Insurance Services

Module 2-Merchant Banking and

Financial Services
MBA III Semester Finance Elective
Ranjani J.
 Insurance Organizations
Insurance Organizations invest the savings of their
policy holders and in exchange promise them or their
beneficiaries a specified sum either at a later stage or
upon the happening of a certain event
• Differ from unit trusts or Mutual Funds in functionality-
Primary function of Insurance Org –to protect against
risk-tertiary investment while for MFs and unit trusts
sole function is investment
• Due to difference in functionality-their investment
avenues are closely regulated w.r.t eligible investment
in India by the Insurance Act of 1938 and Insurance
Regulatory & Development Authority Act, 1999
• Insurance Act , 1938 provides broad framework for the
insurance sector and services in the country
 Life and Non-Life Insurance Services
• Life business or Life insurance means the business of
effecting contracts of insurance upon human life
including any contract whereby the payment of money
is assured on death (except death by accident only) or
the happening of any contingency dependent on
human life and any contract which is subject to
payment of premiums for a term dependent on human
life . The contract should be deemed to include
a. grant of disability and double/triple indemnity
accident benefits,
b. grant of annuities upon human life and
c. grant of superannuation allowance /annuities payable
out of any fund applicable solely to the relief and
maintenance of persons engaged or who have been
engaged in any particular
profession/trade/employment; or the dependent of
such persons
 Non-life insurance services
• General Insurance-fire, marine/misc insurance alone or a
combination of one or more. Also incl. motor and health insurance
• Fire Insurance-business of effecting other than incidental to some
other class of insurance business, contracts of insurance against
loss by or incidental to fire or other occurrence customarily
included among risks insured against fire policies
• Marine Insurance-business effecting contracts of insurance upon
vessels of any description incl. cargos & freights,
goods/wares/merchandise/property of any description for transit
by land or water or both, whether or not incl. warehouse risks or
similar risks in addition or as incidental to such transit and incl any
other risks customarily incl in marine insurance
• Miscellaneous Insurance incl those categories which are not
principally or wholly of any kind included in fire/life and marine
insurance. Recently-wedding insurance, against theft, fire, natural
calamity, robbery, strike disrupting wedding proceedings or causing
losses at weddings, another is Kidnap and Ransom insurance (K&P)
Need and Importance of Life and Non-
Life Insurance Services
• Financial Security
• Protection against mishap and contingencies
especially health, fire, theft to name a few
• Mobilizing small savings and long term funds
especially in life insurance for investment in
infrastructure and other long term projects
• Tax exempt
• Investment avenue and encourages risk taking
to promote activities which without cover
wouldn’t be carried out at all
Insurance Market India-Life and
Non-life Players

Source: [Link]
Indian Insurance Market -Life and Non-Life
Players
• Indian Insurance market was opened to private and foreign
investment in 1999-2000, Free pricing also since 2007
• 34 players of which, Life: 1 public sector player; 16 private
players , Non-life: 6 public sector players; 11 private players
• Major international players like AIG, Aviva, MetLife, New
York Life, Prudential, Allianz, Sun Life, Standard Life and
Lombard are already present with minority stakes in joint
ventures with Indian companies for both Life and Non-life
segments
• The Life Insurance market still dominated by Life Insurance
Corporation (LIC) – a PSU with 75% share of first year
premium in 2006-07
• In non-life, private sector companies (almost all are joint
ventures with foreign insurers) accounted for 34% of the
market in 2006-07
 Essentials of Insurance Contracts
• Risk distribution -among similar category risk bearers
• Adhesion or fine print rule- no changes
• Aleatory- Obligation arises only on occurence of a certain event
• Indemnity-insurer has insurable interest on property insured- has only
right to recover the extent of loss from the proceeds of property
insured and the amount of loss has to be ascertained by the insurer
• Ubberrimae fides or perfect good faith-disclose all mat events
• Personal contract bet indiv and company not transferrable without
insurer’s consent
• Subrogation-stepping into the shoes of others- insurer can step into
insured shoes after settlement of claim to take over right of recovery
from alternative sources
• Executory-where one or more covenants of one or more party remain
partially or fully unfulfilled
• Unilateral-insured only pays premium rest obligations on part of insurer
only
 Risk appraisal and Selection
Insurance is based on a simple concept—a group of people can
collectively bear the costs of unexpected events that are too
great for any one member of the group to handle alone. But how
is this group organized? How is each individual's contribution to
the group determined? And how does a person wanting to be
insured fit into this picture? Risk appraisal is the mechanism
insurance companies use to answer these questions. It is a
critical part of the application process.
INSURER’s BUSINESS MODEL
Profit = Earned premium + Investment income - Incurred loss -
Underwriting expenses
Insurers thus make money in two ways:
– Through underwriting, the process by which insurers select the risks to
insure and decide how much in premiums to charge for accepting
those risks
– By investing the premiums they collect from insured.
 Risk Appraisal
• Purpose- to fairly evaluate each person so that those with
equal appraisals pay the same premium for their insurance
coverage- group policy holders based on their risk assessment
• The Process:
– Determines your risk profile based on medical and financial
factors, and personal attributes (for example, your driving
record).
– Determines whether or not the company can issue a policy to you
based on your risk profile.
– Places you into a group of people with similar risk profiles.
– Determines the premium and contract terms necessary for
members of your group.
– Protects you as an existing customer in that the value of your
insurance will not be compromised by issuing policies to people
with unfavorable risk profiles.
• Actuarial Science is used to quantify the risks and to determine the
premium to be charged to assume the risks
 Risk Selection
Methods by which a insurance underwriter chooses
applicants that an insurer will accept. The
underwriter's job is to spread the costs equitably
among members of the group to be insured.
Therefore, the underwriter must determine which
are normal risks, or standard risks, to be charged the
standard rate; which are substandard risks, to be
charged a higher rate; and which are preferred risks,
to receive a discount. This process is made more
difficult by Self-Selection and Adverse Selection . The
underwriter must screen applicants who are looking
for insurance, specifically because they have a
greater-than-normal chance of loss, and set the
correct Premium rate for them.
 Insurance Products
• Life Insurance plans are classified into children's plans, pension
plans, unit linked insurance plans (ULIP), term plans,
endowment plans, whole-life plans and money-back plans
• ULIPs or Market linked insurance plans invest the premium in
to the equity, debt and cash markets by the way of allocating
units, which like any other mutual fund have a NAV and the
customer is free to switch between one fund class to another
depending on the risk factor he wishes to be in
• Endowment policy are traditional plans designed to pay a lump
sum after a specified term (on its 'maturity') or on earlier death
or critical illness. Typical maturities are 10, 15 or 20 years up to
a certain age limit. Policies can be surrendered earlier at their
‘surrender value’ or including bonuses can be redeemed on
maturity at a ‘sum assured
• Money back plans are Traditional Insurance plans that provide
the investor with returns at regular stages of life.
 Insurance Products continued
• Term plans provide coverage at a fixed rate of payments for a
limited period of time, the relevant term. After that period
expires coverage at the previous rate of premiums is no
longer guaranteed and the client must either forgo coverage
or potentially obtain further coverage with different
payments and/or conditions. If the insured dies during the
term, the death benefit will be paid to the beneficiary
• Non life insurance products include motor, health, travel,
marine and fire insurance apart from other misc products
such as corporate and group insurance
 Insurance Organization in India
• Registration with IRDA
• Paid up capital for life and gen insurance should be
Rs.100 crore and Rs.200 crore respectively
• Promoter holding not >26 percent
• Insurer should deposit with RBI either in cash or
approved securities one and three percent respectively
of the total gross premium written in India in any fin
year not exceeding Rs.10 crore for life and gen business
and 20 crore for reinsurance business. For exclusive
marine insurance business Rs.1 lakh only. If business
closed in India deposit refunded on court orders
• Acturial investigation and assessment every year
 Regulation on Investment of Assets of
Insurers
Acc to Section 27 of Insurance Act:
• 25 percent in Government securities
• Not less than 25 percent in government and other
approved securities
• The balance in any approved investments in Section
27-A (1)and subject to limitations and restrictions in
Section 27-A (2) in any other investment. Deposit with
RBI included in govt securities
• Prohibited from directly or indirectly investing outside
India
• Required to invest a certain percentage as specified by
IRDA in rural/social sectors