Insurance Sector In India

S.Krishnamoorthy: krisna_om@rediffmail.com, Cell:9821461488

@Source Data Acknowledgement: RBI & Various Internet Sources
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Indian Insurance Sector: History & Milestones
1805:The 1
st
general insurance company the Triton Insurance Company Ltd
formed

1818:The Oriental Life Insurance Company was formed in Kolkata

1907:Indian Mercantile Insurance Limited was the first company to handle all
forms of insurance

1912:Beginning of a new era with the passing of the Life Insurance Act

1928:The Indian Insurance Companies Act* was passed

1938: Consolidated & amended Insurance Act passed to protect the interests of
the insuring public

1956:
245 Indian and foreign insurers and provident societies were nationalized
by the GOI
LIC formed by an Act of Parliament [LIC Act, 1956] with an initial capital
contribution of Rs5 cr from the GOI


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1957:General Insurance Council framed code of conduct for ensuring fair conduct
and sound business practices

1968:The Insurance Act amended to regulate investments and set minimum
solvency margins and establish the Tariff Advisory Committee

1972:The General Insurance Business (Nationalization) Act** nationalized
the general insurance business in India effective 1Jan973

1993:Malhotra Committee was formed to evaluate the Indian insurance industry
and recommend reforms


1999: Insurance Regulatory and Development Authority[IRDA] act was passed by
the Parliament



Indian Insurance Sector: History & Milestones
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2000:
Formation of the Insurance Regulatory and Development Authority (IRDA)
Insurance sector liberalized with permission for entry of Private and Foreign
Insurance players
FDI investment up to 26% allowed in Insurance Sector [proposed to be
increased to 49%]


2001: IRDA notified Protection of Policyholders Interest Regulations



2007: Insurance companies came under detariffing regime effective1Jan07
Indian Insurance Sector: History & Milestones

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*The Indian Insurance Companies Act [1928]
Empowered the government of India to gather necessary information about
the life insurance and non-life insurance organizations operating in India

**The General Insurance Business (Nationalization) Act
Amalgamted107 insurers grouped into four companies viz.
National Insurance Company Ltd
New India Assurance Company Ltd
Oriental Insurance Company Ltd
United India Insurance Company Ltd
General Insurance Corporation [GIC] (Indian Reinsurer) incorporated as a
company

Indian Insurance Sector: History & Milestones

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Past: Pre Detariff upto Dec2006
Good customers paid for bad ones and who better managed risks
paid the same premium as their bad counterparts

Cross subsidization of products prevailed

Underwriting skills of the insurers were smothered

No product Innovation

Insurance Industry Scenario

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Post Detariff since Jan2007
Insurance buyers got choice only on one P - Price
A steady/steep fall in property rates for good risks
Aggressive competition good & bad risks alike!
Emergence of new model portfolio underwriting

Future Since Apr2008
Complete freedom to change all product features
Ease of offering customized products
Widening the scope of cover thus making way to offer innovative
products
Insurance Industry Scenario
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Insurance provides indemnity or benefit in the event of an unanticipated
death, accident or loss
Insurance covers both life and property against multitude of risks
Insurance offers variety of risk covers duly customized

Primary Functions:

Providing protection: Insurance provides protective cover against future risk,
accidents and uncertainty

Evaluating risk: Insurance determines extent of risk by assessing diverse factors
that give rise to risk which then is the basis of premium fixing

Provide Certainty: Insurance assists in changing uncertainty to certainty

Collective risk bearing: Insurance is an instrument to share the financial loss . It
provides protective cover against economic loss by apportioning the risk with
others






Basic Functions of Insurance
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Secondary functions:

Preventing losses: Insurance drives individuals and business to adopt
appropriate loss prevention/ minimization measures like observing safety
instructions, installation of automatic sparkler or alarm systems, etc.

Covering larger risks with small capital: By paying small amount of premium large
portion of risk can be covered thus providing comfort to individuals and business

Helps in large scale economic development: By underwriting risks Insurance
shares the risks with capital market and credit market thereby assisting large
business to be set up


Basic Functions of Insurance
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Basic Functions of Insurance
Other functions:

Promotes savings and investment: Insurance is a necessary savings and
investment avenue and also offers tax shield

Boost to trade: Specialized insurance firms [Ex. ECGC, AIC] and insurance
covers[Ex. Mega policy, Marine Insurance policy] boost risk free local and
international commerce & trade

Source of earning foreign exchange: A country can earn foreign exchange issue
of marine insurance policies, risk re-insurance and insurance advisory, etc

Source of livelihood: Different aspects of Insurance like consultancy , risk
advisory, underwriting, risk survey, actuarial valuation , claim assessment , etc
provide immense livelihood
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In 1993 Malhotra Committee was formed to evaluate the Indian insurance industry
and recommend its future direction.

The committee was set up with the objective of complementing the reforms
initiated in the financial sector

The reforms were aimed at
Creating a more efficient and competitive financial system suitable for the
requirements of the economy keeping in mind the structural changes
currently underway and recognizing that insurance is an important part of the
overall financial system where it was necessary to address the need for
similar reforms"


Malhotra Committee on Insurance Sector Reforms [1993]
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Structure
Government stake in the insurance Companies to be brought down to 50%
Government should take over the holdings of GIC and its subsidiaries so
that these subsidiaries can act as independent corporations
All the insurance companies should be given greater freedom to operate

Competition
Private Companies with a minimum paid up capital of Rs.1bn should be
allowed to enter the industry
No Company should deal in both Life and General Insurance through a
single entity
Foreign companies may be allowed to enter the industry in collaboration
with the domestic companies
Postal Life Insurance should be allowed to operate in the rural market
Only One State Level Life Insurance Company should be allowed to operate
in each state


Key Recommendations of Malhotra Committee Report [1994]
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Regulatory Body
The Insurance Act should be changed
An Insurance Regulatory body should be set up
Controller of Insurance (Currently a part from the Finance Ministry) should be
made independent.

Investments
Mandatory Investments of LIC Life Fund in government securities to be
reduced from 75% to 50%.
GIC and its subsidiaries are not to hold more than 5% in any company (There
current holdings to be brought down to this level over a period of time).

Customer Service
LIC should pay interest on delays in payments beyond 30 days
Insurance companies must be encouraged to set up unit linked pension plans
Computerization of operations and updating of technology to be carried out in
the insurance industry
Key Recommendations of Malhotra Committee Report [1994]
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IRDA was set up by the parliament in 1999

The mission of IRDA is
To protect the interest of the policy holders, to regulate , promote and
ensure orderly growth of the insurance industry and for matters connected
therewith or incidental thereto


The section 4 of IRDA Act' 1999, specify the composition of Authority
The Authority is a ten-member team appointed by the GOI consisting of
Chairman
Five whole-time members
Four part-time members

Duties, Powers and Functions
Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of
IRDA
Duty to regulate, promote and ensure orderly growth of the insurance
business and re-insurance business

Insurance Regulatory and Development Authority [IRDA]
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The powers and functions shall include:

Issue to the applicant a certificate of registration, renew, modify, withdraw,
suspend or cancel such registration

Protection of the interests of the policy holders in matters concerning assigning
of policy, nomination by policy holders, insurable interest, settlement of insurance
claim, surrender value of policy and other terms and conditions of contracts of
insurance

Specifying requisite qualifications, code of conduct and practical training for
intermediary or insurance intermediaries and agents

Specifying the code of conduct for surveyors and loss assessors

Promoting efficiency in the conduct of insurance business

Promoting and regulating professional organizations connected with the
insurance and re-insurance business




Powers and Functions of IRDA

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Calling for information from, undertaking inspection of, conducting enquiries and
investigations including audit of the insurers, intermediaries, insurance
intermediaries and other organizations connected with the insurance business

Control and regulation of the rates, advantages, terms and conditions that may
be offered by insurers in respect of general insurance business not so controlled
and regulated by the Tariff Advisory Committee under section 64U of the
Insurance Act, 1938 (4 of 1938)

Specifying the form and manner in which books of account shall be maintained
and statement of accounts shall be rendered by insurers and other insurance
intermediaries

Regulating investment of funds by insurance companies

Regulating maintenance of margin of solvency;

Adjudication of disputes between insurers and intermediaries or insurance
intermediaries
Powers and Functions of IRDA
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Levying fees and other charges for carrying out the purposes of this Act

Supervising the functioning of the Tariff Advisory Committee

Specifying the percentage of premium income of the insurer to finance
schemes for promoting and regulating professional organizations


Specifying the percentage of life insurance business and general insurance
business to be undertaken by the insurer in the rural or social sector

Exercising such other powers as may be prescribed

IRDA has notified 27 Regulations on various issues which include Registration
of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance,
Obligation of Insurers to Rural and Social sector, Investment and Accounting
Procedure, Protection of policy holders' interest etc.



Powers and Functions of IRDA

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IRDA has till now provided registration to
12 private life insurance companies and
9 general insurance companies

If the existing public sector insurance companies are considered then there are
presently 13 insurance companies in the life side and 13 companies functioning in
general insurance business

General Insurance Corporation has been sanctioned as the "Indian reinsurer" for
underwriting only reinsurance business.

Registration of Private Insurance Companies
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IRDA has the responsibility of protecting the interest of insurance policyholders.
Towards achieving this objective, the Authority has taken the following steps:
IRDA has notified Protection of Policyholders Interest Regulations 2001 to provide
for policy proposal documents in easily understandable language, claims
procedure in both life and non-life, setting up of grievance redressal machinery,
speedy settlement of claims, and policyholders' servicing
The Regulation also provides for payment of interest by insurers for the delay in
settlement of claim
The insurers are required to maintain solvency margins to meet obligations with
regard to payment of claims
It is obligatory on the part of the insurance companies to disclose clearly the
benefits, terms and conditions under the policy. The advertisements issued by
the insurers should not mislead the insuring public
All insurers are required to set up proper grievance redress machinery in their
head office and at their other offices
The Authority takes up with the insurers any complaint received from the
policyholders in connection with services provided by them under the insurance
contract

IRDA: Protection of the interest of policy holders

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The solvency ratio of an Insurance company is

The size of its capital relative to premium written

A measure of the risk an insurer faces of claims that it cannot absorb

A basic measure of financial soundness of an insurer

An indicator of how solvent or how prepared an insurer is to meet unforeseen
exigencies

It is the extra capital an insurer must hold

Specified by the Insurance Regulator considering the type/s of business the
Insurer does

A simple calculation based on Net assets Net premium written
[The amount of premium written as against the total amount insured is
considered a better indicator of the likelihood of claims!!]


Solvency Ratio for Insurance Company
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IRDA (Assets, Liabilities and Solvency Margin of Insurers) Regulations 2000
specify that both life and general insurance companies must maintain solvency

It require all non-life insurers to follow the regulations and the life insurer is
expected to maintain 150% solvency margin

It requires all insurers to determine & disclose the required solvency margin
[RSM],the available solvency margin [ASM] and the solvency ratio in the
prescribed method and format

ASM for life insurers means the excess of value of assets over the value of life
insurance liabilities and other liabilities of policyholders fund and shareholders
funds

ASM for other insurers means the excess value of assets with further
adjustments as prescribed

Solvency Ratio means the ratio of the amount of ASM to the amount of RSM


IRDA Regulation on Solvency Margin of Insurers
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Required Solvency Margin 1 [RSM 1] based on net premiums, and shall be determined
as 20% of the amount which is the higher of the Gross Premiums multiplied by a
Factor A as specified below and the Net Premiums

RSM-2 based on net incurred claims and shall be determined as 30% of the amount
which is the higher of the Gross Net Incurred Claims multiplied by a Factor B as
specified below and the Net Incurred Claims

RSM shall be the higher of the amounts of RSM-1 and RSM-2

IRDA Regulation on Solvency Margin of Insurers

Item No Description (Class
of business)
A B
1 Fire 0.5 0.5
2 Marine Cargo 0.7 0.7
3 Marine Hull: 0.5 0.5
4 Motor 0.85 0.85
0.5 0.5
6 Aviation 0.9 0.9
7 Liability 0.85 0.85
8 Rural Insurance 0.5 0.5
9 Others 0.7 0.7
10 Health 0.85 0.85
5 Engineering
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IRDA regulations on Investments

IRDA regulations stipulates that without prejudice to Section 27 or 27(b) of the Act,
every insurer carrying on General Insurance Business shall invest and at all times
keep invested his total assets in the following manner


Details of IRDA Regulations on Investments
Type of Investment (%)
Central Government Securities being not less than 20
State Government Securities and other Guaranteed Securities including (i) above
being not less than
30
Housing and Loans to State Government for Housing and Fire Fighting equipment,
being not less than,
5
Investments in Approved Investments as specified in Schedule II.

a )Infrastructure and Social Sector with in the meaning of IRDA regulations not
less than
10
b )Others to be governed by Exposure Norms specified in IRDA regulation
(Investment in "other than approved investments" can in no case exceed 25% of
the assets) not exceeding
55


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Major provisions
a.Approved Investments
b.Investments by way of other than
Approved Investments
To be not less than 75% of the assets of GIC.Not
more than 25% of the assets of GIC.

Investments in shares
a) Shares of any one Banking/ Investment
Company.
Not to exceed -
i) 10% of assets of the insurer
or
ii)2% of the Subscribed Share Capital and
Debentures of the investee company, whichever is
less
b) Shares and Debentures of any one company
other than Banking/Investment Company.
Not to exceed -
i) 10% of assets of the insurer
or
ii) 10% of the Subscribed Share Capital and
Debentures of the investee company, whichever is
less.
Investment in Private Company Not allowed
Investment in Fixed Deposits/ Current Deposits with
any one Banking Company
Not to exceed 10% of assets of the insurer.


Investments are made within the regulatory framework of Insurance Act, and IRDA
Regulations and within corporate policy and the funds of the insurer are managed
in-house

Investments and Fund Management in Insurance Company
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Insurance sector has been opened up for competition from Indian private insurance
companies with the enactment of IRDA Act 1999

IRDA Act paved the way for the entry of private players into the insurance market
hitherto dominated by PSUs

Under the new dispensation Indian insurance companies in private sector were
permitted to operate in India with the following conditions:
Company is formed and registered under the Companies Act, 1956
The aggregate holdings of equity shares by a foreign company, either by itself or
through its subsidiary companies or its nominees, do not exceed 26%, paid up
equity capital of such Indian insurance company
The company's sole purpose is to carry on life insurance business or general
insurance business or reinsurance business.
The minimum paid up equity capital for life or general insurance business is
Rs100 cr.
The minimum paid up equity capital for carrying on reinsurance business has
been prescribed as Rs200 cr.

Major Policy Changes in Insurance Sector
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Personal Insurance: Taken by an Individual [for himself or his relative/s] or for
group of peoples [by a company for its employees] covering perils of death,
accident, health, disability, medical expenses, funeral expenses, pension,
annuity etc

Property Insurance: Taken by an Individual/ group of persons/company
covering property like house, vehicle, plant & machinery, inventory, other
property against losses from fire, theft, burglary, earthquake, machinery
breakdown, accident, etc

Liability Insurance: Taken for covering claims arising due to professional
conduct, product/services , acts of directors & officers, environmental liability,
etc

Credit Insurance & Credit Default Swap [CDS]: Taken by the
Lender/Business as protection in the in the event that the borrower/Sundry
Debtor/Credit Card holder passes away, becomes unemployed, or becomes ill
before the debt is fulfilled.

Catastrophe [CAT] Insurance: For covering for specific disastrous events like
hurricane, flood, earthquake, etc that can cause severe losses to insured

Broad Types of Insurance Cover
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Indian insurance companies offer a comprehensive range of insurance plans
growing in tandem as the economy matures and the wealth of the middle classes
increases and insurance penetration spreads

Some common types of Life/Personal Insurance plans are:
1. Term life policies
2. Endowment policies
3. joint life policies
4. Whole life policies
5. Loan cover term assurance policies
6. Unit-linked insurance plans
7. Group insurance policies
8. Pension plans and annuities
9. Mediclaim /Health Plan
10. Travel Insurance
11. Kidnap and ransom insurance
12. Income Protection Insurance
13. Directors and Officers Liability Insurance
14. Professional Liability [Indemnity] Insurance
15. Workers [Workmen] Compensation Insurance
16. Key man insurance

Range of Insurance Covers
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Some types of General/Property insurance plans are:
1. Property Insurance [including caused by SRCC]
2. Comprehensive Motor insurance
3. Marine Insurance, Aviation Insurance
4. Home insurance
5. Export Credit Insurance
6. Business Insurance, Business Interruption Insurance
7. Crop Insurance, Crop Credit Insurance
8. Nuclear Energy Insurance
9. Pollution Insurance
10. Cash in transit Insurance
11. Cash in Safe Insurance
12. Fidelity Guarantee [Risk] Insurance
13. Inland Goods in Transit Insurance
14. Overseas Goods in Transit Insurance
15. Stock in Trade/ Stock Throughput Policy
16. Erection All Risk Policy
17. Goods in Storage Policy
18. General Commercial Liability Policy
19. Credit risk insurance
20. Oil & gas deficiency insurance




Range of Insurance Covers
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Insurance companies especially are balance-sheet-driven businesses

Challenges in Balance Sheet [Fund] Management in Insurance Business
Policyholder money we don't have yet include:
Future premiums to be received (premiums receivable)
Money that the reinsurers owe (reinsurance recoverable)
Money already paid to reinsurers for future reinsurance policies (prepaid
reinsurance premium)
Money already paid [but not expensed yet] such as agent commissions and
premium taxes, to acquire policies (deferred acquisition cost)

As s e ts [Amt in Rs c ro re ] Ins ure r A Ins ure r B
Investments 14,300 3,300
Policyholder Money We Don't Have
Yet 3,450 530
Other Assets 1,160 230
To tal As s e ts 18,910 4,060
Simplified Balance Sheet
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Policyholder money we have include
Unearned premiums (policyholder money paid for future coverage)
Loss and loss adjustment expense (policyholder money set aside for
already Incurred losses, incurred but not reported losses, and the cost of
settling claims)
Other policyholder liabilities
Float = Policyholder money we have - Policyholder money we don't have yet
The three main aspect of the balance sheet Float, Debt and shareholder's
equity
Shareholders equity represent the Liquidation value


Liabilitie s & Equity [Amt in Rs
c ro re ] Ins ure r A Ins ure r B
Policyholder Money We Have 10,000 2,000
Debt 1,300 160
Other Liabilities 1,510 300
Shareholders' Equity 6,100 1,600
To tal Liabilitie s + Equity 18,910 4,060
Simplified Balance Sheet
Challenges in Balance Sheet [Fund] Management in Insurance Business

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Brief Summary of Other Challenges:
Premium receipts: Variable, uncertain, cyclical, subject to competition, some
portion refundable

Premium payments: Variable, subject to inflation , claims history and other
factors, non-payment could be construed as default with serious consequence

Claims: Could be sudden, very high, untimely, constant

Other expenses: Ever increasing and high in certain cases/periods

Investments: subject to Regulations, portfolio constraints, lack of long term
investment avenues , low returns, high risk, impact of interest rate changes

Debt: Cost could be high, lack of long term sources, stricter covenants and
options

Equity: Restrictions from regulator, capital market constraints

Solvency requirements: Could impose restrictions on business , lead to higher
risks and costs


Challenges in Balance Sheet [Fund] Management in Insurance Business

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Risk becomes insurable if it has the following
characteristics:
It must be fortuitous in nature [by chance or accident rather than
design]
It must be a pure risk [only loss is the possible outcome
the loss caused by the risk must be capable of being measured
in terms of money
The risk must not be of an illegal nature

Characteristics of Insurable Risk
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