Insurance Industry

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss.

There are different kinds of insurance. Like Auto insurance, Health Insurance, Fire insurance to protect against varied risks. Mainly however, insurance is divided into two broad Categories:

  • Life Insurance
  • General Insurance

History of Life Insurance

The technique of pooling of resources to be re-distributed in times of calamities and emergencies like fire, floods, famine and epidemics is not new in India. This concept of insurance finds mention in the writings of Manu’s Manusmiriti, Yagnavalkya’s Dharmasastra and Kautilya’s Arthasastra. Insurance records in the form of Marine trade loans and carrier’s contracts exist dating ancient times. Over time, the concept of Insurance evolved in India drawing heavily from other countries, particularly England.

Timeline of Life Insurance Companies

  • 1818: establishment of the Oriental Life Insurance Company in Calcutta. This company failed in 1834.
  • 1829: the Madras Equitable started transacting life insurance business in the Madras Presidency.
  • 1870: British Insurance Act enacted, Industry back then was dominated by foreign insurance offices which did good business in India.
  • 1914: the Government of India started publishing returns of Insurance Companies in India.
  • 1912: The Indian Life Assurance Companies Act, the first statutory measure to regulate life business was enacted.
  • 1928: Indian Insurance Companies Act was enacted. This act enabled the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies.
  • 1938: Insurance Act, 1938 amended previous act and consolidated it with comprehensive provisions for effective control over the activities of insurers.
  • 1950: The Insurance Amendment Act abolished Principal Agencies. However, due to fierce competition and allegations of unfair trade practices, The Government of India, decided to nationalize insurance business.
  • 1956 Insurance sector nationalized and Life Insurance Corporation came into existence.

Life Insurance Corporation

The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly in the insurance sector in India till the late 90s when the Insurance sector was reopened to the private sector.

History of General Insurance in India

Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century gave rise to the concept of General Insurance.

Timeline of General Insurance Cos.

  • 1850: General Insurance has its roots in the establishment of Triton Insurance Company Ltd., in Calcutta by the British.
  • 1907: Indian Mercantile Insurance Ltd, was set up and was the first company to transact all classes of general insurance business.
  • 1957: the General Insurance Council, a wing of the Insurance Associaton of India was formed. It framed a code of conduct for ensuring fair conduct and sound business practices.
  • 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins.
  • 1972 General Insurance Business (Nationalization) Act was passed and with it, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were grouped into four companies, namely:
    • National Insurance Company Ltd.,
    • The New India Assurance Company Ltd.,
    • The Oriental Insurance Company Ltd and
    • The United India Insurance Company Ltd.
  • 1971: The General Insurance Corporation of India was incorporated as a company, it commence business on January 1st 1973.
  • 1990s: The process of re-opening of the sector had began and the last decade and more has seen it been opened up substantially.
  • 1993: the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective of Malhotra committee was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 and recommended that the private sector be permitted to enter the insurance industry, preferably in a joint venture with Indian partners.
  • 1999: Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted.
  • 2000: IRDA opened up the market with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%.
  • 2000: Subsidiaries of the General Insurance Corporation of India were restructured as independent companies and GIC was converted into a national re-insurer.
  • 2002: Parliament passed a bill de-linking the four subsidiaries from GIC.

Structure of Insurance Industry in India

Today there are 27 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 24 life insurance companies operating in the country.

The insurance sector is a 72 Billion USD industry and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP.

A well-developed and evolved insurance sector is a boon for economic development of the country as it provides long-term funds for infrastructure development at the same time strengthening the risk taking ability of the country. The insurance sector went from being unregulated to completely regulated and then being partly deregulated.

IRDA: The Insurance Industry Regulator

The autonomous, apex and statutory body which regulates and develops the insurance industry in India is the Insurance Regulatory and Development Authority (IrDA). It is a statutory body constituted by IrDA act 1999, which was passed on the recommendation of the Malhotra Committee report of 1994. IrDA began functioning in April 2000. This agency operates from its headquarters at Hyderabad, where it was shifted from Delhi in 2001.

Functions of IRDA:

  • Protect the rights of policy holders
  • Provide registration certification to life insurance companies
  • Renew, Modify, Cancel or Suspend this registration certificate as and when appropriate.
  • Promoting efficiency in the conduct of insurance business;
  • Promoting and regulating professional organisations connected with the insurance and re-insurance business
  • Regulating investment of funds by insurance companies;
  • Adjudication of disputes between insurers and intermediaries or insurance intermediaries;

Organizational structure or Composition of IrDA

IRDA is a ten member body consisting of:

  • A Chairman (Currently T.S. Vijayan)
    • Five whole-time members,
      • Four part-time members,

All members are appointed by the Government of India.

Insurance Ombudsman

The Insurance Ombudsman is created by Government of India for individual policyholders to have their complaints settled out of the courts in an impartial, efficient and cost-effective way.

There are 12 Insurance Ombudsman in different locations in India that an insured person can approach. Usually complaints are lodged with the ombudsman having jurisdiction over the location of the insurance company office that the insured person has a complaint against.

  • Insured persons can approach the Ombudsman with complaint if:
  • They have first approached their insurance company with the complaint and the company has not resolved it.
  • Not resolved it to the insured person’s satisfaction or
  • Not responded to it at all for 30 days
  • An insured person’s complaint pertains to any policy you have taken in his/her capacity as an individual and
  • The value of the claim including expenses claimed is not above Rs 20 lakh

A complaint to the Ombudsman can be about:

  • Any partial or total repudiation of claims by an insurer
  • Any dispute about premium paid or payable in terms of the policy
  • Any dispute on the legal construction of the policies as far as it relates to claims
  • Delay in settlement of claims
  • Non-issue of any insurance document to you after you pay your premium
  • The settlement process

The Ombudsman acts as counsellor and mediator and arrives at a fair recommendation based on the facts of the dispute.

Integrated Grievance Management System

IRDA has launched the Integrated Grievance Management System (IGMS). Apart from creating a central repository of industry-wide insurance grievance data, IGMS is a grievance redress monitoring tool for IRDA. Policyholders who have grievances should register their complaints with the Grievance Redress Channel of the Insurance Company first. If policyholders are not able to access the insurance company directly for any reason, IGMS provides a gateway to register complaints with insurance companies.

  • Complaints are registered with insurance companies first and only if need be, be escalated them to IRDA (Consumer Affairs Department). IGMS is a comprehensive solution which not only has the ability to provide a centralised and online access to the policyholder but complete access and control to IRDA for monitoring market conduct issues of which policyholder grievances are the main indicators.
  • IGMS has the ability to classify different complaint types based on pre-defined rules. The system has the ability to assign, store and track unique complaint IDs. It also sends intimations to various stakeholders as required, within the workflow. The system has defined target Turnaround Times (TATs) and measures the actual TATs on all complaints. IGMS sets up alerts for pending tasks nearing the laid down Turnaround Time. The system automatically triggers activities at the appropriate time through rule based workflows.

A complaint registered through IGMS will flow to the insurer’s system as well as the IRDA repository. Updating of status will be mirrored in the IRDA system. IGMS enables generation of reports on all criteria like ageing, status, nature of complaint and any other parameter that is defined.

Thus IGMS provides a standard platform to all insurers to resolve policyholder grievances and provides IRDA with a tool to monitor the effectiveness of the grievance redress system of insurers.

Insurance Repository

An Insurance Repository is a facility to help policy holders buy and keep insurance policies in digital/electronic form, rather than as a paper documents.

The Finance Minister of India recently announced the setting of insurance repository system.Like Share Depositories or Mutual Fund Transfer Agencies, Insurance Repositories, will hold electronic records of insurance policies issued to individuals and such policies are called “electronic policies” or “e-Policies”.

In 2013, IRDA has issued licences to five entities to act as Insurance depositories, these companies will maintain data of insurance policies in electronic form for insurers and will open e-Insurance accounts for policyholders.

  • Central Insurance Repository Limited (CIRL)
  • NSDL Database Management Limited
  • SHCIL Projects Limited
  • Karvy Insurance repository Limited
  • CAMS Repository Services Limited

Benefits of Insurance Repositories

  • Policies stored in the electronic form, don’t run the risk of losing the physical documents.
  • It becomes easier to track one’s policies as the details will be available at one place. Insured person won’t have to go to different offices anymore.
  • Less paperwork. With the repository as the single point of service, updating details will become easier, faster and more reliable.

Privatization of Life Insurance in India

In 1993 RN Malhotra Committee was appointed by the Government of India to lay down a road map for privatisation of the life insurance sector. The committee submitted its report in 1994, but it took another six years before the enabling legislation was passed in 2000.

In the same year, insurance regulator – Insurance Regulatory and Development Authority IRDA— started issuing licenses to private life insurers. All insurance companies in India have to comply with the regulations laid out by IRDA. Today, life Insurance is the fastest growing sector in India since 2000 as Government allowed Private players and FDI up to 26% and then Cabinet approved a proposal to increase it to 49%. Apart from Life Insurance Corporation of the Public sector, there are 23 other private sector life insurers, most of them joint ventures between Indian and global insurance groups.

Some famous brand names in the Life Insurance Business in India are:

Aviva India, AEGON Religare, Bajaj Allianz, HDFC Life, ICICI Prudential, IDBI Federal Life Insurance, IndiaFirst Life Insurance Company, ING Life India, LIC, Max Life, Peerless Group, Reliance, SBI Life, Sun Life Financial etc.

Foreign Direct Investment (FDI) Policy in Insurance Sector

  • As of now, the maximum participation in an Indian insurance company is restricted to 26.0% of its equity / ordinary share capital with the balance being funded by Indian promoter entities.
  • 26% cap on foreign investments in the insurance sector also applies to intermediaries such as brokers, third party administrators and surveyors.
  • Insurance brokers are entities which arrange insurance contracts with insurers or reinsurers on behalf of their clients.
  • The Indian government has supported an increase in the FDI limit, which requires a change in the Insurance Act.
  • In 2005 the Union budget had recommended that the ceiling on foreign holding be increased to 49.0%.
  • A change in the Insurance Act requires a passage of the bill in both houses of Parliament.
  • The Indian government tabled the bill in the Upper House of Parliament in August 2010 and again in 2014 but did not pass.
  • IRDA has set up a committee to study the option of allowing 100 percent FDI in insurance intermediaries, third-party administrators, surveyors and loss assessors. But action on this, too, would have to wait.

Types of Life Insurance

Term Insurance Policies

This kind of policy secures the immediate needs of nominees or beneficiaries in the event of sudden or unfortunate demise of the policy holder. The policy holder does not get any monetary benefit at the end of the policy term except for the tax benefits. In the event of death of the policy holder, the sum assured is paid to his or her beneficiaries.

Money-back Policies

Under such a policy the policy holder receives a fixed amount at specific intervals throughout the duration of the policy. In the event of the unfortunate death of the policy holder, the full sum assured is paid to the beneficiaries.

Unit-linked Investment Policies (ULIP)

A ULIP is a product offered by insurance companies gives investors the benefits of both insurance and investment under a single integrated plan, unlike a pure insurance policy which only provides financial cover without the added advantage of an investment.

The money collected by the insurance provider is utilized to form a pool of fund which is used to invest in various markets instruments (debt and equity) in varying proportions just like it is done for mutual funds.

Pension Policies

These are retirement planning investment schemes where the sum assured or the monthly pay-out after retirement entirely depends on the capital invested, the investment timeframe, and the age at which one wishes to retire.

Health Insurance In India

Health insurance is the issuance that essentially coves all types of medical expenses. A health insurance policy is a contract between insurance and individual or group in which insurer agrees to provide specified health insurance cover in exchange of a regular “premium”.

Since 1986 the health insurance industry has grown significantly due to liberalisation and general awareness. By 2010, more than 25% of India’s population had access to some form of health insurance.

The General Insuance Corporation and IRDA have even launched an awareness campaign for all segments of population to improve awareness and reduce procrastination for buying health insurance.

Policies available under the health insurance cover both individuals and families.

Aspects of Health Insurance

Tax Deductions

  • Under section 80D of the income tax act, the insured person who takes out the policy can claim for tax deduction for the amount invested.

Payment Options

  • Direct payment / Cashless facility: here, the person does not need to pay the hospital as the insurer takes care of the all the treatment bills.
  • Reimbursement at the end of the hospital stay : after staying for the duration of the treatment, the patient can take a reimbursement

Cost and Duration

Policy price range: Insurance companies offer health insurance from a sum insured of Rs. 5000/- for micro-insurance policies to a higher sum insured of Rs. 50 lacs and above. The common insurance policies for health insurance are usually available from Rs. 1 lac to Rs. 5 lacs.

Duration: Health insurance policies offered by non-life insurance companies usually last for a period of one year. Life insurance companies offer policies for a period of several years.

Types of Policies

Hospitalization Policy : Under such policies the insurer pays the total or partial amount of the insured person’s hospital bills.

Hospital Daily Cash Benefit Policy : Under this type of schemes daily ash benefits are offered to the policyholder in terms of a fixed amount for each day of hospitalisation

Critical Illness Benefit : In the event of having critical illness, this policy is designed to mitigate expenses.

Employee’s State Insurance Corporation

Functioning under the aegis of Ministry of Labour and Employment and Incorporated under the ESI Act of 1948, the ESIC is a self-financing health insurance and social security scheme for all indian workers earning less than ₹ 15000 per month as wages.

It is a contributory insurance scheme in which employer contributes 4.75% and employee contributes 1.75% of a total 6.5% of the wages earned. In return, the insured per on and their family are entitled to different types of befenits, both medical and cash. In addition to insured workers, poor families eligible under the Rashtriya Swasthya Bima Yojana can also avail facilities in ESI hospitals and dispensaries.

Recently there has been an increase in the role of information technology in ESI, with the introduction of Pehchan smart cards under the corporation’s ‘Project Panchdeep’, India’s largest e-governance project.

Future of Insurance Sector

The future looks good for in Insurance sector. The sector has a strong potential to grow from US$ 72 billion in 2012 to US$ 280 billion by 2020. India’s favorable regulatory environment which guarantees stability and fair play will be the primary driver for this growth. Foreign investors want to tap into the sector’s massive potential.

Since the government liberalized the insurance sector in 2000 by opening the doors for private participation, the Indian insurance sector has gotten stronger.

Competition has provided the consumer with an unforeseen range of products, providers and enhanced service levels. The health of the insurance sector reflects a country’s economy. Insurance sector generates long-term funds for infrastructure development and also increases a country’s risk-taking capacity.

India’s economic growth since the turn of the century is viewed as a significant development in the global economy. This view is helped in no small part by a booming insurance industry.

Select Terms related to Insurance Sector

Actuary

Actuary  is a business professional who analyzes probabilities of risk and risk management including calculation of premiums, dividends and other applicable insurance industry standards.

Annuity

Annuity refers to a contract providing income for a specified period of time, or duration of life for a person or persons.

Collateralized Mortgage Obligations (CMOs)

CMOs are a type of mortgage-backed security (MBS) with separate pools of pass-through security mortgages that contain varying classes of holders and maturities (tranches) with the advantage of predictable cash flow patterns.

Policy Lapse

Policy lapse refers to termination of a policy due to failure to pay the required renewal premium.

Micro Insurance

A micro-insurance policy is a general or life insurance ploy with a sum assured of ₹ 50000 or less. IRDA has created this special category under the micro-insurance regulations, 2005, to promote insurance coverage among the economically vulnerable sections of society.

Morbidity Risk

Morbidity Risk  is the potential for a person to experience illness, injury, or other physical or psychological impairment, whether temporary or permanent. Morbidity risk excludes the potential for an individual’s death, but includes the potential for an illness or injury that results in death.

Mortgage Insurance

Mortgage Insurance is a form of life insurance coverage payable to a third party lender/mortgagee upon the death of the insured/mortgagor for loss of loan payments.

Package Policy

When two or more distinct policies combined into a single contract, it is known as Package Policy.

Premium

Premium is the money charged for the insurance coverage reflecting expectation of loss.

Underwriter

Underwriter is a person who identifies, examines and classifies the degree of risk represented by a proposed insured in order to determine whether or not coverage should be provided and, if so, at what rate.

Underwriting

Underwriting is the process by which an insurance company examines risk and determines whether the insurer will accept the risk or not, classifies those accepted and determines the appropriate rate for coverage provided.

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