Insurance Practices
and
Products
Benefits of Insurance
• Indemnification of loss
– Individual
– Firms
• Reduction of worry &Fear
– Life, PA &Property Insurances
• Source of Investment funds
– Factories, new machineries &equipments, housing
developments, hospitals
Benefits of Insurance
• Loss prevention
– Highway safety &reduction of automobile deaths
– Fire prevention
– Reduction of work related disabilities
– Prevention of auto thefts
– Prevention &detection of arson losses
– Prevention of defective product that could injure the
user
– Prevention of boiler explosion
– Educational programs on loss prevention
Benefits of Insurance
• Enhancement of credit
– Property, Vehicle loan Vs Insurance
Costs of Insurance
• Cost of doing Business
– Amount needed to pay all the expenses, including
commissions, general administrative expenses, service
tax and an allowance for contingencies and profit
• Fraudulent claims
– Fake motor claims
– False health claims
– Dishonest life claims
– Phony burglary claims
Costs of Insurance
• Inflated Claims
– Motor – inflate to cover the deductibles
– PA – manipulate to avail disability income benefit
for longer duration
– Theft – exaggeration of actual value
Elements of Insurance Risk
• Large Number of Exposure units
– Law of large numbers
• Define &measurable loss
– Not measurable – tension, loss of life
• Determinable probability distribution
– Theory of equivalence
• Random (Fortuitous) Loss
– Accidental loss
Elements of Insurance Risk
• Non-Catastrophic Loss
– Catastrophic - Unable to pay the loss
• Premium should be economically feasible
Insurance Vs Gambling
Gambling creates Risk
Insurance transfers Risk
Gambling deals with speculative risks.
Insurance deals with pure risks
LI – Growth &Development
• 1818: Oriental Life Insurance Co (Calcutta)
• 1823: Bombay Life Assurance Co
• 1829: Madras Equitable Life Assurance Society
LI – Growth &Development
• Life Insurance milestones
– 1912: The Indian Life Assurance Companies Act
(1st statute to regulate LI)
– 1928: The Indian Insurance Companies Act
(enables the Govt. to collect statistical information
about both life &non-life insurers)
– 1938: The Insurance Act (to protect the interests
of the insuring public)
– 1956: LIC (Nationalization) Act (Amalgamation of
245 Indian &foreign insurers)
GI – Growth &Development
• General Insurance milestones
– 1850: The Triton Insurance Co Ltd (1st GI Co in
Calcutta)
– 1907: The Indian Mercantile Insurance Ltd. (1st
company to transact all classes of GI)
– 1957: General Insurance Council (Code of conduct to
ensure fair &sound business practices)
– 1968: The Insurance Act (to regulate investments, set
minimum solvency margin &TAC set up)
– 1972: The General Insurance Business
(Nationalization) Act ( Amalgamation of 107 insurers
into 4 companies)
Insurance Sector Reforms
• In 1993 Malhotra (Former Finance Secretary
&RBI Governer) Committee was setup
Purpose
• To assess the strengths &weaknesses of
insurance industry with a objective of creating
efficient and viable Industry which will have
– Wide reach of Insurance services
– A variety of Insurance products
– High quality of service to the public
– Effective financial mobilization instrument for
development
Insurance Sector Reforms
• To recommend Insurance Industry structure
change
• To suggest regarding LIC &GIC for improving
its functions
• To recommend on “Regulation &supervision
of Insurance in India”
• To recommend on “Role &functions of
surveyors and intermediaries”
• To recommend on any other matter relevant
to development of Insurance in India
Insurance Sector Reforms
• Recommendations (1994)
• Structure
– Govt. stake in Insurance Companies to be brought
down to 50%
– Govt. should take over the holdings of GIC and its
subsidiaries
– Greater freedom for Insurance companies to
operate
Insurance Sector Reforms
• Competition
– Pvt. Co minimum paid up capital Rs.100 Crores
– One Company should not do both life &non-life as
a single entity
– Foreign companies can enter the industry in
collaboration with domestic companies
– Postal life insurance should be allowed to operate
in rural market
Insurance Sector Reforms
• Competition
– Only one state level company should be allowed
to operate in each state
– The Insurance Act should be changed
– An Insurance Regulatory body should be set up
– The controller of Insurance should be made
independent
Insurance Sector Reforms
• Investments
– LIC mandatory investments in Govt. securities to
be reduced from 75% to 50%
– GIC and its subsidiaries are not to hold more than
5% in any company
Insurance Sector Reforms
• Customer Service
– LIC should pay interest for delays in payments
beyond 30 days
– Insurance companies should be encouraged to set
up unit linked pension plans
– Computerization of operation & updating of
technology to be carried out
Insurance Sector Reforms
Min. Capital [Link]
Requirement Margin
Life
Insurers 100 Crores 50 Crores
General 50 Crores/20% of
Insurers 100 Crores Net Premium
Reinsurers200 Crores 100 Crores
LI – Growth &Development
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GI – Growth &Development
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