Introduction to insurance

Growth and development of Insurance in India, Reforms

in Indian insurance sector (Malhotra Committee Reforms)
 

By K.Viswanathan

12/07/2021 1
 Introduction to Insurance
What is Insurance?
Definitions:
In law and economics, insurance is a form of
risk management primarily used to hedge
against the risk of a contingent, uncertain
loss. Insurance is defined as the equitable
transfer of the risk of a loss, from one entity
to another, in exchange for payment.
Insurance is a hedging instrument used as a
precautionary measure against future
contingent losses.
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 Introduction to Insurance
Is insurance only a hedge?
 The primary function of insurance, be it life or non-life or
reinsurance, is providing protection by assessing the risk
and sharing the same with many by the process of risk
sharing and thus minimizing individual risk and impact.
 These basic functions are also followed by subsidiary
responsibilities like efforts for preventing losses and aiding
economic development through the investment of funds.
 The huge funds collected from policy holders by way of
premium and the amount retained by them as solvency
funds to meet unforeseen contingencies are invested
according to the mandatory / prudential norms approved
by the Regulator (IRDA), thus leading to economic
development.
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 Introduction to Insurance
Contribution of Insurance :
 It is a cost effective means of hedging risk
 It is a means of savings- both policies and deposit
insurance
 It is a means of investment and development of trade
and industry.
 It encourages risk taking by entrepreneurs
 It is a tool of wealth management
 It ensures optimum utilisation of capital.
 It is a means to achieve better health and higher life
expectancy.

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 Introduction to Insurance
The 5 ‘P’s of insurance:
1. Properties- properties of all descriptions
2. Perils- All types including man-made and vis-
major ( unavoidable catastrophes or acts of
God)
3. People – all segments of the society
4. Places- all places of geographical,
topographical descriptions
5. Period- Durations of different terms

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 Introduction to Insurance
Major concepts of Insurance :
 Any property , human or animal life, or any event that may lead to a
loss of a legal right, including value, or the creation of legal liabilities is
referred to as the subject matter of insurance
 Difference between assurance and insurance:
- event that may or may not occur- insurance
- event certain to happen but the date and timing is not known-
assurance
 Life and non-life
 Tool of risk reduction and loss sharing
 Difference between peril and hazard:
- Hazard- arabic- ( Az-zahar)- chance or luck- an event that happens by
luck or chance arising out of a peril
ex. Occupational hazard, fireman’s hazard, moral hazard, etc.
- Perils are the causes of loss like – fire , water, rain
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 Introduction to Insurance
Major concepts of Insurance :
Major types of hazards:
 Moral hazard: certain undesirable pre-dispositions on the
part of the insured, adding to the chance of risk and
increases the liability of the insurer.- ex. smoking hazard
 Morale hazard: Careless attitude, dishonest tendency
adding to the loss and increasing the liability of the
insurer- a tendency to be careless – for ex. Employee
antecedent non-verification
 Occupational Hazard: Occupation of a fireman or a life
guard on the beach
 Physical hazard: Physical conditions contributing to the
enhancement of risk- ex. rain hazard
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 Introduction to Insurance
Major concepts of Insurance :
 Indemnity principle:
It is a legal principle relating mainly to life and
general insurance which holds that the
person / company covered under a contract of
insurance should be restored to the
approximate financial position before the loss
occurred. Indemnity is a contract document
setting out the terms and conditions of the
compensation for loss arising out of contract of
insurance
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 Introduction to Insurance
Major concepts of Insurance :
Insurable Risk:
To cover a homogenous group should be available. Premium will be
otherwise very high. Insurability of a risk is a function of probability of an
event, which is based on law of averages.
The loss should normally be measurable. But we do have life insurance
where the emotional loss is not measurable.
Insurable risks are those beyond the risk bearing capacity of the insured.
Normally a sinking fund is created for these. For ex. Replacement of a
machine
Insurance does not cover catastrophic losses. Ex . Nuclear explosion,
bombing in a war
Insurability also takes it into account the normal health and general habits
of the life to be insured and in non-life the general risks associated with
such insurance

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 Introduction to Insurance
Major concepts of Insurance :
Insurable interest :
- This doctrine was developed to avoid insurance being used as a way of
making unlawful gains.
- Gambling and racing also have insurance cover abroad - Prize indemnity
Insurance – winner paid by insurance co.
- There are many deviations- like family insuring the children, divorced
husband and wife, dismantled partnership etc.
- There are some decided court cases where in the absence of insurable
interest claims have been rejected.
- In general insurance there should be insurable interest both at the time
of insurance as well as at the time of claim. – exception marine
insurance – the importer bearing the cost of insurance
- Third party motor insurance
- Double insurance – concept of contribution and subrogation – pro rata
clause
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 Introduction to Insurance
Major concepts of Insurance :
Contribution : Where covered by more than
one insurance, Insurers have the right to
recover from others proportionately.
Subrogation: The insurer who fulfilled the
obligation of insurance steps into the shoes
of insured and can claim the loss from a
third party. This right of subrogation arises
only after the claim is admitted by the
insurer.
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 Introduction to Insurance
Major concepts of Insurance :
Insurance- The Contract:
The contract of insurance is to provide compensation for the losses arising
out of the perils as laid down in the contract.
Contract of insurance is subordinate to the National Law of Contracts of the
country in which the company operates.
The following are the requirements :
• Parties should have legal capacity to contract.
• Express consent to the terms of the contract
• Valid consideration
• No disqualification under any statute.
In India the contract of insurance is governed by Section 10 the Indian
Contracts Act 1872.
Insurance is a contract of utmost good faith- or uberrimae fidei.
Caveat emptor- Buyer’s beware
Caveat Venditor- Let the seller beware- Proponent has to declare every
important aspect
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 Introduction to Insurance
Major concepts of Insurance :
 Insurance- The Contract:
Under Section 45 of the Indian Insurance Act 1938, indisputable
clause – i.e no policy can be declared null and void 2 yrs after its
issuance. But in case of non-disclosure of material fact, the insurer
can dispute if there is any claim.
Policy can be assigned.
Contract of adhesion- Insurer sets the terms and insured accepts it.
Insurance of life- Premium has bearing on the amount of
insurance.
In other cases the losses are compensated for the exact amount of
loss.
In case of breach the contract becomes void. There can be minor
breaches and if so contract has to be honoured with minor
damages paid to the breached party.
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 Introduction to Insurance
Major concepts of Insurance :
Sum Assured:
This is one of the important components of insurance.
In the case of life it is the value for which it is insured.
In the case of non-life, it is normally the market value
for which the insurance is taken. The claim is settled
based on the pro rata average clause. i.e. ratio of the
value of the damaged property to the total value of
the asset
In case of some properties where it is difficult to value
it, such properties are covered under “Valued Policy”
based on acceptable certificate of valuation.- normally
life insurance policies.
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 Introduction to Insurance
Major concepts of Insurance :
Risk Commencement:
The risk is covered after realisation of the premium
Expired and Unexpired Risks:
For life it is always the full value.
In non-life the period expired is expired risk. For the
balance the insurer creates Unexpired Risk Reserve (URR).
Business net of reinsurance ceded is recognised as Net
Written Business . For balance sheet purposes the
premium outgo for reinsurance is deducted to arrive the
premium on Net written business.
Net earned premium= Net written premium – unearned
premium Reserve carried forward to the succeeding fiscal.
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 Introduction to Insurance
Major concepts of Insurance :
 Backdating of Policies:
Backdating is permitted within the financial year
only. Not earlier than that.
Back dating is resorted to accommodate late birds.
It is also done to accommodate professionals whose
business is seasonal.
While backdating the difference between the
possible higher premium and the actual premium is
lost by the insurer. But interest is collected.
In general insurance the policy becomes void ab
initio if premium is not received. In Life policies it
depends upon policy conditions.
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 Introduction to Insurance
Based on the nature of cover offered, insurance
business is grouped into the following major
categories:
 Life insurance or Long term contracts
 Annuities or pension
 Group Life insurance
 Non- Life general insurance
 Reinsurance

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 Growth and Development of Insurance in India
The early years:
Organised business began in India in 1818.
First legislation of the British Government in 1870 did not
touch the Indian Insurance.
Subsequent enactment of 1909 also did not cover Indian
Insurance.
Life Insurance Companies Act 1912 . Till that time Companies
Act 1866 covered all insurance companies.
The first Indian Insurance Act 1912 was modelled on Insurance
Companies Act of 1870 modified by the replacing Act of 1909.
Then UK enacted Assurance Companies Act in 1946, which was
applicable to the entire insurance industry. The earlier Act
insisted on deposits, where as the later stipulated capital of £
50000.
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 Growth and Development of Insurance in India

The early years:

Still discrimination between Indian and British Companies
continued. Indian Companies had to place a deposit with the
Government where as the British companies were exempted
from this requirement.
Resentment among Indian Companies.
In 1928 this was sought to be corrected.
Many companies were started and failed.
All India Life Offices Association – a collective Body of Indian
Companies was started in 1928.
Sen Committee made recommnendations.
Reviewed by NN Sarcar Committee and finally Bill piloted in 1937,
became an act in 1938 and came into force with July 1st 1939.
This was the first comprehensive legislation.
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 Growth and Development of Insurance in India
Major points of the Indian Insurance Act of 1938:
 Compulsory Registration of Insurance Companies
 Filing of return on financial statements.
 Norms for investment of net life funds- Indian and foreign
 Prescribed securities for investment
 Compulsory licensing of agents
 Rebating made an offence
 Maximum rate of commission payable were prescribed
 Standardisation of premium for life insurance and compulsory approval of
premium rates by actuaries.
 Standardisation of policy forms and primary documents
 Amount of security deposits to be placed with the government.
 Creation of Dept of Insurance in the government
Many further amendments carried out during 1938-45. Many unscrupulous
companies started operating. Therefore Sir Cowasji Jehangir Commission was
appointed in 1945.
The bill was taken up after independence
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 Growth and Development of Insurance in India

Developments after independence:

 On January 19, 1956, Life Insurance was natioanlised mainly
with the aim of offering insurance to the needy sections of
the society.
 Life Insurance Corporation of India came into being on
September 1,1956 with initial capital of Rs. 5 crores and seed
capital. This was to be increased to Rs. 100 crores.
 In 1968, the Insurance Act was substantially amended to
bring in social control of General Insurance. GIC came into
being in 1972 based on General Insurance Business
(Nationalisation) Act 1971- merging 107 companies into one
or other of the 4 major subsidiaries of GIC- i.e. National
Insurance Co., New India Assurance Co., Oriental Insurance
Co., United India Insurance Co.
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 Growth and Development of Insurance in India

Indian Economy was undergoing a pace of

liberalisation, which led to the opening up of
the financial sector to private players.
It was felt that this should also include the
insurance sector.
Hence a Committee was formed under the
chairmanship of the retired RBI governor R.N
Malhotra to study the insurance sector and
propose the necessary modifications.

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 Growth and Development of Insurance in India
Terms of reference Of Malhotra Committee:
 To examine the structure of Insurance industry-its existing
framework and its strengths and weaknesses with the objective
of creating an efficient and viable insurance industry- providing
efficient services and mobilising financial resources for
development.
 To make suitable recommendations for changes in its structure
 To make suggestions for improvement of LIC and GIC
 To review and make suggestions for improvement of the
regulations to be in tune with the requirements.
 To review and make recommendations on the roles of surveyors,
intermediaries and other ancillaries of the insurance sector.
 To make recommendations for the health and long term
development of the insurance sector.
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 Growth and Development of Insurance in India

Malhotra Committee Major Recommendations:

On liberalisation:
 Pvt sector to be allowed to enter business.
- competition will improve customer service
- improve quality and price of products
-better inroads into the market
- Other wings like Banks and MFs were also exposed
- Public desired competition
- Public sector was already well established. No fear of
competition.
 No composite co- separate for life and general
 No of entrants to be controlled
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 Growth and Development of Insurance in India

Malhotra Committee Major Recommendations:

On liberalisation:
 Minimum paid up capital Rs. 100 crores. Could
be lower for state level co-op Institutions.
 Promoters equity not to exceed 40% or to be
brought within that level.
 Promoters equity not to go below 26%.
 No singe holder other than promoter to have
more than 1% share.
 For pension funds the net worth should be Rs
50 cr.
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 Growth and Development of Insurance in India

Malhotra Committee Major Recommendations:

On liberalisation:
 Obligation to do business in rural areas and for weaker
sections of the community
 Selective entry to foreign companies- to float an Indian co as
joint venture.
 Industry to develop and improve effective customer service
and claims management
 Income tax concessions to individual pension schemes.
 Privatisation of LIC and GIC:
 Establishment of an Insurance Regulatory Authority on the
lines of SEBI.

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 Growth and Development of Insurance in India
Malhotra Committee Major Recommendations:
Insurance Regulatory Authority:IRDA was established by enactment of
the IRDA Bill in 1999.
Comprised of a govt nominee and a member each from Life insurance
and general Insurance industries.
Primary task to frame suitable regulations
Control opening of offices , licensing of intermediaries etc.
Also to develop insurance industry and train and develop
professionalism.
Monitoring the activities of Tariff Advisory Committee , divesting GIC
of its authority to transact non-life business and designating it as
Reinsurer.
IRDA started with N Rangachary as the first chair person, with 4 full
time directors , 2 part time directors and with a 25 member advisory
council.
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 Growth and Development of Insurance in India
Mission of IRDA:
 To protect the interest of and ensure fair treatment to policy
holders
 To ensure speedy and orderly growth of insurance industry
 To set, promote and monitor high standards
 To ensure that insurance customers receive correct
information
 To ensure speedy settlement of genuine claims
 To promote fairness, transparency and orderly conduct in
financial markets
 To take suitable actions where failures are observed
 To bring about optimum self regulation

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 Growth and Development of Insurance in India
Work carried out by IRDA:
 Under the regulations by IRDA, only Indian Co.s
registered under Indian Co.s Act 1956 are eligible to
be registered.
 Hence foreign co.s have to have Indian partners-
joint ventures.
 Foreign co.s can have 29% equity in the joint
ventures.
 Before permitting a foreign co. verification is done of
the foreign co through local regulator of the country
in which it is registered. Local co is also required to
produce an income tax clearance.
 Foreign Direct Investment (FDI) is now riased to 49%
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 Growth and Development of Insurance in India

 After liberalisation many private insurance co.s

have started operations in India.
 Now private insurance co.s have a market
share of approximately 12%.
 They make impressive strides in the pension
markets.

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 Growth and Development of Insurance in India
LIFE INSURERS Websites
Public Sector
Life Insurance Corporation of India www.licindia.com
Private Sector
Allianz Bajaj Life Insurance Company
www.allianzbajaj.co.in
Limited
Birla Sun-Life Insurance Company Limited www.birlasunlife.com
HDFC Standard Life Insurance Co. Limited www.hdfcinsurance.com
ICICI Prudential Life Insurance Co. Limited www.iciciprulife.com
ING Vysya Life Insurance Company Limited www.ingvysayalife.com
Max New York Life Insurance Co. Limited www.maxnewyorklife.com
MetLife Insurance Company Limited www.metlife.com
Om Kotak Mahindra Life Insurance Co. Ltd. www.omkotakmahnidra.com
SBI Life Insurance Company Limited www.sbilife.co.in
TATA AIG Life Insurance Company
www.tata-aig.com
Limited
AMP Sanmar Assurance Company Limited www.ampsanmar.com

Dabur CGU Life Insurance Co. Pvt. Limited www.avivaindia.com

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 Growth and Development of Insurance in India
GENERAL INSURERS
Public Sector
National Insurance Company Limited www.nationalinsuranceindia.com
New India Assurance Company Limited www.niacl.com
Oriental Insurance Company Limited www.orientalinsurance.nic.in
United India Insurance Company Limited www.uiic.co.in
Private Sector
Bajaj Allianz General Insurance Co.
www.bajajallianz.co.in
Limited
ICICI Lombard General Insurance Co. Ltd. www.icicilombard.com
IFFCO-Tokio General Insurance Co. Ltd. www.itgi.co.in
Reliance General Insurance Co. Limited www.ril.com
Royal Sundaram Alliance Insurance Co.
www.royalsun.com
Ltd.
TATA AIG General Insurance Co. Limited www.tata-aig.com
Cholamandalam General Insurance Co.
www.cholainsurance.com
Ltd.
Export Credit Guarantee Corporation www.ecgcindia.com
HDFC Chubb General Insurance Co. Ltd.
REINSURER
General Insurance Corporation of India www.gicindia.com

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Growth and Development of Insurance in India
Solvency Margins for Indian Insurance Cos:
 Till 1970s if the assets of the co matched its liabilities
the co.s were considered satisfactory
 Internationally solvency ratios are tools to measure
the financial stability of an insurer co.
 If the ratio exceeds a certain percentage, then the
Regulator considers that the company will be in a
position to honour all its commitments relating to
expected and unexpected risks.
 An insurer can face unexpected situations like risks due
to calamities, fall in the interest rates, erosion of the
value of the investment portfolios due to market
fluctuations etc The Regulator prescribes norms after
taking into a/c various factors.
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Growth and Development of Insurance in India
Solvency Margins for Indian Insurance Cos:
 The Solvency margins are governed by the provisions of IRDA (Assets,
Liabilities,& Solvency Margins for insurers) Regulations 2000.
 Insurers are required to maintain an excess of value of assets over
liabilities to the prescribed extent, which is Rs. 50 crores or an
equivalent amount prescribed in the IRDA formula, which is based on
the mathematical reserve and sum at risk.
 The present norm is Rs. 100 crores for Life insurance co.s and Rs. 50
crores or an amount equal to 30% of the net incurred claim
whichever is higher for general insurance co.s and Rs. 100 crores for
reinsurance co.s.
 All insurers are required to maintain a solvency ratio which is 150% of
normal stipulation.
 The recommendation for introducing a formula based link between
minimum capital and solvency margin is under consideration.

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 Introduction to insurance
Growth and development of Insurance in India, Reforms in
Indian insurance sector (Malhotra Committee Reforms)
 

THANK YOU

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