PROJECT REPORT ON

INSURANCE SECTOR

&

LIFE INSURANCE CORPORATION OF INDIA

SUBMITTED TO : PROF. B.S.RAO

SUBMITTED BY : PIYUSH KHARE

B2-38

INTRODUCTION

Insurance is a term which means a form of agreement or contract. Its actually a protection against a loss for which we pay certain amount of money periodically in exchange for a guarantee that we will be compensated under stipulated conditions for any specified loss by fire, accident, death, etc. in other words we can say that a system to make large financial losses more affordable by pooling the risks of many individuals and business entities and transferring them to an insurance company or other large group in return for a premium. When we talk about insurance the first thing comes in our mind is the loss. So to compensate that loss, we pay a nominal charge to any institution, which is known as premium and the guarantee which we receive from that particular institution is known as insurance. It may be described as a social device toreduce or eliminate the risk of loss to life and property. Insurance is a collective bearing of risk. Insurance is a scheme of economic cooperation by which the members of the community share the unavoidable risks. The risks which can be insured against include fire, deaths, accidents and burglary. It can’t prevent the occurrence of risk but it provides for the losses of risks.

Insurance can be defines as a legal contract between two parties whereby one party called the insurer undertakes to pay a fixed amount of money on the happening of a particular event, which may be certain or uncertain. The party called the insured pays in exchange a fixed sum known as premium. The document which embodies the contract is called the policy.

HISTORY OF INSURANCE

In the beginning was . . . insurance? Maybe not. But people have always yearned for security. Over 4,000 years ago Hammurabi, King of ancient Babylon, introduced a crude form of life and robbery insurance. An injured party had merely to declare his loss before God and the state would make suitable restitution. God as claims adjuster-who could be fairer?

The Romans used burial clubs as a form of life insurance, providing funeral expenses for members and later payments to the survivors. With the growth of towns and trade in Europe, the medieval guilds undertook to protect their members from loss by fire and shipwreck, to ransom them from captivity by pirates, and to provide decent burial and support in sickness and poverty. By the middle of the 14th cent., as evidenced by the earliest known insurance contract (Genoa, 1347), marine insurance was practically universal among the maritime nations of Europe. In London, Lloyd's Coffee House (1688) was a place where merchants, shipowners, and underwriters met to transact business. By the end of the 18th cent. Lloyd's had progressed

into one of the first modern insurance companies. Around 600 A.D., the Greeks and Romans developed their own versions of health and life insurance by forming groups that cared for the families and funeral expenses of members upon death. Other specialized lines of insurance started developing in post-Renaissance Europe, as London was becoming a major trade center. With all of the marine explorations and shipping, a more need developed for a more sophisticated type of insurance. Lloyd's of London was formed to meet this need, beginning in a London coffee house frequented by mariners and investors alike, Now, Lloyd's of London remains the largest insurer in specialty markets. It should be noted that Lloyd's is not a typical

insurance company -- it essentially brokers the risk to its private investors. That's one of the reasons the company is able to insure unusual things such as priceless works of art, a musician's fingers, a model's face, etc.

INSURANCE SECTOR IN INDIA

The history of insurance in India can be traced back to the Vedas. The Sanskrit term YOGAKSHEMA, the name of Life Insurance Corporation of India’s corporate headquarters, is found in the Rig Veda. Some form of ‘community insurance’ was practiced by the Aryans around 1000 BC. The joint family system prevalent in India was an important form of social cooperation.

Insurance is a federal subject in India and has a history dating back to 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and these companies were not insuring Indian natives. However, later with the efforts of eminent people like Babu Muttylal Seal, the foreign life insurance companies started insuring Indian lives. But Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them. Bombay Mutual Life Assurance Society, the birth of first

Indian life insurance company in the year 1870, and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society.

The Swadeshi Movement of 1905-07 and many more movement of this time led to an increase in number of insurance companies. In 1912 the first legislation regulating insurance, the Life Insurance Companies Act, 1912, was promulgated. The Insurance Act, 1938, the first comprehensive legislation governing both life and non life branches of insurance was enacted to provide strict state control over the insurance business. By the mid 1950s, there were 154 Indian insurers, 16 foreign insurers and 75 provident societies carrying on life insurance business in India. Insurance business flourished and so did scams, irregularities, and dubious investments practices by scores of companies. As a result, the govt. decided to nationalize the life assurance business in India. The Life Insurance Corporation of India was set up in 1956 to take over 245 companies. The General Insurance Corporation of India was set up in 1973.

Right now there are several insurance companies in India. Some of the top companies are:

1. Life Insurance Corporation of India.2. ICICI3. Bajaj Allianz Life Insurance Company Limited4. SBI Life Insurance Company Limited

5. SBI Life Insurance Co Ltd

6. Reliance Life Insurance Company Ltd7. HDFC Standard Life Insurance Company Limited8. Birla Sun Life Insurance Company Ltd9. Max New York Life Insurance Company Ltd

MALHOTRA COMMITTEE

The government set up, in 1993, a committee under the chairmanship of R.N. Malhotra, the former insurance secretary and the RBI governor to evaluate the Indian insurance industry and recommend its future direction. The main recommendation of the Malhotra Committee was as follows:-

i) The government should bring down its stake in the insurance companies to 50%.

ii) Private companies with a minimum paid-up capital of Rs.100 crore should be allowed to enter the industry.

iii) Foreign companies may be allowed to enter the industry in collaboration with domestic companies.

iv)A strong and effective insurance regulatory authority in the form of a statutory autonomous board on the lines of the SEBI.

v) The mandatory investment of LIC life fund in government securities need to be reduced from 15% to 50%.

vi) The GIC and its subsidiaries should not hold more than 5% in any company.

vii) No single company should be allowed to transact business in both the life and general insurance business.

vii) The number of entrants should be controlled.

viii) The state level cooperatives should be allowed to set up cooperatives societies for transacting life insurance business in the state.

There are some other recommendations which the committee had put. According to the recommendation of the Malhotra Committee an autonomous body was constituted on 19th April 2000, name Insurance Regulatory and Development Authority (IRDA). The Act was approved in the parliament in December 1999 and the insurance sector was thrown open for private licensees on 15th

August 2000.

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

The Insurance Regulatory and Development Act of 1999 were set out as follows. “To provide for the establishment of an Authority to protect the interests of holders of insurance policies, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto and further to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, 1972.”

The Act effectively reinstituted the Insurance Act of 1938 with (marginal) modifications. Whatever was not explicitly mentioned in the 1999 Act referred back to the 1938 Act?

(1) It specified the creation and functioning of an Insurance Advisory Committee that sets out rules and regulation.

(2) It stipulates the role of the “Appointed Actuary”. He/she has to be a Fellow of the Actuarial Society of India. For life insurers the

Appointed Actuary has to be an internal company employee, but he or she may be an external consultant if the company happens to be a non-life insurance company. The Appointed Actuary would be responsible for reporting to the Insurance Regulatory and Development Authority a detailed account of the company.

(3) Under the “Actuarial Report and Abstract”, pricing of products have to be given in detail. It also requires details of the basic assumptions for valuation. There are prescribed forms that have to be filled out by the Appointed Actuary including specific formulas for calculating solvency ratios.

(4) It stipulates the requirements for an agent. For example, insurance agents should have at least a high school diploma along with training of 100 hours from a recognized institution.

(5) Under “Assets, Liabilities, and Solvency Margin of Insurers”, the Insurance Regulatory and Development Authority has set up strict guidelines on asset and liability management of the insurance companies along with solvency margin requirements. Initial margins are set high (compared with developed countries). The margins vary with the lines of business.

Life insurers have to observe the solvency ratio, defined as the ratio of the amount of available solvency margin to the amount of required solvency margin: (a) the required solvency margin is based on mathematical reserves and sum at risk, and the assets of the policyholders’ fund; (b) the available solvency margin is the excess of the value of assets over the value of life insurance liabilities and other liabilities of policyholders’ and shareholders’ funds.

(6) It sets the reinsurance requirement for (general) insurance business. For all general insurance, a compulsory cession of 20% regardless of line of business to the General Insurance Corporation, the designated national reinsurer was stipulated.

(7) Under the “Registration of Indian Insurance Companies”, it sets out details of registration of an insurance company along with renewal requirements. For renewal, it stipulates a fee of one-fifth of one percent of total gross premium written direct by an insurer in India during the financial year preceding the year. It seeks to give detailed background for each of the following key personnel: Chief Executive, Chief Marketing Officer, Appointed Actuary, Chief Investment Officer, Chief of Internal Audit and Chief Finance Officer. Details of sales force, activities in rural business and projected values of each line of business are also required.

(8) Under “Insurance Advertisements and Disclosure”, details of insurance advertisement in physical and electronic media has to be detailed with the Insurance Regulatory and Development Authority. The advertisements have to comply with the regulation prescribed in section 41 of the Insurance Act, 1938. The Act of 1938 says, “No person shall allow or offer to allow, either directly or indirectly, as an inducement to any person to take out or renew or continue an insurance in respect of any kind of risk relating to lives or property in India, any rebate of the whole or part of the commission payable or any rebate of the premium shown on the policy, nor shall any person taking out or renewing or continuing a policy accept any rebate, except such rebate as may be allowed in accordance with the published prospectus or tables of the insurer.”

(9) All insurers are required to provide some coverage for the rural sector. It is called the “Obligations of Insurers to Rural Social Sectors.”

LIFE INSURANCE CORPORATION OF INDIA

LIC has been one of the pioneering organizations in India who introduced the leverage of Information Technology in servicing and in their business. Data pertaining to almost 10 crore policies is being held on computers in LIC. LIC have gone in for relevant and appropriate technology over the years.

1964 saw the introduction of computers in LIC. Unit Record Machines introduced in late 1950’s were phased out in 1980’s and replaced by Microprocessors based computers in Branch and Divisional Offices for Back Office Computerization. Standardization of Hardware and Software commenced in 1990’s. Standard Computer Packages were developed and implemented for Ordinary and Salary Savings Scheme (SSS) Policies. LIC of India is the one and only public sector life insurance company in India. The LIC has been a national builder since its formation. True to objectives of nationalization, the LIC has invested the funds mobilized from policy holders for the benefit of the community at large.

INTERNATIONAL OPERATIONS / ASSOCIATES OF LIC

INTERNATIONAL OPERATIONS LIC Fiji. LIC Mauritius. LIC United Kingdom. LIC (International) B.S.C(C), Bahrain. LIC (Nepal) Ltd. LIC (Lanka) Ltd. Saudi Indian Company for Co-op. Insurance, KSA Kenindia Assurance Co. Ltd., Kenya. LIC Mauritius Offshore Ltd. LIC Co-ordinating Office in India.

ASSOCIATES

LIC Housing Finance Ltd.Incorporated in 1989, its main objective is to provide long term finance for construction/purchase of individual houses/flats. It is the housing finance institution with widest marketing network in India. These are schemes designed for NRIs, for repair/renovation of house, for purchase of site, for setting up their own office in case of professionals.The company has set up a representative office in Dubai in 2002.

LICHLF Care Homes Ltd.A wholly owned subsidiary of LIC HFL, eatablished to built and operates on commercial basis "Assisted Community Living Centres" for senior citizens. First such centre is completed in Bangalore. The project in Bhubaneshwar (Orissa) is in progress.

LIC Mutual Fund AMC Ltd.The LIC Mutual Fund was set up in June 1989 as a separate trust by LIC of India with a view to providing accessibility of various investment media including the stock markets to all sections of investors, particularly the small investors in rural and semi-urban areas. A Mutual Fund pools the savings from numerous small investors(who buy units) and invests them in diversified securities (shares, debentures, bonds, etc.) in the capital market in order to optimize the high return, safety, high liquidity trade-off for the maximum benefit to investors.For LIC Mutual Fund schemes, Jeevan Bima Sahayog Asset Management Company Limited (JBS AMC) incorporated on 20Th. April, 1994 acts as Investment Manager.

BUSINESS PERFORMANCE OF LIC IN 2007-08

(Rs. In crores)

z

0100000200000300000400000500000600000700000800000900000

TotalIncome

TotalPremiumIncome

Total PolicyPayments

Total LifeFund

Total Assets

2006-07

2007-08

Comparative Study of Business Performance of LIC in 2007-08 & 2006-07

Here we see that the total income is increased by 18%. There is a significant growth of the total assets and total life insured in the year 2007-08 from the last fiscal year.

CHANNELS OF DISTRIBUTION

AgentsAgents are just like the retailers of any consumer product who help in selling and distributing the product. An agent is a person licensed by the IRDA to do insurance business. The professional agent has been the strongest link between the life insurer and the customer. The professional agent has the onerous role of explaining the concepts, terms and conditions, benefits and privileges of the insurance contract. Every insurance is having its agents to sell its insurance policies.

BrokersThey are just like agents but with a difference. Unlike agents, they can sell policies of several life and non life insurance companies at a time. Insurance brokers are professionals who assess risk on behalf of their clients, provide advice on mitigation of the said risk, identify the optimal insurance policy structure, bring together the insurer and the insured, carry out the preparatory work for entering into insurance contracts, and facilitate processing where claims arise.

BancassuranceBancassurance is insurance companies tying up with banks to sell insurance products. Bancassurance is an innovative distribution channel in India. The persistency rate in Bancassurance, due to the

continuous contact with the client is better than in other channels. The ease of payment of premium and the facility of maturity/claim payments through the bank account make it a customer friendly channel. LIC is just following this one.

Direct MarketingIn this, LIC gets a data base of the potential customers, contacts them on the telephone to market the different policies of the company.

NEW BUSINESS BROUGHT IN BY ALL THE CHANNELS OF LIC(1/4/07 To 31/3/08)

Here we see that the growth rate of LIC is in negative but even then there is a significant growth in the first premium income of LIC just because of the new policies and schemes that were introduced by LIC.

SPAN OF ORGANIZATION

At present, LIC is having 2048 fully computerizes branch offices all

over the country and 100 divisional offices and 7 zonal offices and

the corporate offices. LIC’s wide are network covers 100 divisional

offices and connects all the branches through a Metro Area Network.

LIC has tied up with some banks and service providers to offer on-line

premium collection facility in selected cities. LIC’s ECS and ATM

premium payment facility is an addition to customer convenience.

Apart from on-line kiosks and IVRS, Info Centres have been

commissioned at Mumbai, Ahmadabad, Bangalore, Chennai,

Hyderabad, Kolkata, New Delhi, Pune and many other cities. With a

vision of providing easy access to its policy holders, LIC has launched

SATELLITE SAMPARK OFFICES. The Satellite offices are smaller, leaner

and closer to the customer. The digitalized records of the satellite

offices will facilitate anywhere servicing and many other

conveniences in the future.

OBJECTIVES OF LIC

Spread life insurance widely and in particular to the rural areas and to the socially and economically backward classes with a view to reaching al insurable persons in the country and providing them adequate financial cover against death at a reasonable cost.

� Maximize mobilization of people’s savings by making insurance linked savings adequately attractive.

� Bear in mind, in the investment of funds, the primary obligation to its policyholders, whose money it holds in trust, without losing sight of the interest of the community as a whole; the funds to be deployed to the best advantage of the investors as well as the community as a whole, keeping in view national priorities and obligations of attractive return. � Conduct business with utmost economy and with the full realization that the moneys belong to the policy holders. � Act as trustees of the insured public in their individual and collective capacities. � Meet the various life insurance needs of the community that would arise in the changing social and economic environment. � Involve all people working in the corporation to best of their capabilities in furthering the interests of the insured public by providing efficient service with courtesy.

INVESTMENT IN GOVT. AND SOCIAL SECTOR

As on Type of investment31.03.06 31.03.07 31.03.08

01. CENTRAL GOVT.SECURITIES 236959 272498 29815702. STATE GOVT.& OTHER GOVT..

GUARANTEED MARKETABLE SECURITIES

58928 64285 89195

Sub-Total (A) 295887 336783 38735203. INFRASTRUCTURE AND SOCIAL

SECTOR INVESTMENTa) HOUSING 19807 22451 24325b) POWER 29740 37881 41120

c) IRRIGATION / WATER SUPPLY & SEWARAGE

8288 7500 6649

d) ROAD,RAILWAYS,PORT&BRIDGES

725 1516 1154

e) OTHERS 3954 4398 8774Sub – Total (B) 62514 73746 82022TOTAL 304002 358401 410529

Here we see that LIC has invested more in the fiscal year 2007-08 than in the fiscal year 2006-07. By having a look over this we can say that LIC is investing a significant amount in the infrastructure segment as a part of their social activity.

True to the spirit of nationalization the Corporation has deployed its funds to the best advantage of LIC policyholders as well as for the community as whole. National Priorities and obligations of reasonable returns to the policy holders are the main criteria of LIC’s investments.

Not less than 50% is invested in Govt. Securities or other approved Investments.

Not less than 15% is invested in infrastructural and social sector Investments.

Not exceeding 35% in others to be governed by prudent exposure norms.

Products

As individuals it is inherent to differ. Each individual’s insurance

needs and requirements are different from that of the others. LIC’s

Insurance Plans are policies that talk to you individually and give you the most suitable options that can fit your requirement. There are

several insurance plans offered by LIC, some of the important ones are

JEEVAN ANURAG

JEEVAN KISHORE

CHILD CAREER PLAN

CHILD FORTUNE PLUS

JEEVAN AADHAAR

THE ENDOWMENT ASSURANCE POLICY

JEEVAN ANAND

JEEVAN AMRIT

MONEY BACK POLICY

JEEVAN BHARTI

BIMA BACHAT

THE WHOLE LIFE POLICY

JEEVAN TARANG

AMULYA JEEVAN

ANMOL JEEVAN

JEEVAN SURABHI-25 YEARS.

…….and many more.

IMPACT OF FINANCIAL CRISIS ON LIC

LIC is a public sector insurer and a domestic investor. As such, not directly affected by the global financial crisis. However, the volatility in Indian financial market due to the uncertainty in global markets affect returns that LIC gets on its investments. But LIC has an indisputable record of prudently planning its investments and getting the maximum returns on the policyholders’ money. We will continue to do that in any type of scenario.

Script/ Funds Value of the Fund on 08.01.08

Value of the Fund on 10.10.08

% Change in the Value

SENSEX 21207 10528 -50.36Jayaprakash Ass 100000 16483 -83.52Reliance Infra 100000 20319 -79.68DLF 100000 24479 -75.52Sterile Inds 100000 26504 -73.5ICICI Bank 100000 27304 -72.7Reliance Comm 100000 29516 -70.48Tata Steel 100000 32238 -67.76Tata Motors 100000 38873 -61.13L&T 100000 41044 -58.96Hindalco 100000 42512 -57.57Grasim Inds 100000 43431 -56.57Reliance Inds 100000 50057 -49.94Tata power 100000 49429 -50 .57

LIC 100000 89715 -10.28

LIC RelianceInfra

DLF Sterile Inds ICICI RelianceComm.

Value of the Fund on 10/10/08

Estimated value as on 8/01/08

Here its very clear that the individuals who have invested in LIC have better returns as compared to the returns by the other companies un between the financial crisis.

AWARDS

Some of the recent awards received by LIC are

1. LIC has been ranked :” Number One Trusted Service Brand” in the Economic Times Brand Equity Survey for the year 2008 for the 5th consecutive year, with overall ranking across all categories going up from 27th to 12th.

2. Readers Digest “Trusted Brand”2008 in the platinum category.3. SKOCH Challengers Award 2008 for our Micro Insurance

Product Jeevan Madhur.

4. Customer & Brand Loyalty Award 2008 in the Life Insurance category from India times Mindscape.

5. Rated as the “Most Preferred Life Insurance Company of the year” at the CNBC Awaaz Consumer Awards 2007 third time in a row.

6. “Conferred Peacock Award “ for Excellence in Corporate Governance

7. Conferred Outlook Money NDTV profit-“Best Life Insurer Award 2007”

8. “Web 18- Genius of the Web award -2007 “For the best website in Insurance Category.

9. Adjusted the” Best Life Insurance Company of the year”- at the Second NDTV Profit Business Leadership Awards-2007.

SUMMARY

By having a close look over the profile and achievements of LIC, we can conclude that LIC has been working on the basics of providing error free service to its customers. LIC is also very much concerned about the social responsibility of any company or corporation. LIC is having the punchline “Jeevan Ke Aaj Bhi, Jeevan Me Baad Bhi.” And LIC is stick to this also. Moreover LIC is the top most company in the field of insurance in India. The policies offered by LIC are for every age group. Total premium growth of LIC has always been quite stable, even when there are periodical ups and downs in new premium income.