General Insurance 1

8/8/2019 General Insurance 1

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ACKNOWLEDGEMENT

I would like to express my gratitude to all those who gave me helping

hand incompleting this term paper. I want to thank my teacher

LECT.MANPREET KAUR KALER for helping me whenever I needed it the

most. My friends have also supported me in my work. I want to thank

them all for their help, support, interest and valuable hints.

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INDEX

SRNO CONTENTS PAGE NO

1. Concept of insurance 4

2. Basic insurance terminologies 4

3. Origin of insurance 5

4. General insurance 6

5. Insurance sector 6

6.

Development of general insurance 107. De tariffing of general insurance 11

8. Insurance products 12

9. General insurance council 13

10. Investment polcies of GIC 13

11. Current trend in insurance sector 14

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THE CONCEPT OFINSURANCE

Insurance is a contract between

two parties where by one partycalled insurer under takes in

exchange for a fixed sum called

premiums, to pay the other party

called insured a fixed amount of

money on the happening of a

certain event.

Insurance is a protection against

financial loss arising on the

happening of an unexpected event.

Insurance companies collect

premiums to provide for this

protection. A loss is paid out of the

premiums collected from the

insuring public and the Insurance

Companies act as trustees to the

amount collected. For Example, in

a Life Policy, by paying a premium

to the Insurer, the family of the

insured person receives a fixed

compensation on the death of the

insured. Similarly, in a car

insurance, in the event of the car

meeting with an accident, the

insured receives the compensation

to the extent of damage. It is a

system by which the losses

suffered by a few are spread over

many, exposed to similar risks.

Insurance is a mechanism for

transferring risk and reducing risk

by having a large number of

individuals who share in the

financial losses of the group. Risk

in hibitsaction and is highlysubjective on an individual basis.

Insurance objectifies risk. People

trade the possibility of financial loss

for the relative certainty of the

premium paid and reimbursement

for loss. Insurance frees people to

take action even in the face of

possible financial loss. Thus,

insurance provides utility even if no

loss ever occurs.

Some people believe insurance is

similar to gambling or opening a

savings account.

BASIC INSURANCETERMINOLOGIES

Insured

The person known as the policy

holder ,a person with insurance

coverage.

Insurer

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A company licensed to transact the

business of insurance and issue

insurance policies.

Policy

It's the written contract between an

insurance company and its insured.

It defines what the company agrees

to cover for what period of time and

describes the obligations and

responsibilities of the insured.

Premium

It's the amount of money a

policyholder pays for insurance

protection.

Claim

It's the notice to the insurance

company that under the terms ofa

policy, a loss maybe covered.

Indemnity

Legal principle that specifies an

insured should not collect more

than the actual cash value of a loss

but should be restored to

approximately the same financial

position as existed before the loss.

Agent

A licensed person or organization

who sells insurance and represents

the insurance company to

the policy holder.

ORIGIN OF INSURANCE

Whenever there is uncertainty

there is risk. We do not have any

control over uncertainties which

involves financial losses. The risk

may be certain events like death,

pension, retirement or uncertain

events like theft, fire, accident, etc.

Insurance is a financial service for

collecting the savings of the public

and providing them with risk

coverage. It comes under service

sector and while marketing this

service due care is taken in quality

product and customer satisfaction.

The main function of the Insurance

is to provide protection against the

possible chances of generating

losses. The insurance sector in

India has come a full circle from

being an open competitive market

to nationalization and back to a

liberalized market again. Tracing

the developments in theIndian

insurance sector reveals the 360-

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degree turn witnessed over a

period of almost two centuries.

GENERAL INSURANCE

General (non life) insurance

provide a short term coverage

,ususall for a period of one year.general insurance transact fire

insurance, motor insurance, marine

insurance, and miscellaneous

insurance business. Among these

categories fire and motor

insurance business are

predominant motor vehicle

insurance is compulsory in india

and the motor insurance portfolio

constitutes around 40 percent of

the total gross premium collected

by the general insurance

industry .Moreover, motor

insurance due to third party liability

claims has substantially contributed

to underwriting losses.

The government nationalized the

general insurance business on 1

jan 1973, by passing the general

insurance business act, 1972.prior

to nationalization, insurance

business was concentrated in

urban area.

INSURANCE SECTOR

The opening up of Insurance sector

was a part of theon going

liberalization in the financial sector

of India. The changing face of the

financial sector and the entry of

several companies in the field of

life and non life Insurance segmentare one of the key results of these

liberalization efforts. Insurance

business by way of generating

premium income adds significantly

to be the GDP. Over the past three

years, more than thirty companies

have expressed interest in doing

business in India. The IRDA

(Insurance Regulatory

Development Authority) is the

regulatory authority, which looks

over all related aspects of the

insurance business. The provisions

of the IRDA bill acknowledge many

issues related to insurance sector.

The IRDA bill provides guidance for

three levels of players - Insurance

Company, Insurance brokers and

Insurance agent. Life Insurance

sector is one of the key areas

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where enormous business potential

exists. InIndia currently the life

insurance premium as a

percentage of GDP is 1.3 %

against, 5.2 per centin the US.General Insurance is another

segment, which has been growing

at a faster pace. But as per the

current comparative statistics, the

general insurance premium has

been lower than life insurance.

General Insurance premium as a

percentage of GDP was a mere 0.5

'per cent in 1996. In the General

Insurance Business , General

Insurance Corporation (GIC) and

its four subsidiaries viz. New India

Insurance, Oriental Insurance,National Insurance and United

India Insurance, are

doing major business. The General

Insurance Industry has been

growing at a rate of 19 percent

per year.

The entry of several private

insurance companies, particularly

international insurance companies,

through joint ventures, will speed

up the process of insurance

mobilization. The competition will

unleash new schemes and

benefits, which will give consumers

a better Chance to save as well as

insure. The regulatory system in

India is relatively new and takes

some more time to make the

Insurance sector a perfectly

competitive one. Insurance

Regulatory Authority of India issued

regulations on 15 subjects which

included appointed. Actuary,

actuarial report, Insurance agents,

solvency margins, reinsurance

registration of Insurers, and

obligation of insurers to rural and

social sector, investment and

accounting procedure. The reform

in Insurance in India is guided by

factors like availability of a variety

of products at a competitive price,

improvement in the quality of

customer services etc. Also the

employment opportunities in the

Insurance sector wil1increase as

major players set their businessplans in India. The policy of the

government to openup the financial

sector and the Insurance sector is

expected to bring greater FDI

inflow into the country. The

increase in the investment limit in

this vital sector has generated

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considerable business interests

among the foreign Insurance

companies" Their entry wil1

certainly change the Insurance

sector considerably

Sector and companies in general

insurance:

There are four nationalized and

nine private general insurance

companies:

The government notified the

general insurance corporation of

india (GIC) as an Indian reinsurer

in November 2000. With this the

four public sector companies which

were subsidiaries of GIC have

been delinked from it and are noe

broadly run as board managed

companies. the four public sector

companies are:

The oriental insurance

company limited.

The new india assurance

company limited.

The national insurance

company limited.

The united india insurance

company limited.

The private sector general

insurance companies are:

The general Royal sundram

alliance insurance company

limited.

Reliance general insurance

company limited.

IFFCO Tokio general

insurance company

limited.

TATA AIG general

insurance company limited.

Bajaj Allianz general


ICICI Lombard general


Cholamandalam general


HDFC-Chubb general


Star health and alliedinsurance company limited.

Two new public sector entrants in

general insurance business are:

Export credit guarantee

corporation limited.

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Agriculture insurance

company of india Ltd.

The minimum paid up capital of the

general insurance companies was

raised to Rs 100 crore under the

modified insurance Act.the four

nationalised general insurance

companies enhanced their paid up

capital from 40 crore to Rs 100

crore.

The general insurance market is

not big as the life insurance market.

While life insurance accounts for 81

per cent of the insurance market in

india, general accounts for the

remaining 19 per cent.

General insurance products

Fire insurance

This cover the following:

Bulding or flat.

Furniture fixtures and other

contents.

Loss of profit, that is,

consequently loss.

Fire insurance is comprehensive

policy which covers loss on

account of fire, earthquakes, flodd,

strike. It can be taken only by

premises to be insured.fire

insurance segment is the most

lucrative as fire rate as govern by

tariff.the compitation is maximum in

the segment .bulk of the premium

comes from corporate clients with

large industrial assets. fire

insurance today accounts for a fifth

of business for non-life insurance

companies and brings in most of

their profits.

Motor insurance

The coverage is for the following:

Various types of cars,

trucks, two-wheelers, and

three wheelers.

There are two types of motor

insurance namely:

Third party insurance which

only insure the party other

than the owner in an

accident.

Comprehensive insurance

which insure the owner as

well as the third party

involved.

In motor insurance, the rates were

revised upwards twice,once in1982

and then in 1990 as the high cost

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of repairs coupled with third party

claims had adversely affected the

incurred loss ratio.motor insurance

is mandatory leading to good

amount of premium collection but it

is not financed upon as it could

lead to litigation problem.motor

insurance is the single largest and

the fastest growing business line

for insurance companies .

Marine cargo insurance

This covers:

Cargo in transit.

Cargo declaration policy.

Marine hull insurance.

Inland vessels, ocean going

vessels,fishing and scaling vessels,

freight at risk,construction of

ships,ship breaking insurance.the

marine hull portfolio is a Rs 400

crores business and detarifing the

competition among general

insurance to offer cheaper prices

wil increase,as a result the shiping

industry will be the beneficiary.

Some of the General Rules:1.

Mis-description :

The insurance policy shall be void

and all the premiums paid byinsured may beforfeited by the

insurance company in the event of

mis-presentation or mis-declaration

and/or non-disclosure of any

material facts.

2.

Reasonable care :

The insured shall take all

reasonable steps to safeguard the

property insuredagainst any loss or

damage. Insured shall exercise

reasonable care that

onlycompetent employees are

employed and shall take all

reasonable precautions toprevent

all accidents and shall comply with

all statuary or other regulations

3.

Fraud :

If any claim under the policy may

be in any respect fraudulent or if

any fraudulentmeans or device are

used by the insured or any oneacting on the insureds behalfto

obtain any benefit under the

insurance policy, all the benefits

under theinsurance policy may be

forfeited.

4.

Few basic principles of general

insurance are :1. insurable interest2. utmost good faith3. subrogation4. contribution5. indemnity

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Risks of loss not covered undergeneral insurance are:

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The loss or damage or

liability or expenses whether direct

or indirect occasion byhappening

through or arising from any

consequences of war, invasion, act

of foreignenemy, hostilities(whether

war be declared or not), civil war,

rebellion revolution, civilcommotion

or loot or pillage in connection

therewith and loss or damage

caused bydepreciation or wear and

tear.However the risk of loss or damageby war can be insured by paymentof additionalpremium in some cases only

Development of general insurance:

British and other foreign insurance

companies transacted general

insurance business in india through

their agents. Subsequently,they

established their companies

inindia. The triton insurance

company limited was the first

general insurance company

established in Calcutta in

1850.Foreign companies had a

monopoly in the insurance

business upto the close of

nineteenth century.the first Indian

company to transact general

insurance business was Indian

mercantile insurance company

limited in Bombay in 1907.in

1957,the general insurancecouncil .Framed a code of conduct

for insuring fair transaction of

general insurance business. A

controller of insurance was

appointed to implement this code of

conduct.

In 1965 , insurance floated a

reinsurance company,Indian

reinsurance corporation limited, for

retention of the general insurance

business in india. In 1961,the

Indian guarantee and general

insurance company limited ,a

government company along with

Indian reinsurance corporation

were notified as Indian reinsurance.

The insurance companies

voluntary ceded to each of them 10

percent of their gross directpremium. In 1960,the govt of made

it mandatory for every insurer to

ceded 20 percent in fire and marine

cargo,10 percent in marine hull and

miscellaneous insurance and 5

percent in credit and solvency

business to these two

reinsurancers.

In1966 , Indian reinsurance

companies are formed the

reinsurance pools in fire and hull

department for retention of higher

premiums in the country. The

members companies ceded aspecified percentage of premium to

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the respective pools which were

managed by two statutory

reinsurance.

The government nationalized the

general insurance business Act

1972. One hundered and seven

insurer including the branches of

foreign companies operating in

india were amalgamated and group

into four companies, namely the

national insurance company limited

,the new india assurance company

limited ,the oriental insurance

company limited,the united india

assurance limited..the general

insurance corporation as a holding

company of these four companies

in November 1972.

The general insurance company is

smaller than the life insurance

company. The total market size in

annual premium is about half of

that life insurance. The general

insurance in nidia has currently

about Rs20,000 crores of premium

income with a five year

compounded annual growth rate in

the 16 percent range. The demand

for general insurance is still

generated by some of mandatory

or regularitybrequirements. Motor

vehicle insurance is compulsoryand hence motor insurance

premium dominates the total

premium portfolio.the growth of

general insurance business is

hampered by lack of product

innovation,lack of quality data on

risks and associated parameters

handicaps product innovation.

De-tariffing of non-life insurance

products:

Most of the non-life insurance

business transacted in india was

governed by tariffs. Tariffs are

documents that prescribe the rates

as well as policy coverage and

condition pertaining to a class of

insurance. This had resulted in a

very little room for competition in

these areas. This also left very

less incentives for a rating better

managed risks, thus resulting in

avoidable claim costs for the

insurers. To add fuel to fire

,features like adverse selection and

moral hazard ensured that bottom

lines of insurance always under

pressure regardless of volume of

business. The year 2007 will

witness a switch over to atariff-free

pricing regime for non life

insurance. This is excepted to bring

about hectic competition in pricing

of non life insuranceproducts.hoeever,with a view to

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ensuring a gradual transition to a

free market regime,the regulator

has put on hold the freedom

tomodify coverage or policy

conditions.

De=tariffing of motor insurance

from 1 january, 2007,will be the

biggest deregulation in the

insurance industry since

nationalization. Motor insurance

today accounts for over 35 percent

of the premium income of non life

insurance companies . IRDA

adopted a phased approach to

detariffing in motor insurance.

With a view to pre-empting a

rate war in motor

insurance,the regulator has

asked companies not to

offer vehicle cover at rates

lower then 10 percent of the

tariff.

If the companies want to

offer higher discount after

jan 2007,they would have to

explain their pricing

rationale.

Insurance are allowed to

marginally increase the rates

for third party insurance.

The third party premium

would go into a special pool

which will be managed by

general insurance counciland claims will be paid out of

this pool.

If the premium in the pool is

inadequate to meet all

claims,the claim shortfall be

shared by the insurer in

proportion of their overall

business size.

Insurance companies will

receive 10 percent of the

premium as management

expenses,while general

insurance council will get2.5

percent for managing the

pool.

In the first phase,companies

will issue polcies and settle

claims through their

branches.the claims shortfall

Would be shared by the

industry at the end of the

year.

GENERAL INSURANCE

COUNCIL:

The function of the general

insurance council include aiding

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and advising the insurer carrying

on general insurance business in

the matters of setting up standards

of conduct and sound practice and

in the matter of rendering efficient

services to holders of policies of

general insurance. The council has

deliberated on issues relating to de

tariffing of the motor insurance

business,review of the motor

vehicles Act and structure of

compensation/remuneration

payable to agents.

INVESTMENT POLICY OF GIC

Central Govt. securities being not

less than20%

State Govt. securities and othergovernment guaranteed securities,

including (1) above, being not

less than30%Loans to HUDCO/DDA/GIC-HFand to state govts. For housing andfirefighting equipment, notless than15%

Market sector not more than 55

CURRENT TRENDS ININSURANCE SECTOR

India's insurance sector is zooming

to show an unprecedented

progressive growth of more

than200% by the period of 2009-

10. The Associated Chambers of

Commerce and Industry of

Indiahas clocked out the fact that

during this period, private players in

the industry will see a growth of

about 140 per cent, owing to the

adoption of the aggressive

marketing techniques in

comparison of the growth rate of 35

per cent-40 per cent achieved bythe state owned insurance

companies. The chamber is

expected to poise the business of

insurance to reach at

Rs.2000billion in coming 2 years

from the present level of Rs. 500

billion. With the result of adoption

of the intense marketing strategies

by the private players, the

declination has been witnessed in

respect of the share of the state

owned insurance companies

captured in the market. The market

share fallout has been noticed in

context of such companies like

GIC, LIC, which have comedown to

nearly 70 per cent in the past 4-5

years from the 97 per cent. The

experts have forecasted the more

severe competition in the insurance

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sector likely to be occurred in the

near future. Till recently, insurance

sector was majority driven by the

government sector players but now

many private sector multinational

players have come into the picture.

Like HDFC, ICICI, Kotak, Mahindra

and Birla Sunlife. Insurance sector

has been characterized as the

booming sector of the Indian arena,which has shown the growth rate of

more than 15 per cent to 20

percent. Insurance in India is put

under the federal subject and is

governed by the Insurance

Act,1938, the Life Insurance

Corporation Act, 1956 and General

Insurance

Business(Nationalization). Act,

1972, Insurance Regulatory and

Development Authority(IRDA) Act,

1999 and by various other acts.

The roots of the insurance sector

can be tracked down in the year

1818 in the formation of thelife

insurance Corporation in Calcutta.

The idea was to provide means to

the English widows.During that

time different premiums were

charged for the Indian and English

people lives. In1870, the Bombay

Mutual Life Insurance Society

started its insurance business and

it chargedthe same premium from

all people irrespective of whether

they were Indian or English. In the

year 1912, insurance regulation

was started due to the passing of

the Life Insurance Companies Act

and the Provident Fund Act. By the

year of 1938, in India there were

total 176 insurance. companies. In

the year of 1938, with the passing

of Insurance Act, 1938 there was

the introduction of the first

comprehensive legislation. It was

passed with the aim of providing

the strict state control over the

insurance business. After the

independence, insurance sector in

India grew at a much higher pace.

In the year 1956, Indian

government combined together 245Indian and foreign insurers and the

provident societies under the name

of nationalized

monopolycorporation. It was the

same period when the life

insurance corporation (LIC)came

into theexistence by the passing of

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the Act of Parliament and through

the contribution of capital around

Rs. 5 crore. Till 1972, private sector

has enjoyed somehow monopoly in

the general insurance sector. There

were around 107 private

companies in the field. With the

effect of the General Insurance

Business (Nationalization) Act,

1972, the general insurance

business got the India. Due to the

amalgamation of 107 private

insurance companies, 4 new

companies, as the subsidiaries of

the General Insurance Company,

came into effect- National

Insurance Company, New India

Assurance Company, Oriental

Insurance Company and United

India Insurance Company.

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General Insurance 1