Introduction to Insurance Sector in India

8/12/2019 Introduction to Insurance Sector in India

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Introduction to Insurance sector in India

In India, insurance has a deep-rooted history. It finds mention in the writings ofManusmrithi,

Dharmasastraand Kautilya (Arthasastra). The writings talk in terms of pooling of resources

that could be re-distributed in times of calamities such as fire, floods, epidemics and famine.

This was probably a pre-cursor (Predecessor) to modern day insurance. Ancient Indian

history has preserved the earliest traces of insurance in the form of marine trade loans and

carriers contracts. Insurance in India has evolved over time heavily drawing from other

countries, England in particular.

In 1818 the advent of life insurance business in Indiawith the establishment of the Oriental

Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the

Madras Equitable had begun transacting life insurance business in the Madras Presidency.

1870 saw the enactment of the British Insurance Act and in the last three decades of thenineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897)

were started in the Bombay Residency. This era, however, was dominated by foreign

insurance offices which did good business in India, namely Albert Life Assurance, Royal

Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard

competition from the foreign companies.

The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate

life business. In 1928, the Indian Insurance Companies Act was enacted to enable 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. In 1938, with

a view to protecting the interest of the Insurance public, the earlier legislation was

consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for

effective control over the activities of insurers.

The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a

large number of insurance companies and the level of competition was high. There were also

allegations of unfair trade practices. The Government of India, therefore, decided to

nationalize insurance business. An Ordinance was issued on 19thJanuary, 1956 nationalising

the Life Insurance sector and Life Insurance Corporation came into existence in the same

year. 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 till the late 90s when the

Insurance sector was reopened to the private sector.


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Life Insurance in India

Life insurance is popularly referred to as life assurance.Life insurance is a contract between

two parties whereby one party agrees to pay to the other party, a certain amount of money as

premium to make good the loss of life arising out of an uncertain event of death in which the insured

has interest. In the case of life insurance, the underwriter agrees to pay the assured or his heirs, a

certain sum of money on death or on the happening of an event dependent upon human life in consideration of

premiums paid by the assured. Section 2(11) of the Insurance Act, 1938 defines Life Insurance

business as follows:

Life Insurance Business is 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 dependant on human life and any contractwhich is subject to the payment of premiums for a term dependant on human life and shall be

deemed to include:

(a) The granting of disability and double or triple indemnity accident benefits if so provided

in the contract of insurance.

(b) The granting of annuities on human life; and

(c) The granting of superannuation allowances and annuities payable out of any fund

applicable solely to the relief and maintenance of persons engaged in any particular

profession, trade or employment or of the dependants of such persons

Human life is subject to risks of death and disability due to natural and accidental causes.

When human life is lost or a person is disabled permanentl y or temporari ly, t here

is a l oss of income to the household. The family is put to hardship. Sometimes,

survival itself is at stake for the dependants. Risks are unpredictable. Death/disability may

occur when one least expects it. An individual can protect himself or herself

against such contingencies through life insurance. Though Human life cannot be

v a lu ed , a mo n e ta ry su m co u ld b e d e te rmin ed wh ich i s b ased o n lo ss

o f income in future years. Hence in life insurance, the Sum Assured (or the amount

guaranteed to be paid in the event of a loss) is by way of a benefit in the case of life

insurance. It is the uncertaint y that is risk, which gives rise to the necessity for

some form of protection against the financial loss arising from death. Insurance

substitutes this uncertainty by certainty. The primary purpose of life insurance is the

protection of the family. Insurance in its various forms protects against such misfortunes b y


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having the losses of the unfortunate few paid b y the contribution of the many

that are exposed to the sa m e r i s k .

Need for the Life Insurance:

The original basic intention of life insurance is to provide for one family and perhaps others

in the event of death. Originally, polices were to provide for short periods of time, covering

temporary risk situations, such as sea voyages. As life insurance became more

established. It was realized what a useful tool it was in a number of situations,

including:

Temporary needs threats: The original purpose of Life Insurance remains an

important element, namely providing for replacement of income on death etc.

Regular saving: Providing ones family and oneself, as a medium to long term

exercise (through a series of r egular payment of premiums). This has been

become mo re rel evant in recent times as people seek financial independence from their

family.

Investment: Put simply, the building up of saving while safeguarding it from

ravages of inflation. Unlike regular saving products are traditionally lump is investments,

where the individual makes are onetime payment.

Retirement: Provision for ones on later years has become increasingly

necessary. Especial ly in charging culture abs social environment, one can buy a suitable

insurance policy which will provideperiodical payments on ones old age.

R o l e o f L i f e I n s u r a n c e C o r p o r a t i o n

Largest Insurance Company in India-71 % market share in 2012, monpoly for 50years, insurance is not an option but necessity in current times.

Largest institutional investor. Provides expenses of Central government-24.6 percent of the expenses of the central.

Govt.

Maximum types of schemes which touch every aspect of life-40+ schemes. Covers different economic sections of the society.


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Largest insurer in rural areas. Help in Channelizing Money of NRI's through schemes-Currency Policy One of the biggest Employer-8 zonal Offices and 113 divisional offices located in

different parts of India, 350 million policies and corpus of Rs 8 trillion.

Non inflationary source of funds for the government. Funds to Private sector. Within 57 year of its existence, LIC contributed 7% to GDP. Social service with profit.

Functions of Life Insurance Corporation

The functions of the Corporation shall be to carry on and develop life insurance business to

the best advantage of the community.

The Corporation shall have power

(a) To carry on capital redemption business, annuity certain business or reinsurance business

in so far as such reinsurance business relating to life insurance business;

(b) To invest the funds of the Corporation in such manner as the Corporation may think fit

and to take all such steps as may be necessary or expedient for the protection or realisation of

any investment; including the taking over of and administering any property offered as

security for the investment until a suitable opportunity arises for its disposal;

(c) To acquire, hold and dispose of any property for the purpose of its business;

(d) To transfer the whole or any part of the life insurance business carried on outside India to

any other person or persons, if in the interest of the Corporation it is expedient so to do;

(e) To advance or lend money upon the security of any movable or immovable property or

otherwise;

(f) To borrow or raise any money in such manner and upon such security as the Corporation

may think fit;

(g) To carry on either by itself or through any subsidiary any other business in any case

where such other business was being carried on by a subsidiary of an insurer whose

controlled business has been transferred to and vested in the Corporation by this act.

(h) To carry on any other business this may seem to the Corporation to be capable of being

Conveniently carried on in connection with its business and calculated directly or indirectly

to render profitable the business of the Corporation; and


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(i) To do all such things as may be incidental or conducive to the proper exercise of any of

the powers of the Corporation.

(j) In the discharge of any of its functions the Corporation shall act so far as may be on

business principles.

Important types of life insurance policies are:1. Whole Life Policy

2. Endowment Policy

3. Joint Life Endowment Policy

4. Family Protection Policy

5. Multipurpose Policy

6. Convertible Whole Life Policy

7. Money Back Policy

1. Whole Life Policy:

This is the purest form of permanent contract. Premiums are payable throughout the Life

time of the life assured and the sum assured is payable only at his death. The element ofprotection of dependants is the dominating element and that of provision for old age is totally

absent. This type of assurance provides a larger amount of life cover than any

other permanent type of life assurance and it is therefore the most inexpensive form of

permanent protection for dependants. It has the disadvantage that premiums continue in old

age when the ability to pay them may be lessened by contraction of income. To obviate this

difficulty the Corporation had decided that under these tables premiums are now limited to a

maximum number and are payable either till age 80 or till 35 annual premiums are paid

whichever is later. For example a person aged30 has to pay premiums for a maximum period

of 50 years if he survives this period while a person aged 50 will have to pay for a maximum period

of 35 years (i.e. not till age 80 but also beyond if he survives beyond age 80). With this benefit extended

to all policies including those issued by the previous Insurers, the Corporation has no whole

life assurance contract where under premiums are payable indefinitely throughout life.

Whole Life Assurance by Limited Premiums:

Under this type of policy, it can be arranged that premiums cease at retirement age so that the

difficulties of maintaining the premiums in old age are removed. When the premium cease, the

policy becomes fully paid-up. With profits policies continue to participate in profits till the

claim arises even though the premiums have ceased.

2 Endowment Policy

This is undoubtedly the most popular form of assurance at the present time. Under this classof contract, the sum assured is payable at the expiration of a fixed term of years or at death

should that occur previously. This type of policy is really a combination of Life assurance

and investment. In the case of policies running for long terms the assurance element

predominates while in the case of assurances maturing at the end of comparatively shorter

terms the actual cost of the life assurance is very small the bulk of the premium being required

for the investment portion.

3 Joint Life Endowment Policy

Under this plan, two lives are simultaneously insured and the sum assured is payable on the

expiry of the term or/on the death of one of the assured lives during the endowment period.

The premiums are payable throughout the endowment period or till the prior death of either of the lives


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assured. It should be noted that one payment of the sum assured is envisaged even though two lives are

insured; two payments on two deaths are not contemplated as the first death will determine the

contract.

4 Family Protection Policy

Many different names are given to describe policies such as Family Protection, Family

Safeguard, Planned Protection etc., but most of them incorporate the idea of protecting or

safeguarding the family while the family members are young. The policy provides that whenthe assured die during a fixed period, from the outset annual instalments or yearly income

usually 10% to 12% of the basic sum assured shall be paid for the balance of the period. In

addition the basic sum assured is paid either at the time of death or at the expiration of the

fixed period or in varying proportion at both points of time. In the event of the life assureds

surviving the specified term, only the basic sum assured is payable either at death or at

maturity depending on the main plan of assurance. Premiums under this plan are generally

payable for a fixed term of years or till death.

5Multipurpose Policy

Under the multi-purpose policy the basic assurance is a type of family income policy under

the endowment assurance scheme. The following benefits can be taken under the policy bypaying appropriate extra premium:

School Education Provision

College Education Provision

Marriage Provision for Daughter

6 Convertible W hole Life Policy

This plan is essentially a whole life assurance with the option to convert after 5 years from

commencement, into an endowment assurance effective from inception. This plan is suitable

for a young man earning amongst income for the time being but with good prospects of

higher income after a short period. The objective is to provide maximum assurance protection

at minimum immediate cost and at the same time to offer a flexible contract which can bealtered to an endowment assurance at the end of 5 years from the commencement of the

policy by which time it is expected that there would be a rise in his income which would enable

him to pay the larger premium payable after conversion. If the conversion option is not exercised the policy

would continue as whole life assurance.

7 Money Back Policy

This plan is suitable for those who besides providing for their old age and family, need lump

sum benefit at periodic intervals. The sum assured is paid in suitable instalments. Yet

throughout the period of assurance, the dependents are guaranteed the benefit of the full sum

assured protection in the event of the death of the assured, irrespective of the instalments that

might have been paid. The policy is available for 4 terms i.e. 12years, 15 years, 20 years and 25

years to suit onesbest convenience. No loan is granted under this plan.

Modern Life Insurance in India


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Documents

Introduction to Insurance Sector in India