially hazardous activities like mining and freight transfers might not attract any private investment. It is not surprising; therefore, that economists have long argued that insurance facility is necessary to ensure the completeness of a market.
ORGANISATIONAL STRUCTURES AND THEIR IMPLICATIONS :
Insurance companies can be broadly divided into four categories: stock companies, mutual companies, reciprocal exchanges, and Lloyd’s companies. The former two are the dominant forms of organisational structures in the US insurance industry. A stock company is one that initially raises capital by issue
NLDIMSR 36
The Emerging Insurance sector of India.
of shares, like a bank or a non bank financial institution, and subsequently generates more funds for investment by selling insurance contracts to policyholders. In other words, there are three sets of stakeholders in a stock insurance company, namely, the shareholders, managers and the policyholders. A mutual company, on the other hand, raises funds only by selling policies such that the policyholders are also partners of the companies. Hence, a mutual company has only two groups of stakeholders, namely, the policyholder cum part owners and the managers. As in any organisation, the objectives of the owners, managers and policyholders are significantly different, giving rise to conflicts of interest.
Specifically, owners and managers are often more keen to undertake risky activities than are the policyholders, largely because the former have limited liability such that, in the event of an unfavorable outcome, the policyholders will have to bear the lion's share of the loss. However, it is unlikely that in a company that the appetite of the owners and the managers will be similar, and this provides the owners with a rationale to monitor the managers. In principle, both the shareholders in a stock company and the policyholder owners in a mutual company have it in their interest to monitor, the managers. But whereas stockholders can exit a company easily by selling its shares in the secondary market, thereby paving the way for a take over, the policyholder owners find it more difficult to exit because they then have to incur the informational cost of associating themselves with another (viable) company. In other
NLDIMSR 37
The Emerging Insurance sector of India.
words, the threat of exit by owners, and the associated threat of overhaul of the incumbent management by the owners, is more credible for stock insurance companies than for mutual insurance companies. Hence, policyholder owners of mutual companies are likely to allow the managers of these companies less operational flexibility than the flexibility of the managers in stock insurance companies. As a consequence, the mutual insurance companies are likely to be more conservative with respect to risk taking than the stock companies. Alternatively, if an insurance company writes lines of business that do not require a significant amount of managerial discretion, then it might be profitable for the company to adopt the mutual ownership structure and thereby eliminate the agency conflicts that can potentially arise between the owners and the policyholders.
Some insurance products not available in India :
Associated Market Quest after a study of some of the international markets, points out the following areas for new product development: 1. Industry all risk policies 2. Large projects risk cover
3. Risk beyond a floor level
NLDIMSR 38
The Emerging Insurance sector of India.
4. Extended public and product liability cover 5. Broking and captivities. 6. Alternative risk financing 7. Disability insurance 8. Antique insurance 9. Mega show insurance 10. Celebrity visits to the country.
AN ALTERNATIVE TO REINSURANCE :NLDIMSR 39
The Emerging Insurance sector of India.
Reinsurance is a process by which private insurers transfer
some part of their risk to reinsurers. That is, the reinsurer reimburse
The Emerging Insurance sector of India.
INVESTMENT OF INSURANCE FUNDS :
Any reform of the insurance sector must necessarily consider aspects related to the investment of insurance funds. Under sec 27A of the insurance act and its application in the LIC act, the manner in which LIC can deploy its funds is stated. Under the current guidelines, the LIC is required to invest 75% of the accretions through a controlled fund in certain approved investments. 25% of accretions may be invested by LIC for investments in private corporate sectors, loans to policyholders, construction and acquisition of immovable assets. These stipulations have resulted in the lack of flexibility in the optimization of its risk and profit portfolio. It has been reported that the government is planning to offer greater autonomy to LIC through the following: It is proposed that the deployment of the balance of 50% of the funds will be left to discretion of LIC. Similarly, it is proposed that the GIC will be subject to the following guidelines:
CAPITAL NORMS FOR NEW INSURANCE COMPANIES :
One of the contentious issues raised by foreign companies seeking an entry into the insurance sector in India is the minimum paid up capital requirements. The Malhotra committee (1994) recommended
NLDIMSR 46
The Emerging Insurance sector of India.
Rs 100 crores as the norm. The multilateral insurance working group (an industry forum representing most of the interested foreign and Indian companies seeking an entry into the insurance sector) has recommended Rs. 50 crore. The IRA is also reported to considering a graded pattern for capitalization of the companies keeping in mind the volume of business likely to be handled by them.
The Insurance Potential :
The main reason why the leading insurance companies in the world and the leading corporate group in India have shown a keen interest in the insurance sector, is the vast potential for future business. Restricted, as the market has been, through the operations of
the two monopolies (LIC and GIC), it is generally felt that the sector can grow exponentially if it is opened up. The decade 1987-97 has witnessed a compounded growth rate of marginally more than 10% in life insurance business. LIC predicts for itself that its business has potential to grow by 16.27% p.a. in a decade 1997-2007 (LIC, 1997). If we take a look at insurance coverage index for the age group of 20- 59 years a considerable gap between India and other countries in Asia can be observed. In this scenario, naturally insurance companies see a vast potential.
NLDIMSR 47
The Emerging Insurance sector of India.
THE ROLE OF PORTFOLIO MANAGEMENT :
Portfolio and asset liability management are important for both life and property liability insurance companies. However, the latter face the problem that their liabilities are far more unpredictable than the liabilities of the life insurance companies. For example, given a stable mortality table and other historical data, it is easier to predict the approximate number of death claims, than the approximate number of claims on account of car accidents and fire. As a consequence of such uncertainty, and perhaps also moral hazard stemming from reinsurance facilities, asset liability management of property liability companies in the US has left much to be desired. Hence, a meaningful discussion about the changing nature and role of portfolio management for US's insurance companies is possible only in the context of the experience of its life insurance companies. Although the role of an insurance policy is significantly different from that of investments, economic agents like households have increasingly viewed insurance contracts as a part of their investment portfolio. This change in perception has not affected much the status of the property liability or non life insurance policies, which are still viewed as plain vanilla insurance contracts that can be used to hedge against unforeseen calamities. However, the perception about life insurance contracts has perhaps been irrevocably altered, and it has changed the nature of fund management of insurance companies significantly, forcing them to move away from passive portfolio
NLDIMSR 48
The Emerging Insurance sector of India.
adversely, and a systemic problem will be precipitated. In other words, the insurance industry in any country should be subjected to regulations that are at least as stringent as, and perhaps more stringent than those governing the activities of other financial organizations. It is evident from the above discussion that decisions about what constitutes acceptable portfolio quality, and the extent of price regulation hold the key to insurance regulation in a post liberalisation insurance market. As the US experience suggests, insurance companies are usually subjected to stringent asset quality norms. Indeed, while a part of their portfolio might comprise of equity, mortgages and other relatively risky securities, much of their portfolio is made up of bonds and. liquid (and highly rated) mortgage backed securities. An Indian insurance company, on ,the other hand, is constrained by the fact that the market for fixed income securities is very illiquid such that only gilts and AAA and AA+ rated corporate bonds have liquid markets. At the same time, absence of a market for liquid mortgage backed securities denies these companies the opportunity to enhance the yield on their investment without significantly adding to portfolio risk. This might not pose a problem in the absence of competition, especially if the government helps to increase the returns to the policyholders by way of tax breaks, but might pose a serious problem if liberalization leads to "price" competition among a large number of insurance companies It might be argued that if the insurance and pension fund industries are
NLDIMSR 59
The Emerging Insurance sector of India.
liberalised, and if the fund managers of all these companies indulge in active portfolio management, the liquidity of the bond market will increase significantly. Such increase in liquidity across the board would enable the fund managers to invest in investment grade bonds of lower rating and thereby add to the
average yield of their investment without adding significantly to their portfolio risk. The problem, however, is that till the imperfect character of the bond market is removed to a significant extent, the insurance companies might either have to operate with thinner margins or remain exposed to unacceptably high levels of liquidity risk. It might, therefore, be prudent for the policymakers to impose stringent capital and reserve norms on the insurance companies, in order to ensure their viability in the short to medium run." Subsequent to liberalization, the Indian insurance industry might also be at the receiving end of regulations governing insurance prices / premia. Specifically, there might be highly politicized interventions in the markets for workers' compensation and medical insurance. The government might also be under pressure to "regulate" the prices of infrastructure related lines like freight and marine insurance. In principle, the risks associated with such liability insurance policies may be hedged by way of reinsurance. But if the reinsurers price the risks' accurately and the Indian insurance companies are forced to underprice the risks, the margins of the insurance companies will be affected adversely, thereby reducing their long term viability. In view of these political and
NLDIMSR 60
The Emerging Insurance sector of India.
financial realities, it might be better to subsidies the policyholders of politically sensitive lines directly or indirectly through tax benefits, if at all, rather than distort the pricing of the risks themselves. At the end of the day, it has to be realised that while competition enhances the efficiency of market participants, the process of "creative destruction," which ensures the sustenance and enhancement of efficiency, is not strictly applicable to the financial markets. Hence, while exit is perhaps the most efficient option for insolvent firms in many markets, insolvency of financial intermediaries calls for government action and usually affects the governments' budgetary positions adversely. At the same time, other things remaining the same, the risk of insolvency is perhaps higher for insurance companies than for other financial intermediaries because of the option like nature of their liabilities. Therefore, competition in the insurance industry has to be tempered with appropriate prudential norms, regular monitoring and other regulations, thereby making the robustness of the industry critically
dependent on the efficiency of and regulatory powers accorded to the proposed Insurance Regulatory Authority.
BIBLIOGRAPHY
(1) Insurance : Ajit Ranade and Rajeev Ahuja; India Development Report 1999-2000 (2) Insure for life: Navjit Gill : Business World, 28 February 2000. (3) Complete Guide to Business Risk Management : Kit Sadgrove (4) Risk Management Excellence : Economist Int. Unit (5) The Insurance Sector : ICFAI ( Institute of Charter Financial Analyst of India. (6) Impossible guidelines editorials : Business India, February 7-20, 2000 (7) Economic Times clippings. (8)w ww.licindia.com
NLDIMSR 66
Insurance Sector of India
DownloadPrintMobileCollectionsReport Document
Info and Rating Education Follow vijayshinde108 Share & Embed Related Documents PreviousNext 1.
p.
p.
p. 2.
p.
p.
p. 3.
p.
p.
p.
4.
p.
p.
p. 5.
p.
p.
p. 6.
p.
p.
p. 7.
p.
p.
p. 8.
p.
p.
p.
9.
p.
p.
p. 10.
p.
p.
p. 11.
p.
p.
p. 12.
p.
p.
p. 13.
p.
p.
p.
14.
p.
p.
p.
More from this user PreviousNext 1.
39 p.
3 p.
9 p. 2.
9 p.
21 p.
37 p. 3.
22 p.
36 p.
23 p. 4.
66 p.
6 p.
20 p.
5.
1 p.
1 p.
1 p. 6.
2 p.
22 p.
66 p. 7.
9 p.
19 p.
6 p. 8.
24 p.
13 p.
73 p. 9.
18 p.
Recent Readcasters Add a Comment
Top of Form
Bottom of Form
akipiuleft a comment
plz send this project in my in [email protected] 05 / 26 / 2010
itsruchika18left a comment
[email protected] 04 / 23 / 2010
vironika2008left a comment
hi i request u to plz send me this project on my email id - [email protected] 04 / 06 / 2010
aaveshchaudharyleft a comment
is reading Insurance Sector of India. 04 / 01 / 2010
alok_rleft a comment
hi .. this is a great project...can u send me the project in my email ID [email protected] 03 / 23 / 2010
sjguitarboyleft a comment
hey cn u send me this project on my email [email protected] plz its really imp 03 / 22 / 2010
rajul836227left a comment
fine qarticle must be available for downloading why limted its spreading 01 / 25 / 2010
mehandileft a comment
hello sir will u pls send me a copy of this project insurance in india its very urgent pls [email protected] [email protected] 01 / 04 / 2010
mani_20left a comment
heya...can u plz send me a copy of dis project..plz..i really wnt it..n [email protected] 12 / 14 / 2009
hossam123left a comment
car-auto insurance http://carautoinsuranceforu.blogspot.com 12 / 03 / 2009
akjha007left a comment
hello sir can u pls send me the file of urs on life insurance project so that it would help me in gaining the data for my master thesis at [email protected] m in urgent need of it. 11 / 20 / 2009
dypimleft a comment
pls let me download this proj to help me in final project 11 / 08 / 2009
nifitianleft a comment
hello sir..i need this repot for my poject wrkk...plz send me this on [email protected] 11 / 07 / 2009
giriwar18left a comment
It is a piece of hard labor & efforts, so beautifully structured. I wonder would you share it with me on email: [email protected] Giriwar 10 / 08 / 2009
merjimmyleft a comment
can you please send me this report at [email protected] have read it and liked it.. good work keep it up.... 09 / 15 / 2009 Upload a Document
Top of Form
Search Documents
Bottom of Form
• • • • • • • • • • • • • • • • • •
Follow Us! scribd.com/scribd twitter.com/scribd facebook.com/scribd About Press Blog Partners Scribd 101 Web Stuff Scribd Store Support FAQ Developers / API Jobs Terms Copyright Privacy
n our daily lives we encounter lot of risks which results in fiscal losses. One of the excellent ways to safeguard these losses is through insurance. The insurance firms in India take entire charge of any such losses against the payment forfeited every month in the form of premium. Insurance is a commercial means for relocating risks and covering fiscal losses. Project Report on Insurance provides an insight on the various policies offered by the insurer to cover particular losses, the premium charged by the insurer and how much money an insurer forfeits the policyholder in case of losses. The Insurance Project Report offers experts, consultancies, government divisions, authoritative units and analysts with self-sufficient predictions and domestically viable intelligence on the insurance industry. The project report on Insurance deals with the 5-7 year insurance industry predictions, target business prospects, probable risks, SWOT analysis and explore the current competitive sectoral acumen. The reports offer key insight into the industry and impact on conglomerates in the market. Industry indicators in the report comprise of number of life and non-life insurance firms; total and per capita Casualty premiums and assertions; aggregate premium revenues, total expenditures, operating expenditures, total assets, sectoral density, Market penetration, etc The users of the information are usually the prospective investors, policyholders, top management for decision makers and stake holders.
Project Report on Insurance - Objectives
A project report on Insurance is carried out on the basis of few objectives. Some of them are: • • • • • • To encourage the expansion of capital markets; To accelerate the intermediation competence in the insurance sector, and to release latest out new schemes and services; To contribute to all-inclusive sectoral reforms To facilitate and improve the corporate administration and introduce sound commercial structure To sustain health modifications and private health insurance. To enable the investors to take a close view of the fund performance over the years
• • •
To motivate the selling of insurance schemes To monitor the insurance schemes transactions To trigger long term strategic planning
