PROJECT REPORT ON INSURANCE BROKING BUSINESS IN FULFILLMENT OF MMS COURSE

SUBMITTED BY: VAISHALI R. CHAUGHULE MMS (IV) FINANCE 2002 04

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH MUMBAI

EXECUTIVE SUMMARY

The insurance business is complex whether one is a Life Insurer, a General Insurer, a Re-insurer or an Insurance Brokerage house. Taking the complexity of the industry into account one the has to invest a great in risk deal in understanding such business. In insurance and risk management, evaluating, specialist and helps identifying, in all the reducing managing

countries that one does business. Globally Insurance Brokers play this very vital role. The Indian insurance market is in transitory phase; the sector has been opened up to competition with the entry of private insurance companies in late 1999 with majority of the companies starting operations in 2000. In the last 2 years significant changes have come about in the Insurance market, the independent regulator namely Insurance Regulatory and Development Authority (IRDA) has tried to evolve a level playing field. Quite a few innovations have been introduced such as Third party Administrators, Brokers, Corporate Agents and Bank

assurance

etc.

The global practice of using Brokers to act as the principal distribution arm of the insurance companies is evolving in fits and starts. Based on the amendment to the Insurance Act, 1938, which was passed by the Parliament after a lot of deliberations, over 100 brokers have been granted licence. The brokers play a very vital role in the Insurance industry.

II

DEFINITION AND EXPLAINATION ON WHO AN

INSURANCE BROKER IS: WHO IS AN INSURANCE BROKER?

3

With

the

recent

developments

new

insurance

intermediary - The INSURANCE BROKER is now visible on the insurance horizon and is likely to play a very important role in the future of the insurance business. So let us understand an insurance broker. The insurance brokers are such individuals who contribute maximum share of insurance business. A high standard of professional skills and conduct is expected of the broker. The insurance broker can be issued license under section 42-D of the Insurance Act, 1938. DEFINITION: The insurance broker acts as an intermediary between the insurance customer and the insurance company.
BROKER

BUYER

INSURA NCE MARKET Intense

In the past, most insurance business was conducted directly between customers and insurance companies. Today, however, insurance buyers requirements have become more complex, demanding and varied and this has led to more important role in the market for the insurance broker. The most important feature is that the broker acts on behalf of the insured both at the time of placing the risk and also during settlement of the claim whereas an agent acts on behalf of insurer. The broker works with a number of Insurance Companies and is much well positioned to obtain a good deal for insured on favorable terms. The brokers task is to help & identify the risks to which an insureds business may be exposed. He analyses the risk and advices which risks should be insured and explores the insurance market by canvassing to obtain the best insurance protection at a most competitive price. The brokers are to arrange for all the policies and to complete all documentation for or on behalf of the insured. Insurance brokers are specialists in insurance They are independent, have a deep
5

protection.

knowledge of the market and can provide professional

objective advice on identification and exposures and recommend cost effective solution. WHO CAN BECOME AN INSURANCE BROKER? Any person may be an individual, a partnership firm or a company formed and registered under the Companies Act, 1956 can apply for grant of license to be a broker. (In case of a company the aggregate holding of equity shares by a foreign company either by itself or through its subsidiaries or nominees or persons should be within the prescribed limits laid down by the Reserve Bank of India) FUNCTIONS OF AN INSURANCE BROKER: Acts as a Link: This is one of the most important function of an Insurance broker. They are the only link between the insurance company and the client or the insured. Understands Clients requirements Insurance brokers are trained to understand and be able to match available
6

policies in the market to their Clients requirements as well as to advise them on such policies. Their independence and detailed insurance knowledge, ensures that they provide complete and in depth advice on a whole range of options, from different insurance suppliers to meet the clients insurance requirements. Carrying out risk inspection and suggesting risk improvement/ loss minimization measures: An insurance broker will have to provide his expertise in evaluating and analyzing what are the possible risk that the insured could face. Based on which he should give professional advice to minimize the same. Preserve their destiny: All brokers are required to retain their independence from insurance suppliers in order to be in a position to act in their clients best interests. Free service to Clients: Unlike many other

intermediaries, who receive commission both from the buyer and the seller, insurance broker only receive commission from seller. When a client uses the services
7

of a broker, the insurance cover purchased is no different in price to that purchased by a buyer directly from the insurer. What happens is that costs for distributing the policy, which are fixed, are shared between the insurer and the broker. Offers after sales service: many cases is also offered Another client function of without charge. The

insurance broker is that of claims handling, which in professional relationship between broker and insurers ensures that clients claims are processed efficiently and expeditiously. Matching customers needs: An insurance brokers

office is a center offering a variety of insurance policies from different insurance companies for the clients varied needs. Having one point of advice on insurance facilities insurance purchases for the buyer and ensures that covers are arranged to fit the buyers requirements. Thus the principal aim of a Broker is to foster a better understanding between the insured and the insurer. This aim, coupled with the observance of a professional code of ethics, will maintain and enhance the publics image of
8

insurance brokers as the agents of insurance buyers and their advisers, a true Friend, Guide and Philosopher. Thus functions of both Life and General insurance brokers will inter alia consist of: a. Relationship with clients b. Sales practices c. Duty to disclose information d. Explanation of the contract e. Renewal procedures f. Claims g. Complaints h. Documentation i. Handling clients/insurers money

TYPES OF BROKERS The application under sub-regulation (1) shall be made for any one of the following categories, namely:
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(a) Category - I Direct General Insurance Broker means a person who is for the time being registered in respect of general insurance business but not reinsurance business. Direct Life Insurance Broker means a person who is for the time being registered in respect of life insurance business but not reinsurance business. The functions of both general insurance broker and life insurance broker will inter alia consist of: (i) obtaining a detail knowledge of the clients

A.

B.

business and philosophy; maintaining clear records of the clients business so that this can be explained to an insurer and other parties; (ii) provision to the client of technical advice and advice on developments in the insurance market and the law; (iii) maintaining a detailed knowledge of available markets;
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(iv) selection and recommendation of an insurer or group of insurers; (v) negotiating with insurers on the clients behalf; (vi) acting promptly on instructions from a client and (vii) providing written acknowledgements and progress reports; collecting and remitting premiums and claims; (viii) where appropriate and dependent on the size of both the client and broker, providing additional services, such as insurance consultancy services, risk management services and uninsured loss recoveries; (ix) (x) assisting in the negotiation of claims; maintaining precise records of past claims.

Category II Reinsurance Broker, whose functions will inter alia consist of: (i) obtaining a detailed knowledge of the Insurers business and philosophy;
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(ii)

maintaining clear records of the Insurers business so that this can be explained to a reinsurer and other parties

(iii) provision to the Insurer of technical advice and advice on developments in the International insurance and reinsurance market; (iv) maintaining a detailed knowledge of available markets; (v) selection and recommendation of a reinsurer or group of reinsurers; (vi) negotiating with reinsurer on the insurers behalf;
(vii)

acting promptly on instructions from a client and providing written acknowledgements and progress

reports; (viii) (ix) collecting and remitting premiums and claims; assisting in the negotiation of claims;

(x) maintaining precise records of past claims. (c) Category - III

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Composite Broker, whose functions consists of both that of a Direct Insurance Broker and Reinsurance Broker as stated in (a) and (b) above. (d) Category - IV Others Insurance consultant, Risk management

consultant or any other nomenclature description as may be approved by the Authority.

QUALIFICATION & CONSIDERATION OF APPLICATION IRDA shall take into account, for consideration of grant of the license, for all the matters which are relevant to the activities relating to Insurance Broker and in particular that applicant has to satisfy the following requirements, namely: the applicant has the necessary infrastructure like including adequate office
13

(1)

space, equipment and manpower to effectively discharge his activities; (2) the applicant has in his employment a minimum of two persons who have the experience to conduct the business of the Insurance Broker. (3) A person directly or indirectly connected with the applicant has not been rejected granted license by the Authority in granting license in the past. Explanation:- For the purposes of this clause the expression directly or indirectly connected means any person being an associate, subsidiary, interconnected or group company of the applicant in case of the applicant being a body corporate. (4) the applicant fulfils the capital adequacy

requirements specifies in regulation 7; (5) the applicant, his every partner of the firm, director or principal officer
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(i)

is not a minor; court of competent jurisdiction;

(ii) has not been found to be of unsound mind by a (iii) has not been found guilty of criminal

misappropriation or criminal breach of trust or cheating or forgery or an abatement of or attempt to commit any such offence by a court of competent jurisdiction provided that where at least five years of his have elapsed director since or the on completion applicant, the sentence imposed

partner,

principal

officer in respect of any such offence, the authority shall ordinarily declare in respect of such person that his conviction shall cease to operate as a qualification under this clause; (iv) that in the course of any policy of insurance of the winding up of an Indian Insurance Company or in the course of an investigation of the affairs of an insurer it has not been found that he has been guilty of or has knowingly participated in or connived insured;
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at

any

fraud, an

dishonestly insurer or

or an

misrepresentation

against

(6)

The possesses (i)

applicant,

minimum

of

two

partners/directors in a firm and the principal officer

a minimum qualification as an Associate of

Insurance Institute of India or its equivalent or any other professional qualification from an institution recognized by the government in finance, law, engineering and practical or business for a management; and (ii) theoretical specified training period to be conducted by National

Academy, Pune on the basis of a syllabus approved by the Authority. Provided that in the case of a person carrying on reinsurance broking and/or insurance consultancy for a continuous period of ten years or who has sufficient experience of running insurance business with any insurer for ten years or more before these regulations come into force and who is required to be licensed under this regulation, the Authority on
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consideration person however from of will

of the this have

the

qualifications of Such

and

experience of such a person may exempt the provisions section. to undergo minimum persons as training qualification

required under sub-regulation 6(ii) above The applicant, a partner, a director or the principal officer does not violate the Code of Conduct as specified in Schedule III. Grant of license to the applicant is in the interest of policyholders. These are very clear guidelines, which clearly spell out the requirements for an insurance broker. which, a person may not be given broker ship. Failing on

(7)

(8)

CAPITAL ADEQUACY REQUIREMENT (1) The capital adequacy requirement referred

17

to in sub-regulation (4) of Regulation 6 shall not be

less than the net worth of the person making the application for grant of license. (2) For the purpose of sub-regulation (1), the

net worth shall be as follows, namely: CATEGORY MINIMUM AMOUNT Category I A Rs.25 lakhs Category I B Rs.25 lakhs Category II Rs.100 lakhs Category III Rs.125 lakhs Category IV Rs. 10 lakhs Explanation:- For the purposes of this regulation net worth means in the case of an applicant which is a partnership firm or a body corporate, the value of the capital contributed to the business of such firm or the paid up capital of such body corporate plus free reserves as the case may be at the time of making application. SOLVENCY REQUIREMENTS
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(1) Every Insurance Broker shall, throughout the license period, maintain an excess of the value of his assets over the amount of his liabilities of not less than the amount specified (hereinafter referred to as the required solvency margin), in accordance with each category of license, namely; Category I A Direct General Insurance Broker/ Category I B Direct Life Insurance Broker The greater of Rs.50,000 and 10% of Net retained brokerage and fees in a year subject to minimum of Rs. 50,000. Category II Reinsurance Broker The greater of Rs.200,000 and 10% of Net retained brokerage and fees in a year subject to minimum of Rs. 200,000. Category III Composite Broker

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The greater of Rs.250,000 and 10% of Net retained brokerage and fees in a year subject to minimum of Rs. 250,000. Explanation: - For the purpose of this regulation asset means those assets which are either in the form of cash or can reasonably be expected to be turned into cash within one year from the date of the balance sheet. Liability means those liabilities, which are expected to have been paid within one year from the date of the balance sheet. (2) If, at any time an Insurance Broker does not maintain the required solvency margin in accordance with sub-regulation (1), he shall, in accordance with the directions issued by the Authority, submit a financial plan, indicating a plan of action to correct the deficiency to the Authority within a specified period not exceeding three months. (3) An insurance broker who has submitted a plan under sub-regulation (2) to the Authority shall propose modifications to the plan if the Authority
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considers it inadequate, and shall give effect to any plan accepted by the Authority as adequate.

(4) An Insurance broker who does not comply with the provisions of sub-regulation (3) shall be deemed to be insolvent and may be wound up by the court on the application of the Authority. (5) Every Insurance broker shall furnish to the Authority under sub-regulation (3) of regulation 19, a statement certified by an auditor, of the required solvency margin maintained by the Insurance Broker in the manner required by sub regulation (1). PROCEDURE FOR LICENSING (1) The Authority on being satisfied that the applicant is eligible shall grant a license in Form B and send an imitation to the applicant mentioning the category for which the Authority has granted the
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license. (2) (i) Notwithstanding anything contained in subwhere a license has been granted for a category other than for what has been applied for, the applicant, may make an application to the Authority at any time after the expiry of one year from the date of grant of such license. (ii) The Authority may consider an application made under clause (i) and grant a license for other category. (3) An application made under clause (i) of sub-

regulation (1),

regulation (2) shall be considered in the same manner as an application made under regulation 3.

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(4) On the grant of a license the applicant shall be liable to pay the fees for the category for which the license is granted in accordance with schedule II: Provided the amount of fees payable shall be proportionately reduced by the amount of fees already paid by the Insurance broker for the year in which the licensing is granted in the higher category. (5) A license granted to an insurance broker, in terms of these regulations, shall remain valid for a period of three years from the date of issue thereof in the manner prescribed therein.

DIFFERENCE BETWEEN BROKER AND AGENT

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The distinction between insurance agents and brokers is that an agent represents one or more insurers for the purpose of writing policies, while a broker represents consumers to assist them in obtaining coverage from one of the companies with which that broker deals To begin with the most fundamental difference between broker and an agent is that, an agent works for the Insurance Company and the broker works on behalf of the Insured. The broker works with a number of Insurance companies as a result is much well positioned to obtain a good deal for the insured on favorable terms. As against this an agent works with only one company and promotes products of one company. Insurance broking is essentially a full time work where, a broker not only acts as an insurance broker but also risk management and financial planning for the insured. An agent as compare is nothing but an insurance
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intermediary.

III DUTIES AND RESPONSIBILITIES OF BROKER CODE OF CONDUCT: There is a code of conduct that has been chartered which outlines what are the duties and responsibilities of an insurance broker. The objective of the code of conduct is to establish a recognized standard of professional conduct to which all insurance brokers should, in the interest of the public and in the performance of their duties, conform and in doing so they should bear in mind this objective and the underlying spirit of this code in this matter of regulation of their professional standards. The code is not exhaustive or all embracing and while it shall serve as a guide to insurance brokers and other persons concerned with their conduct nevertheless the mention or the lack of mention in it of a particular act or omission shall not be taken as conclusive of any question of professional conduct. Claims against insurance brokers for compensation arising from acts or omissions amounting to negligence are matters for determination
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by the courts. Nevertheless, acts of gross negligence or repeated acts of negligence may amount to unprofessional conduct and notwithstanding that the matter be the subject of legal proceedings, the Authority may still investigate the conduct of the Insurance brokers.

The ethical requirements of any Insurance Brokers should be based upon the following fundamentals principles by which an Insurance broker should be governed in the conduct of his professional relations with others: conduct his dealing with clients with the utmost good faith and integrity at all times; act with care and diligence; inform his clients about the extend of the choice of products they that are being offered; inform his clients about the product they are buying and its price;

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 ensure that all products or services he is offering are suitable to the needs of his clients; deal prudently with assets held on behalf of others; maintain adequate financial resources to meet his commitments; avoid conflicts of interest; correct errors and handle complaints fairly and speedily; preserve and enhance the reputation of the profession; comply with rules and regulations in an open, transparent and co-operative manner

a. RELATIONSHIP WITH CLIENTS An insurance broker must: Conduct their dealings with clients with utmost good faith and integrity at all times; act with care and diligence;

27

 ensure that the client understands his relationship with the broker and on whose behalf the broker is acting; treat all information supplied by the prospective clients as completely confidential to themselves and to the Insurer(s) to which the business is being offered; take appropriate steps to maintain the security of confidential documents in their possession; understand the type of client that they are dealing with and the extent of the clients awareness of risk and insurance. This knowledge should be taken into account in their dealings with their client, and avoid conflicts of interest. b. SALES PRACTICES Insurance Broker must: Confirm that they are members of the Insurance Broker Association of India (IBAI); as approved by the Authority.

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 Identify who they are and explain as soon as possible the degree of choice in the products that they are able to offer; Ensure that the client understands the type of service they can offer Ensure that the policy proposed is suitable to the needs of the prospective client; Give advice only on those matters in which they are knowledgeable and seek or recommend other specialist advice when necessary; Not make inaccurate or unfair criticisms of any insurer or IBAI member; Explain why a policy or policies are proposed and provide comparisons in terms of price, cover and/or service where they are able to offer more than one choice of product; Explain the period for which the quotation remains valid if cover is not effected immediately; Explain when and how the premium is payable and how it is to be collected. Where another party is financing all or art of the premium, full details should be given to the client including any obligations that
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the client may owe to that party, and explain the procedures to follow in the event of a complaint. c. DUTY TO DISCLOSE INFORMATION Insurance Brokers must: Ensure that the consequences of non-disclosure and inaccuracies are pointed out to the prospective client; Avoid influencing the prospective client and make it clear that all the answers or statements given are the latters own responsibility. given; Request their clients to make true, fair and complete disclosure where they believe that the client has not done so. If further disclosure is not forthcoming they should consider declining to act further; Explain to their clients the importance of disclosing all subsequent changes that might affect the insurance throughout the duration of the policy; and The client should always be asked to check the details of information

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Disclose on behalf of their client all material facts within their knowledge and give a fair presentation of the risk.

d. EXPLANATION OF CONTRACT Insurance Brokers must: Identify the insurer and insurers. Any changes once the contract has commenced must be advised immediately; Explain all the essential provisions of the cover afforded by the policy(ies), they are recommending so that, as far as possible, the prospective client understands what is being purchased; Draw attention to any major or unusual restrictions and exclusions in the policy, explain how the contract may be cancelled; Provide the client with prompt written confirmation that insurance has been affected. If the full working of the contract is not included with this confirmation, it should be forwarded as soon as possible;

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 Notify changes to the terms and conditions of any insurance contract and give reasonable notice before any changes take effect; Advise their clients of any insurance proposed on their behalf which will be effected with an insurer outside India and, if appropriate, of the risks involved; and Advise their client that any non-insurance product will not be subject to IBAI and, if appropriate, implications in terms of consumer redress and solvency. e. RENEWAL PROCEDURES Insurance Brokers must: Ensure that their clients are aware of the expiry date of the insurance even if they choose not to offer further cover to the client, Ensure that renewal notices contain a warning about the duty of disclosure including the necessity to advise changes affecting the policy, which have possible

32

occurred since the policy inception or the last renewal date; Ensure that renewal notices contain a warning that the proposer should keep a record (including copies of letters) of all information supplied to the insurer for the purpose of renewal of the contract; and Ensure that their client always receives the insurers renewal behalf). f. CLAIMS Insurance Brokers must: Explain to their clients their obligations to notify claims promptly and to disclose all material facts and advise subsequent developments as soon as possible; Request their clients to make true, fair and complete disclosure where they believe that the client has not done so. If further disclose is not forthcoming they should consider declining to act further for the client;
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invitation

(unless

they

have

delegated

authority from an Insurer to issue one on their

 Give prompt advise to the client of any requirements concerning the claim; Forward any information received from the client regarding a claim or an incident that may give rise to a claim without delay, and in any event within three working days; Advise the client without delay of the insurers decision or otherwise of a claim, and on request give all reasonable assistance to a client in pursuing his claim. g. COMPLAINTS Insurance Brokers must: Ensure that letters of instruction, policies and

renewal documents contain details of complaints handling procedures; Accept complaints either by phone or in writing; Acknowledge a complaints not later than 14 days from the receipt of correspondence, advise the member of staff who will be dealing with the complaint and the timetable for dealing with it;
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 Ensure that response letters inform the complaints of what they should do if they are unhappy with the response; Ensure that they have a procedure so that complaints are dealt with at a suitably senior level; Have in place a system for recording and monitoring complaints. h. DOCUMENTATION Insurance Brokers must: Ensure that any documents issued by them comply with all statutory or regulatory requirements from time to time in force; Send policy documentation without avoidable delay; Make available, with policy documentation, advice that the documentation should read carefully and retained by the client; Not withhold their documentation consent, from their clients and without unless adequate

justifiable reasons are disclosed in writing and without delay to the client. Where documentation is
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withheld, the client must still receive full details of the insurance contract; Acknowledge receipt of all money received in connection with an insurance policy; Ensure that they reply promptly or use their best endeavors to obtain a prompt reply to all correspondence; Ensure that all written terms and conditions are fair in substance and set out clearly and in plain language clients rights and responsibilities; and Subject to the payment of any monies owed to them, make available to any new Insurance Broker instructed by the client all documentation to which the client is entitled and which is necessary for the new Insurance Broker to act on behalf of the client. i. HANDLING CLIENTS/ INSURERS MONEY Insurance Brokers must: ensure that the moneys belonging to clients or insurers are not mixed with their/his own;

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 separate accounts are properly maintained in regard to those amounts and proper information is periodically made to the client/insurer. Ensure that these moneys are banked in a proper manner; Ensure that moneys belonging to others are kept with them for a reasonable period only; Ensure strict compliance of the provisions of regulation 17 (i.e Segregation of Insurance moneys). Insurance Money Segregation this is something very specifically given in the draft bill by IRDA. Subject to the provision of Section 64 VB of the Insurance Act, 1938 every Insurance Broker must: 1. treat all money (premiums and claims) received from or on behalf of an Insured as Insurance money. 2. ensure that Insurance money is held in an Insurance Bank Account with one or more approved scheduled banks or with such other institutions as approved by the Authority.
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3.

give

written

notice

to,

and

receive

written

confirmation from, the bank, or other institutions that he is not entitled to combine the account with any other account, or to exercise any right of setoff, charge or lien against money in the account. 4. ensure that all money received from or on behalf of an Insured is paid into the Insurance Bank Account and will remain there until it is passed on to the insurer or to the insured. 5. only remove from the Insurance Bank Account charges, fees or commission earned and interest received from any funds comprising the account. 6. take immediate steps to restore the required positions if at any time he becomes aware of any deficiency in the required segregated amount. j. REMUNERATION Insurance brokers must: Reveal all fees or charges (not commission) they propose to charge the client, which will be in addition to the insurance premium. Score back of
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commission will be considered as a charge for these purposes; Recommend the client in writing of the Insurance premium and any fees or charges separately and the purpose of any related services; If requested by a client, disclose the amount of their commission or other remuneration they receive as a result of effecting Insurance for that client. This will include any payment received as a result of securing on behalf of the client any service additional to the arrangement of the contract of Insurance; and Advice their clients prior to effecting the Insurance of their intention to make any deductions from the amount of claim collected for a client where this is a recognized concerned. DOS AND DONTS OF INSURANCE BROKERS Giving below are some Dos and Donts of what a professional Brokers with ethics should follow which has been compiled from the existence practices worldwide.
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practice

for

the

type

of

Insurance

This

can

assist

them

in

establishing

recognized

standard of professional conduct. The following are the acts, which if not observed by a licensed insurance broker may constitute unprofessional conduct: Business is to be conducted with utmost good faith and integrity.

The insurance requirements of the client same client must be satisfies

and interests of the

before all other considerations.

Advertising shall not be misleading and extravagant. The following are some examples for the application of these principles: 1. 2. advice is to be provided objectively and independently the description insurance broker must only be used in connection with the business of insurance in accordance with the requirements of the guidelines of IRDA, India. 3. Insurance broker must equip himself with the required product knowledge and the developments in the
40

Insurance field which will help the insured to have most appropriate policy at an economical rate. 4. all work carried out in connection with insurance broking must be under the supervision of a qualified and experience insurance broker. 5. 6. the different types of insurance and relative costs must be explained on request of the client. a sufficient number of insurance companies policies must be made available by the broker to satisfy the insurance requirements of the client. 7. the amount of commission paid by the insurer under any relevant policy of insurance must be disclosed to the client on request. 8. the broker must use his skill objectively in the best interests of the client when choosing an insurance policy 9. written evidence or documentation relating to the contract of insurance must not be withheld from the policyholder. 10. the name of all insurers with whom a contract of insurance is placed must be revealed to the client.

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11. the amount to be charged must be disclosed to the client before any work involving a charged is concluded. 12. any payment which is received as a result of securing any service additional to the arrangement of a contract of insurance on behalf of the client is to be disclosed 13. there is to be proper regard for the wishes of a policy holder or client who seeks to terminate any agreement with the broker. 14. any information acquired by an insurance broker from his client shall not be misused.

IV WHAT KIND OF BUSINESS SHALL A BROKER BE DOING? CLASSIFICATION FROM BUSINESS POINT OF VIEW From business point insurance can be classified into two broad categories: 1. Life insurance; and 2. General insurance
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Life insurance contains the element of investment and protection, while the accidental, sickness or health insurance contains the element of indemnity only. the contract provides for the payment Also of periodic

premium periodically to the insurer by the insured for a long period of time. this. General insurance business refers to fire, marine, and miscellaneous insurance business whether carried on singly or in combination with one or more of them but does not include capital redemption business and annuity certain business. This is something very unique to

CLASSIFICATION FROM RISK POINT OF VIEW From risk point of view, insurance can be classified into four categories: 1. 2. 3. Personal insurance Property insurance Liability insurance
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4.

Fidelity guarantee insurance

A brief description of each is given below. Personal insurance Personal insurance refers the loss to life by accident, or sickness to individual, which is covered by the policy. The insurer undertakes to pay the sum insured on the happening of certain event or on maturity of the period of insurance. The insurable sum is determined at the time of affecting the policy and includes life insurance, accident insurance, and sickness insurance. Property insurance Contract of property insurance is a contract of indemnity. Proof by the assured of loss is an essential element of property insurance. The policies of insurance against fall under this burglary, home breaking or theft etc. property.

category. The assured is required to protect the insured After the loss has taken place, the assured usually required notifying the police as to losses. Liability insurance
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Liability insurance is the major field of General insurance whereby the insurer promises to pay the damage of property or to compensate the losses to a third party. The amount of compensation is paid directly to third party. The fields of liability insurance include: workmen compensation insurance, third party motor insurance, and professional indemnity insurance. There may be various reasons for the arising of liability, viz, accident of a worker at the workplace, defective goods, explosion in the factory during the process of production and formation of poisonous gas within the factory due to the uses of chemicals and other such substances in the manufacturing process.

Fidelity guarantee insurance In this type of insurance, the insurer undertakes to indemnity the assured (employer) in consideration of certain premium, for losses arising out of fraud, or embezzlement on the part of the employees. This kind of insurance is frequently adopted as a precautionary measure in cases where new and untrained employees are given position of trust and confidence.
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GLOBAL INDUSTRY STATISTICS This section gives the important and detailed statistics of the Indian as well as the Global insurance industry:

The global life insurance market stands at $1,521.2 billion while the non-life insurance market is placed at $922.4 billion. The United States itself accounts for about one-third of the $2443.6 billion global insurance market and Japan stands next with a 20.62% share. India takes the 23rd position with US $9.933 billion annual premium collections and a meagre 0.41% share. Out of one billion people in India, only 35 million people are covered by insurance. India's life insurance premium as a percentage of GDP is just 1.77 per cent. The income derived by GIC and its subsidiary companies through investment was Rs.2491.76 crore and the investible funds generated was Rs.2843 crore in 1999-2000.
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Indian insurance market is set to touch $25 billion by 2010, on the assumption of a 7 per cent real annual growth in GDP. Brokers' commissions amounted to 134 million in 2002

Following are some tables which show the business of Insurance Internationally and Indias ranking in the world.

Global Insurance Scenario (Total in 1999: (%) 34.5 (Total in 2000: (%) 37.32

$2,128.7 billion) $2,244.3 billion) North America

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Europe Asia Oceania Latin America Africa

31.4 29.1 1.9 1.8 1.3

31.93 26.46 1.59 1.67 1.03

Total premiums by Country, 2000 Share of world market (in %) 35.41 20.62 9.7 5.06 4.99 2.58 2.39 1.91 1.54 1.49 0.41

Premiums Country (USD millions) United States Japan 14 United Kingdom Germany + France + Italy South Korea 14 Canada 11 Spain Netherlands India 14* 865327 504005 236960 123722 121910 63062 58348 46587 37617 36450 9933

*Premiums *Premiums in % of GDP 8.76 10.92 15.78 6.54 9.4 5.8 13.05 6.56 6.73 9.87 2.32 per capita (in USD) 3152.1 3973.3 3759.2 1491.4 2051.1 1084.3 1234.1 1516.8 954.2 2290.2 9.9
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* estimated 11 Life business: net premiums 14 Financial year 01.4.200031.3.2001 + provisional V POTENTIAL IN INDIA

INSURANCE SECTOR IN INDIA India, with a population of 1 Billion offers great potential and opportunity for the insurance industry. The insurance business in India is pegged at $ 6.6 Billion whereas industry leaders feel privatization will increase it to $ 40 Billion within next 3-5 years. Today hardly 20 per cent of the population in India is insured and insurance premium (life as well as non-life) account for just 2 per cent of GDP as against the G-7 average of 9.2 per cent. The Malhotra Committee estimated that the insurance penetration in India is to the extent of about 25 % of the insurable population. The poor reach of insurance in the
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country and the sheer numbers make India a market with tremendous potential. The following facts show how under-developed the Indian insurance business is due to state monopoly and lack of aggressive marketing of insurance policies: Per capita insurance premium in India is a mere US$ 6, one of the lowest in the world. In South Korea, the corresponding figure is US$1,338, in USA it is $ 2250 and in UK it is $1589. Insurance premium in India accounts for a mere 2 per cent of GDP compared to the world average of 7.8 per cent and G-7 average of 9.2 per cent. As of 1999-2000, LICs Insurance premium Income was approximately Rs.32000 crores. It is observed that currently LIC has about 10 crore policies in force, which contributes a premium of about 6% of the Gross Domestic Saving of households in India. By the year 2010, the premium Income is expected to account for 18% of the GDS, amounting to Rs.512,000

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crore. In the previous fiscal (2002-03), 8.36 lakh policies were sold by 12 private insurance companies. All this reports suggest that there is a huge potential market to be tapped in India. IRDA GUIDELINES AS OF TODAY The Insurance Regulatory and Development Authority have stipulated the withdrawal of the five per cent discount offered by the companies to their clients. A special discount of 5% in lieu of Agency Commission / Broker's Remuneration is now available for companies with a paid up capital above Rs. 10 lakhs. IRDA has now fixed the agency commission and brokers' remuneration rates, which vary between 5-17.5 per cent depending on the type of risks covered and the size of the company. The new rates will be applicable from April one for a period of one year. IRDA had made it compulsory for brokers to invest Rs. 50 lakh in order to offer professional services. Brokers also have to take up professional indemnity policy three-times
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their brokerage income, with a minimum amount of Rs. 50 lakh. PRIVATE COMPANIES STATUS The following table summaries current status of various companies, which have shown keen interest in this industry. COMPANY Birla Ltd. Cadila FOREIGN PARTNER Sunlife SECTOR Life Insurance General Insurance Life Insurance Life Insurance Life Insurance Life Insurance General Insurance STATUS Active Planning Planning Applied for License Planning License Received Joint Venture
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Pharmaceuticals Corporation bank Dabur Allstate,

USA Gujurat Ambuja Money Life Cement HDFC ICICI Insurance Standard Life Lombard, Canada

ICICI India Farmer Fertilizer Co-

Prudential, UK Tokio Marine,

Life Insurance Non Life Insurance Life Insurance Life Insurance

formed Active In principal clearance Active Active

operative Japan Kotak Mahindra Old Mutual, Finance Max India South Africa New York Life

International Punjab National Life Bank, Bank of Baroda Punjab National Bank, Vijaya Bank, Allahabad Bank, Bank of India Reliance Group Reliance Group Sundaram Finance Royal & Sundaram Life Insurance Non Life Insurance Non Life Insurance Insurance Non Life Insurance

Planning

Planning

License Received License Received License Received

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Alliance PRIVATE COMPANIES PREPAREDNESS OR ATTITUDE TOWARDS BROKERS: Of the companies, which have started their operation, all are ready to accept business brought in by insurance brokers. For them it shall be another mode of business along with the agents or the insurance Internationally also it is the generation

consultants as they call.

Brokers who bring the majority of the business for the insurance companies as against the agents. VI AREAS FROM WHERE REVENUES CAN BE

GENERATED AMOUNT OF COMMISSION THAT COMPANIES PAY: It is expected that brokers are going to be treated on the same lines, as are the agents today, as far as the commission is concerned. The structure for paying commission for the insurance policies is given by IRDA where it has given the upper limits or the maximum
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commission payable.

So a company is free to pay

commission as per its wish provided it does not exceed the upper limits. Brokers' commissions amounted to 134 million in 2002 Avenues for income, for an insurance agent/broker are one time commission recurring commission and annual bonuses. One time commission and recurring commission are paid as percentage of premium and annual bonus is paid out of the income that is been generated from the investments. The limits for the same is given below. TYPE OF POLICY Immediate Annuity Deferred Annuity (Single Premium) Deferred Annuity (regular Premium) All other cases (Endowments, Money back etc.)

COMMISSON LIMITS 2% of Premium 2% of Premium 7.5% of the first years Premium 2% of Premium A maximum of 40% of the first years Premium A maximum of 7.5%
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of the 2nd & 3rd years Premium

A maximum of 5% of the 4th & 5th years Premium

Thereafter, 5% of the renewal Premium Total commission payable in the first 5n years cannot exceed 60% of the annual premium payable on the policy. These are the upper limits but the exact amount of commission given companies is not available. Being an up coming industry and a very competitive one the players in the industry are not ready to spell out openly what is the commission that they are offering. However all have to adhere the to IRDA guidelines which has given the upper levels beyond which the company cannot give commission to an agent/consultant.
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VII LIABILITIES TOWARDS BOTH THE PARTIES MEMBERSHIP TO CLAIM SETTLEMENTS Insurance broker has to be registered broker with the IRDA. IRDA has made it mandatory for every broker to appear for a certification exam every three years Also irrespective of he or she having cleared it before.

every insurance broker shall take out and maintain a professional indemnity insurance cover throughout the validity of the period of license granted by the Authority. The terms and conditions of the insurance cover must comply with the following requirements. 1) The insurance cover must indemnify, as a minimum, an insurance broker against: (i) breach of duty in relation to any aspect of the brokers business by reason of any negligent act, error or omission;
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(ii) Libel or slander committed in the course of business; (iii) any loss of money or other property for which the broker is legally liable in consequence of any financial or fraudulent act or omission; (iv) legal liability incurred by the broker by reason of loss of documents and costs and expenses incurred in replacing or restoring such documents; (v) dishonest or fraudulent acts or omissions by brokers employees or former employees; and (vi) any financial penalty imposed by the authority or by any ombudsman scheme to which the broker belongs. 2) The insurance policy must not contain any terms to the effect that payments of claims depend upon the insured having first made payment. 3) The insurance policy must ensure the payment of all claims made and reported during the period of the insurance regardless of the time at which the eventgiving rise to the claim may have occurred.
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4)

The insurance policy period shall not be more than 12 months form Inception or the last renewal date (unless approved by the Authority). The broker will be required to take insurance policy on a yearly basis for the entire period of license. 5) Limit of Indemnity to any one claim and in the aggregate shall be: Category I A and Category I B 4 times of brokerage and fees in a year subject to a minimum limit of Rs 60 lakhs. Category II 4 times of brokerage and fees in a year subject to a minimum limit of Rs.3 crores. Category III 4 times of brokerage and fees in a year subject to a minimum limit of Rs.6 crores. Category IV 4 times of brokerage and fees in a year subject to a minimum limit of Rs.30 lakhs. 6) The uninsured excess in respect of each claim must not exceed Rs.
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50,000. The excess may be increased above Rs. 50,000 provided that the solvency margin required in sub-regulation 18 is maintained. 7) The insurance policy must be taken out with any

licensed insurer in India who has agreed to : (i) provide the broker with an annual certificate as evidence that the cover meets the requirements of the Authority. The certificate will contain the name and address, including the license number of the broker, the policy number, the limit of indemnity, the excess and the name of the Insurer; and (ii) send a duplicate certificate to the Authority at the time the certificate is issued to the broker; and (iii) inform the authority by means of monthly lists, of any case of voidance, nonrenewal or cancellation of cover mid-term. Every insurance broker must:
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8)

(i) inform the authority immediately should any cover be cancelled or voided or if any policy is not renewed; (ii) immediately inform the insurer in writing of any claim made by or against it; (iii) immediately advise the insurer of all circumstances or occurrences that may give rise to a claim under the policy; and (iv) advise Authority as soon as an insurer has intimated that it intends to decline indemnity in respect of a claim under the policy. Since a broker acts on behalf of the insured he should see that even the claim settlements takes place very easily. At the same time it is very important that the An insurance broker is only an intermediary he can facilitate in claim procedure but not settle the claim. company. involved agreement is between the insured and the insuring So in case if there are any complications or are only the insured and the insurance the errors as to settlement of the claims the two parties company. The broker has no capital commitment towards the insured. He purely works on the principle of utmost
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good faith where the insured provide all the information which are true and fair and at the same time it is the duty of the company to honor genuine claims. VIII MISCELLANEOUS OTHER INTERMEDIARIES IN INSURANCE BUSINESS Ideally an insurance company would have openings in the marketing, distribution, actuarial, underwriting, operations and investing departments. other industry, actuarial and Though some jobs like underwriting jobs are investing, marketing and distribution are the same in any exclusive to the insurance industry. Actuaries An actuary is the heart of an insurance business. An actuary solves a wide range of financial problems in insurance, investment, financial planning and management through the use of mathematical, statistical and economic models. products and prices. An actuary not only fixes the Generally, a big insurance firm
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premium rates for new products, but also revises both

abroad has about 50 actuaries. Even a medium sized firm has to have half-a-dozen actuaries, one or two qualified and the rest apprentices. Underwriters Both life and non-life segments require professional underwriters, who assess the risk in the business. In the life insurance business, an underwriter is expected to filter the bad or substandard lives, whereas he takes care of risk management in the general insurance segment. Surveyors Surveyors are professionals who assess the loss or damage. An insurance surveyor must possess a license issued by the Controller of Insurance under Ministry of Finance, Govt. of India. Licenses are issued to technically qualified people who are engineering graduates or diploma holders of the in any discipline, Insurance Chartered Institute of Accountants, London or Graduates in Medical Sciences or Associates in Insurance Chartered Federation of Insurance Institute of India. all of the insurance companies.
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A surveyor

after obtaining the license may be empanelled by any or

Operations Its InfoTech everywhere! The new players would require elaborate database, a network, and in-house packages to have an edge over their rivals. Database and network The professionals will, therefore, be in great demand. develop customized off-the-shelf packages. Investment Like banks and mutual funds, an insurance firm will also need investment professionals to manage its assets. People with experience in banks and mutual funds would be preferred. financial sector. Marketing and Distribution Insurance is a push product and marketing plays a major role in a companys success. And the key marketing men would be the traditional agents. But the private insurance companies would look at a more professional agent who not only sells insurance products but also acts like a personal finance consultant to the customers. There
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industry would also require software programmers to

Remuneration would be on par with the

would be openings for both the experienced and the novice. Remuneration would be on commission basis. IT IN THE INSURANCE INDUSTRY Today the companies are actively pursuing new IT initiatives, such as, data ware housing, e-commerce and componentization. The objective is to get clarity around the products channels and service features for new entrants investments in information technology is crucial for success. It takes time to build it systems and the new firms need to get of the block soon as possible. Core processes such as finance policy administration investment management and basic rate system need to be set up first. The following processes should be set up after the core processes: Sales system and publicity Claim management and loss control MIS, product design and supply system, Data ware housing solutions will be helpful to the insurance industry in:

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 Facilitate strategic decision based on the timely and accurate data. Functioning as an effective decision support system and executive information system. Capture data quickly from disparate databases and translating to into a format and easily system understandable professionals. Assist in understanding customer behaviour and trends Freeing up internal technical staff. Worldwide interest in E-commerce and India's business

predominant position in information technology and software development is also likely to be a major factor in the marketing of insurance products in the immediate future.

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CONCLUSION

With the opening up of insurance business in the country Broker in insurance, are going to play a very important role in days to come. professional financial They are not just going to be intermediaries providing risk
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provider of insurance schemes but shall be acting as the management services to the prospective insured.

Broking in insurance is going to be a big industry as it has been internationally with insurance brokers evolving to be the main business generator for the Insurance Company. With the amount of commission that has been offered to insurance agents it is expected that the same or probably more shall be offered to insurance brokers. Super imposing this to the fact that about only 20 % insurable population of the country is currently insured this business holds very good prospect. This industry also makes a very good business as it attracts a very less investment and has virtually no liability that a broker has to take on his name. To conclude insurance broking shall be a pure financial service intermediary, which shall put life in all the nonlife activities of the Indians.

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BIBLOGRAPHY irdaindia.org irdaonline.org bimaguru.com bimaonline.com bimakoj.com themanagementor.com

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