CHAPTER 1

INTRODUCTION TO INSURANCE.

Insurance is a contract which is represented by the policy, in which a particular individual or a

whole entity receives the financial protection or the reimbursement against the losses from an
insurance company. The company pools the clients' risks to make the payments more affordable
for the insured.

Insurance is the contract that transfers risk of the financial loss from an individual or the business
to an insurance company. The company collects the small amounts of the money from its clients
and then pools that money together to pay for the losses.

Insurance means managing the risk. The growth of insurance sector in India has been
phenomenal. The insurance industry has undergone to a massive change from over the last few
years and also the metamorphosis has been noteworthy. There are numerous private and the
government insurance companies in India that have become synonymous with the term insurance
over the years.

Insurance is the means of protection from the financial loss. An entity which provides the
insurance is known as an insurer, an insurance company, an insurance carrier or an underwriter.

In simple words, an insurance is a such arrangement in which you pay the money to a particular
company, and in return they pay money to you if something or other unpleasant happens to you,
for example: if your owned property is stolen or damaged, or if you get a serious illness.
With the rapid growth of Indian Insurance industry, in particularly serving the Middle Class that
is growing on the both size and wealth every year, it is hardly surprising that the Indian insurance
companies are rapidly growing, and also playing an increasingly important role in the nation's
financial services industry.

A person or the entity who buys the insurance is known as an insured or as the policyholder.

The insurance contract which contains insured by the guaranteed and also known relatively the
small loss in the form of payment to the insurer in exchange for insurer's promise to compensate
the insured in event of the covered loss.

The losses may or may not be financial, but it should be reducible to the financial terms, and it
usually involves something in which the insured has an insurable interest which would be
established by the ownership, possession, or pre-existing relationship.

The insured receives the contract which is called as the insurance policy that gives the details
about the conditions and the circumstances under which the insurer will compensate the insured.
The amount of a money charged by the insurer to the insured for the coverage set forth in the
insurance policy is called as premium.

If the insured experiences a loss which is potentially covered by an insurance policy, the insured
submits a claim to the insurer for further processing by a claims adjuster. An insurer must hedge
its own risk by taking out the reinsurance, whereby on other hand another insurance company
agrees to carry some of the risk.

An Insurance is a term in law and economics. It is something that people buy to protect
themselves from losing their money. People who buy the insurance pay a "premium" (often paid
every month) and then promise to be careful (a "duty of care"). In exchange for this, if something
bad happens to the person or the thing that is insured, the company that sold the insurance will
then pay money back.

Insurance is nothing however a system of spreading the chance of 1 onto the shoulders of the
many. While it becomes somewhat not possible for a person in-tuned by himself 100 percent loss
to his own property or interest arising out of AN unforeseen contingency, insurance may be a
methodology or process which distributes the burden of the loss on a number of persons within
the group formed for this particular purpose.

Basic Human feature is to be unenthusiastic to the knowledge of risk taking. Insurance, whether
of life or non-life, offers persons with a sensible degree of safety and guarantee that they will be
protected in the event of a calamity or failure of any sort. Insurance is also delineated as a social
device to scale back or eliminate risk of loss to life and property.

Under the arrange of insurance, an oversized variety of {individuals} associate themselves by

sharing risks hooked up to individuals. The risks, which may be insured against, embrace
fireplace, the perils of sea, death and accidents and burglary. Any risk contingent upon these, is
also insured against at a premium commensurate with the chance concerned. Thus collective
bearing of risk is insurance.

INSURANCE INDEMNIFIES ASSETS & INCOME

Every quality incorporates a price and generates financial gain to its Owner. There is a normally
expected Life-time for the Asset during which time it is expected to perform. If the quality gets
lost earlier, being destroyed or made Non-functional through an Accident or other unfortunate
event the Owner is Prejudiced. Insurance helps to cut back CONSEQUENCES of such Adverse
Circumstances that area unit referred to as Risks.

INSURANCE IS THE SCIENCE OF DIFFUSION OF THE RISK

It is the system of spreading the losses of a private over a bunch of people

INSURANCE COULD BE A METHODOLOGY OF SHARING OF MONETARY

LOSSES
Of a rare from a communal deposit molded out of Involvement of the many who are equally
exposed to the same loss. What is hesitation for an Specific Individual becomes a conviction for
a Group. This is the basis of All Insurance Operations. Thus insurance convert uncertainties to
certainty
 CHAPTER 1.1

DEFINITION OF INSURANCE.

According to the Gosh and Agarwal, “An insurance may be predefined as a co-operative form of
distributing the certain risk over the group of persons who are expressed to it.”

According to Allen Z. Myerson define insurance as a “a device for transfer to an insurer of

certain risks of the economic losses that would otherwise come by the insure”

According to Cambridge Dictionary, “Insurance is the agreement in which you pay

the accompany money and the company pays the cost in case if you have an accident, injury,
or loss”

From the above definitions, it is observed that the ‘Insurance’ is a contract between the insurer
and the insured under which the insurer undertakes for compensating the insured for loss arising
from the risk insured. In a consideration, the insured agrees to pay the premium regularly. The
person whose risk is insured is known as ‘Insured’ or ‘Assured’. The person who agrees for
compensating the losses which arises from the risk is called the ‘Insurer’ or ‘Assurer’ or
‘Underwriter’.
 CHAPTER 1.2
THE HISTORY OF INDIAN INSURANCE INDUSTRY

Insurance in this current form has its history dating back to 1818, when Oriental Life Insurance
Company was started by Anita Bhavsar in Kolkata to cater to the needs of European community.
The pre-independence era in Bharat saw discrimination between the lives of foreigners (English)
and Indians with higher premiums being charged for the latter. In 1870, Mumbai Mutual life
insurance Society became the primary Indian insurance underwriter.
At the dawn of the 20th century, many insurance companies were founded. In the year 1912, the
Life Insurance Companies Deed and the Provident Fund Deed were accepted to standardize the
insurance business. The life assurance corporations Act, 1912 made it necessary that the
premium-rate tables and periodical valuations of companies should be certified by an actuary.
However, the inequality still existed as discrimination between Indian and foreign corporations.
The oldest existing underwriter in Bharat is that the social insurance Company, which was
founded in 1906, and is still in business.
The Government of Bharat issued AN Ordinance on nineteen January 1956 nationalizing the life
assurance sector and life assurance Corporation came into existence within the same year. The
Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers and also 75
provident societies—245 Indian and foreign insurers in all. In 1972 with the final Insurance
Business (Nationalization) Act was gone along the Indian Parliament, and consequently, General
Insurance business was nationalized with effect from 1 January 1973. 107 insurers were
amalgamated and classified into four companies, namely National Insurance Company Ltd., the
New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India
Insurance Company Ltd. The General Insurance Corporation of Bharat was incorporated as a
corporation in one971 and it commenced business on 1 January 1973.
The LIC had monopoly until the late 90s once the Insurance sector was reopened to the personal
sector. Earlier that, the business involved of merely 2 state insurers: Life Insurers (Life Insurance
Corporation of Bharat, LIC) and General Insurers (General Insurance Corporation of Bharat,
GIC). GIC had four subsidiary companies.
With impact from Dec 2000, these subsidiaries square measure de-linked from the parent
company and were identified as freelance insurance companies: Oriental underwriter restricted,
New Republic of India Assurance Company restricted, social insurance Company restricted and
United Bharat underwriter.

Life Insurance
In 1818 the British established the first insurance company in India in Calcutta, the Oriental Life
Insurance Company. First attempts at regulation of the industry were made with the introduction
of the Indian Life Assurance Companies Act in 1912. A number of amendments to this Act were
made until the Insurance Act was drawn up in 1938. Noteworthy features in the Act were the
power given to the Government to collect statistical information about the insured and the high
level of protection the Act gave to the public through regulation and control. When the Act was
changed in 1950, this meant far reaching changes in the industry. The extra requirements
included a statutory requirement of a certain

Level of equity capital, a ceiling on shareholdings in such companies to prevent dominant

control (to protect the public from any adversarial policies from one single party), stricter control
on investments and, generally, much tighter control. In 1956, the market contained 154 Indian
and 16 foreign life insurance companies. Business was heavily concentrated in urban areas and
targeted the higher echelons of society. “Unethical practices adopted by some of the players
against the interests of the consumers “then led the Indian government to nationalize the
industry. In September 1956, nationalization was completed, merging all these companies
into the so-called Life Insurance Corporation (LIC). It was felt that “nationalization has lent the
industry fairness, solidity, growth and reach”.
Some of the important milestones in the life insurance business in India are:

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life
insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect
statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of
protecting the interests of the insuring public.

1956: The market contained 154 Indian and 16 foreign life insurance companies.

General insurance

The General Insurance industry in India dates back to the Industrial Revolution and the
subsequent increase in trade across the oceans in the 17th century. As for Life Insurance, the
British brought general Insurance to India, and a similar path was followed in the development of
this industry. A Number of private companies were in existence for years and years until, in
1971, the Indian government decided that the public interest would be served by nationalizing
the industry, merging all the 107 companies into four companies, depending on the sort of
business transacted (Marine, Fire, Miscellaneous). These were the National Insurance Company
Ltd., the Oriental Insurance companyltd. The New India Assurance Company Ltd., and the
United India Insurance Company Ltd. Located in Calcutta, New Delhi, Bombay and Madras
respectively. The General Insurance Corporation (GIC) was set up in 1972 as a ‘holding’
company, having these four companies as its subsidiaries.

Some of the important milestones in the general insurance business in India are:
1907: The Indian Mercantile Insurance Ltd. Set up, the first company to transact all classes of
general insurance business.
1957: General Insurance Council, a wing of the Insurance Association of India, frames a 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 the Tariff Advisory Committee set up.
1972: The General Insurance Business (Nationalization) Act, 1972 nationalize the general
insurance business in India with effect from 1st January.
1973. 107 insurers amalgamated and grouped into four companiesviz.the National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental insurance company Ltd.
And the United India Insurance Company Ltd. GIC incorporated as a company.

PRESENT SCENARIO IN THE INSURANCE SECTOR

•Insurance agents are the main intermediaries in the Indian insurance market, but with
liberalization brokers will be an additional channel for selling insurance products.

•Brokers are likely to play a major role in ensuring clients get insurance covers tailor made to
suit their requirements at good terms.

•Fast growing middle class of 300 million who can afford insurance.

•Increasing financial strength of middle class with disposable income.

•Narrowing gap between rural and urban populace in terms of access to information and services.

•More and more entrepreneurs in traditional and modern business areas.

•Increase in number of double income families leading to lifestyles and attitude changes.

•Growth of rural market is at 4 times of urban markets.

•The potential of the Indian insurance market is huge with current life insurance penetration
being only1.9 of the GDP.

•Insurance market is set to touch 25 billion by 2010 in India. (It was only 7.2 billion in 98-99
survey. At that time India’s rank in annual premium was 23rd for Life insurance and contribution
in GDP was merely 1.4%). Presently it is still lower then develops economy but increased to
2.61% of GDP in 2002.So immense opportunity can’t be ignoring.
 CHAPTER 1.3
MAJOR PLAYERS IN THE INSURANCE INDUSTRY IN INDIA

•Life Insurance Corporation of India (LIC)

Life Insurance Corporation of India (LIC) was established on 1 September 1956 to spread
the message of life insurance in the country and mobilize people’s savings for nation-building
activities. LIC with its central office in Mumbai and seven zonal offices at Mumbai, Calcutta,
Delhi, Chennai, Hyderabad, Kanpur and Bhopal, operates through 100 divisional offices in
important cities and 2,048 branch offices. LIC has 5.59 lakh active agents spread over the
country. The Corporation also transacts business abroad and has offices in Fiji, Mauritius and
United Kingdom. LIC is associated with joint ventures abroad in the field of insurance, namely,
Ken-India Assurance Company Limited, Nairobi; United Oriental Assurance Company Limited,
Kuala Lumpur; and Life Insurance Corporation (International), E.C.Bahrain. It has also entered
into an agreement with the Sun Life (UK) for marketing unit linked life insurance and pension
policies in U.K.In 1995-96, LIC had a total income from premium and investments of $ 5 Billion
while GIC recorded a net premium of $ 1.3 Billion. During the last 15 years, LIC's income grew
at a healthy average of 10 per cent as against the industry's 6.7 per cent growth in the rest of Asia
(3.4 per cent in Europe, 1.4 per cent in the US). LIC has even provided insurance cover to five
million people living below the poverty line, with 50 per cent subsidy in the premium rates.
LIC's claims settlement ratio at 95 per cent and GIC's at 74 per cent are higher than that of global
average of 40 per cent. Compounded annual growth rate for Life insurance business has been
19.22 per cent per annum

•General Insurance Corporation of India (GIC)

The general insurance industry in India was nationalized and a government company known as
General Insurance Corporation of India (GIC) was formed by the Central Government in
November 1972. With effect from 1 January 1973 the erstwhile 107 Indian and foreign insurers
which were operating in the country prior to nationalization, were grouped into four operating
companies, namely, (i) National Insurance Company Limited; (ii) New India Assurance
Company Limited; (iii) Oriental Insurance Company Limited; and (iv) United India Insurance
Company Limited. (However, with effect fromDec'2000, these subsidiaries have been de-linked
from the parent company and made as independent insurance companies). All the above four
subsidiaries of GIC operate all over the country competing with one another and underwriting
various classes of general insurance business except for aviation insurance of national airlines
and crop insurance which is handled by the GIC. Besides the domestic market, the industry is
presently operating in 17 countries directly through branches or agencies and in14 countries
through subsidiary and associate companies.

IN ADDITION TO ABOVE STATE INSURERS THE FOLLOWING HAVE

BEEN PERMITTED TOENTER INTO INSURANCE BUSINESS: -

The introduction of private players in the industry has added to the colors in the dull industry.
The initiatives taken by the private players are very competitive and have given immense
competition to the on time monopoly of the market LIC. Since the advent of the private players
in the market the industry has seen new and innovative steps taken by the players in this sector.
The new players have improved the service quality of the insurance. As a result LIC down the
years have seen the declining phase in its career. The market share was distributed among the
private players. Though LIC still holds the 75% of the insurance sector but the upcoming natures
of these private players are enough to give more competition to LIC in the near future. LIC
market share has decreased from 95% (2002-03) to 82 %( 2004-05).
 HDFC STANDARD LIFE INSURANCE COMPANY LTD.
HDFC Standard Life Insurance Company Ltd. is one of India’s leading private life
insurance companies, which offers a range of individual and group insurance solutions. It
is a joint venture between Housing Development Finance Corporation Limited (HDFC
Ltd.), India’s leading housing finance institution and The Standard Life Assurance
Company, a leading provider of financial services from the United Kingdom. Their
cumulative premium income, including the first year premiums and renewal premiums is
Rs. 672.3 for the financial year, Apr-Nov 2005. They have managed to cover over 11,
00,000 individuals out of which over 3, 40,000 live have been covered through our group
business tie-ups.

 MAX NEW YORK LIFE INSURANCE CO.

LTD.Max New York Life Insurance Company Limited is a joint venture that brings
together two large forces- Max India Limited, a multi-business corporate, together with
New York Life International, a global expert in life insurance. With their various
Products and Riders, there are more than 400 product combinations to choose from. They
have a national presence with a network of 57 offices in 37 cities across India.

 ICICI PRUDENTIAL LIFE INSURANCE COMPANY LTD.

ICICI Prudential Life Insurance Company is a joint venture between ICICI Bank, a
premier financial powerhouse and prudential plc, a leading international financial
services group headquartered in the United Kingdom. ICICI Prudential was amongst the
first private sector insurance companies to begin operations in December 2000 after
receiving approval from Insurance Regulatory Development Authority (IRDA). The
company has a network of about 56,000 advisors; as well as 7 banc assurance and 150
corporate agent tie-ups.

 OM KOTAK MAHINDRA LIFE INSURANCE CO. LTD.

Kotak Mahindra Old Mutual Life Insurance Ltd. is a joint venture between
Kotak Mahindra Bank Ltd. (KMBL), and Old Mutual plc.
 BIRLA SUN LIFE INSURANCE COMPANY LTD.
Birla Sun Life Insurance Company is a joint venture between Aditya Birla Group and
Sun Life financial Services of Canada.

 TATA AIG LIFE INSURANCE COMPANY LTD.

 SBI LIFE INSURANCE COMPANY LIMITED

 ING VYSYA LIFE INSURANCE COMPANY PRIVATE LIMITED

 ALLIANZ BAJAJ LIFE INSURANCE COMPANY LTD.

 METLIFE INDIA INSURANCE COMPANY PVT. LTD.

 AMP SANMAR ASSURANCE COMPANY LTD.

 DABUR CGU LIFE INSURANCE COMPANY PVT. LTD

 ROYAL SUDRAM ALLIANCE INSURANCE COMPANY LIMITED

this joint venture bringing together Royal & Sun Alliance Insurance and
Sundaram Finance Limitedstarted its operations from March 2001. The company is Head
Quartered at Chennai, and has twoRegional Offices, one at Mumbai and another one at
New Delhi.

 BAJAJ ALLIANZ GENERAL INSURANCE COMPANY LIMITED

Bajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Auto
Limited andAllianz AG of Germany. Both enjoy a reputation of expertise, stability and
strength. Bajaj AllianzGeneral Insurance received the Insurance Regulatory and
Development Authority (IRDA) certificate of Registration (R3) on May 2nd, 2001 to
 conduct General Insurance business (including Health Insurance business) in India. The
Company has an authorized and paid up capital of Rs 110 crores. Bajaj Autoholds 74%
and the remaining 26% is held by Allianz, AG, and Germany.

 ICICI LOMBARD GENERAL INSURANCE COMPANY LIMITED

ICICI Lombard General Insurance Company Limited is a joint venture between ICICI
Bank Limited andthe US-based $ 26 billion Fairfax Financial Holdings Limited. ICICI
Bank is India's second largest bank; while Fairfax Financial Holdings is a diversified
financial corporate engaged in general insurance,reinsurance, insurance claims
management and investment management.Lombard Canada Ltd, a groupcompany of
Fairfax Financial Holdings Limited, is one of Canada's oldest property and
casualtyinsurers. ICICI Lombard General Insurance Company received regulatory
approvals to commencegeneral insurance business in August 2001.

 CHOLAMANDALAM GENERAL INSURANCE COMPANY LTD.

Cholamandalam MS General Insurance Company Limited (Chola-MS) is a joint venture
of theMurugappa Group & Mitsui Sumitomo. Chola-MS commenced operations in
October 2002 and hasissued more than 1.4 lakh policies in its first calendar year of
operations. The company has a pan-Indian presence with offices in Chennai, Hyderabad,
Bangalore, Kochi, Coimbatore, Mumbai, Pune, Indore,Ahmedabad, Delhi, Chandigarh,
Kolkata and Vizag.

 TATA AIG GENERAL INSURANCE COMPANY LTD.

Tata AIG General Insurance Company Ltd. is a joint venture company, formed from
the Tata Group andAmerican International Group, Inc. (AIG). Tata AIG combines
the strength and integrity of the TataGroup with AIG's international expertise and
financial strength. The Tata Group holds 74 per cent stakein the two insurance ventures
while AIG holds the balance 26 per cent stake.Tata AIG GeneralInsurance Company,
which started its operations in India on January 22, 2001, offers the complete range of
insurance for automobile, home, personal accident, travel, energy, marine, property and
casualty, aswell as several specialized financial lines.
  RELIANCE GENERAL INSURANCE COMPANY LIMITED.
 IFFCO TOKIO GENERAL INSURANCE CO. LTD.
 EXPORT CREDIT GUARANTEE CORPORATION LTD.
 HDFC-CHUBB GENERAL INSURANCE CO. LTD.

CHAPTER 1.3
INSURANCE POLICY COMPONENTS

When choosing a policy, it is important to know but insurance works. Three vital parts of
insurance policies area unit the premium, policy limit, and deductible. A firm understanding of
those ideas goes an extended method in serving to you decide on the policy that most accurately
fits your wants.

A policy's premium is its worth, typically expressed as a monthly cost. The premium is decided
by the underwriter supported your or your business's risk profile, which may include
creditworthiness. For example, if you own many valuable cars and have a history of reckless
driving, you'll doubtless pay a lot of for associate automotive vehicle policy than somebody with
one mid-range sedan and a perfect driving record. However, completely different insurers could
charge different premiums for similar policies; therefore, finding the price that is right for you
requires some legwork.

The policy limit is the maximum amount an insurer will pay under a policy for a covered loss.
Maximums may be set per period (e.g., annual or policy term), per loss or injury, or over the life
of the policy, also known as the lifetime maximum. Typically, higher limits carry higher
premiums. For a general life assurance policy, the maximum amount the insurer will pay is
referred to as the face value, which is the amount paid to a beneficiary upon the death of the
insured.

The deductible is a specific amount the policy-holder must pay out-of-pocket before the insurer
pays a claim. Deductibles perform deterrents to massive volumes of very little and insignificant
claims. Deductibles will apply per-policy or per-claim betting on the underwriter and also the
kind of policy.

Policies with very high deductibles are typically less expensive because the high out-of-pocket
expense generally results in fewer small claims. In regards to insurance, those that have chronic
health problems or want regular medical attention ought to seek for policies with lower
deductibles. Though the annual premium is higher than a comparable policy with a higher
deductible, less expensive access to medical care throughout the year may be worth the trade-off.

CHAPTER 1.4

TYPES OF INSURANCE.
All too often we hear about the various types of the insurance policies without really considering
what they are and most importantly, what they protect. The major truth is there are 2 main types
of insurance namely Life Insurance and General Insurance which covers different aspects in
your life.

Life insurance

Life insurance is such insurance coverage that pays a certain amount of the money to the insured
or their specified beneficiaries upon a certain event such as the death of the individual who is
insured. The coverage period for the life insurance policy is more than a year, hence it includes
the periodic premium payment either monthly, quarterly or annually. Life policies are the legal
contracts and the terms of the contract describe the limitations of the insured events. Specific
exclusions are often written into the contract to limit the liability of the insurer; common
examples are the claims relating so suicide, fraud, war, riot and civil commotion. The risk
covered a life insurance policy are:

1. Premature Death
2. Income during retirement
3. Illness

Some Main products of the Life Insurance Policy are as follow:

1. Whole life
2. Endowment
3. Term
4. Life annuity plan
5. Investment Linked
6. Child plans
7. Money back plans or cash back plans

GENERAL INSURANCE
General Insurance is an insurance coverage policy that covers a person from losses and the
damages other than of those covered by Life insurance policy. General insurance provides the
payments which depends on losses from the financial event. General insurance is typically
defined as of any insurance that is so determined to be life insurance.

The risks covered by general insurance are:

a) Property loss, for the stolen house or burnt house.

b) Liability arising from the damage caused by the owner
c) Accidental death or injury.

General insurance can be categorized as follows:

 Vehicle Insurance: Vehicle Insurance can be classified into the two groups, two and four
wheeled insurance.
 Health Insurance: Health insurance includes an individual health insurance, the family
floater health insurance, the comprehensive health insurance and the critical illness
insurance.
 Travel Insurance: Travel insurance can be further grouped into student travel insurance,
individual travel policy, family travel policy, and senior citizen health insurance
 Home Insurance: Home insurance are the homeowner's insurance. Home insurance
secures a house and its contents.
 Marine Insurance: Marine cargo insurance covers the goods, freight, cargo and the
other interests against the losses or damage during transit by the rail, road, sea and air.
 Commercial insurance: Commercial insurance encompasses the solutions for all sectors
of the industry arising out of the business operations.

CHAPTER 1.5
 BENEFITS OF INSURANCE.

The following are some of the benefits of insurance:

 Shipping of risks: Insurance is a social device whereby individuals and businessmen

shift specific risks to the insurer beneath agreement of insurance. This helps the
businessman to concentrate their attention their attention on important business issues.
 Providing pecuniary security: Insurance gives a sense of security to the policyholder. In
the event of loss or damage to the insured property, he is indemnified to the extent of the
actual loss and his financial condition remains unaffected by the loss/damage. In life
insurance, a life policy grants pecuniary protection to the dependents, where the
policyholder dies before the date of maturity of the policy, and to the policyholder where
he survives till the maturity of the policy.
 Assuring expected profits: An insured businessman or policyholder can enjoy normal
expected profits as he would know: be required to make provision or allocate funds for
meeting future contingencies
 Safeguarding interest of consumers: As the businessman is duly insured against the
risks that can cause losses, and he can hope for a normal profit margin, he need not
maintain large reserves of finds to meet the consequences of unforeseen uncertain
occurrence of losses. This enables him to charge lower prices and protect the interests of
consumers
 Improving credit standing: Insurance has the effect of banks and financial institutions.
Life policy is a value and one can raise an emergency loan against it. Improving credit
standing of businessman as the assets which are insured are easily accepted as security
for loans by co
 Providing investment opportunity: A life insurance Contract provides not only
protection but also Investment opportunity as pension in old age. It is a contingent
contract and not a contract of indemnity. In case of life insurance, the payment is
guaranteed and in most of the policies, bonuses are also paid along with the guaranteed
amount.
 Encouraging savings: It is particularly true for life insurance. The insured person must
regularly save out of his current income an amount equal to the premium to be paid. The
 policy gets clasped if the premium is not paid on time. Thus, life insurance is a
compulsory form of saving.
 Capital Formation: Insurance companies mobilize the saving of community through
collection of premiums and invest these savings in productive channels. Institutional
investors, these companies provide funds for financing economic development plans.
Thus, insurance serves as an agency of capital formation.
 Generating employment opportunities: With the growth of insurance business, the
insurance companies are creating more and more employment opportunities.
 Promoting social welfare: Policies like old-age pension scheme; policies in respect of
education of children or marriage of children or marriage of children provide a sense of
security to the poor policyholder, ensuring social welfare.
 Helps controlling inflation: Insurance extracts the money in supply through collection
of premium amounts from all the policyholders. These funds when provided for
production narrow down the inflationary gap.

CHAPTER 1.6
 FUNCTIONS OF INSURANCE

The functions of insurance may be discussed as follows:

 Diffusion of risks: Insurance may not be avoid uncertainties associated with life, in
general and business in particular, but it is able to diffuse the impact of the occurrence of
loss by equitably distributing the loss over large number of policyholders. For example,
in the case of fire insurance, all the policyholders pay premiums, but all of them do not
suffer losses caused by fire. Only those who actually suffer the loss are compensated out
of the common pool.
 Providing protection: The main function of insurance is to provide protection against
risk of loss. The insurance policy covers the risk of loss. The insured person is
indemnified for loss suffered by him. Insurance thus provides financial protection to the
insured. Life insurance policies may also be used as collateral security far raising loans.
 Encouragement of savings: Insurance not only provides protection against risks but also
a number of other incentives which encourage people to insure. Since regularity and
punctuality provides premium of payment of premium is a prerequisite for keeping the
policy in force, the insured feels compelled to save.
 Promotion of efficiency and motivation: In contributed greatly in the advancement of
industry and trade. The large-scale industrial and commercial organizations that exists
today are the result of the various services provided by the insurance companies. With the
elimination of worries and uncertainty of risks, businessmen feel motivated and
encouraged to take risks to enhance their profit-earning. This also helps in improving
their efficiencies.
 Prevention of losses: The insurance companies help in prevention of losses as they join
hands with those institutions which are engaged in loss-prevention measures. The
reduction in losses means that the insurance companies would be required to pay lesser
compensations to the assured and manage to accumulate more savings, which in turn will
assist in reducing the premium.
 Providing funds for investment: Insurance provides not only protection but also capital
to the society. Usually, accumulated funds through savings in the form of insurance
premium are invested in economic development plans or productivity projects. The vast
 economic reservoir built up by the insurance sector, furnishes a good means of capital
formation in the country.
 Solution to social problems: One of the most important functions of insurance is to take
care of many social problems. At present, we have insurance against industrial injuries
accidents, old age, disability or death, etc. In the absence of insurance, the businessmen
and individuals will have to provide for all such risks. With no or little savings for
investment economic growth would be possible. Thus, insurance is of great service to the
society as a whole, and acts as a good means of solving many social problems

MARKET SHARE OF TOP 10 INSURANCE COMPANIES:

•LIC (Life Insurance Corporation of India) still remains the largest life insurance company
accountingfor 64% market share. Its share, however, has dropped from 74% a year
before, mainly owing to entry of private players with innovative products and better sales
force.•ICICI Prudential Life Insurance Co Ltd is the biggest private life insurance company in
India. Itexperienced growth of 58% in new business premium, accounting for increase in market
share to 8.93%in 2007-08 from 6.97% in 2006-07.•Bajaj Allianz Life Insurance Co Ltd
has reported a growth of 52% and its market share went up to6.98% in 2007-08 form 5.66% in
2006-07. The company ranked second (after LIC) in number of policies sold in 2007-08, with
total market share of 7.36%.•SBI Life Insurance Co Ltd in terms of new number of policies sold,
the company ranked 6th in 2007-08. New premium collection for the company was Rs 4,792.66
crore in 2007-08, an increase of 87%over last year.•Reliance Life Insurance Co Ltd
Total collected was Rs 2,792.76 crore and its market share went up to2.96% from 1.23% a year
back. It now ranks 5th in new business premium and 4th in number of new policies sold in 2007-
08.•HDFC Standard Life Insurance Co Ltd with an income of Rs 2,680 crore in FY 2007-08,
registering ayear-on-year growth of 64%. Its market share is 2.88% and it ranks 6 th among
the insurance companiesand 5th amongst the private players.
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•Birla Sun Life Insurance Co Ltd market share of the company increased from 1.22% to 2.11%
in 2007-08. The company moved to the 7th position in 2007-08 from 8th a year before, pushing
down Max NewYork Life insurance company.•Max New York Life Insurance Co Ltd has
reported growth of 73% in 2007-08. Total new businessgenerated was Rs 641.83 crore as against
Rs 387.51 crore. The company was pushed down to the 8th position from 7th in 2007-08.•Kotak
Mahindra Old Mutual Life Insurance Ltd the fiscal 2007-08, the company reported growth
of 80%, moving from the 11th position to 9th. It captured a market share of 1.19% in 2007-08.
Last year the company doubled its branch network to 150 from 74.•Aviva Life Insurance
Company India Ltd ranking dropped to 10th in 2007-08 from 9th last year. It has presence in
more than 3,000 locations across India via 221 branches and close to 40
bancassurance partnerships. Aviva Life Insurance plans to increase its capital base by Rs 344
crore. With the freshinvestment, total paid-up capital of the insurer would go up to Rs
1,348.8 crore
MARKETING OF INSURANCE IN INDIA
Insurance is in a manner of speaking the last frontier in the financial sector to open. It is also a
sector,which leads to benefits across the full spectrum, from the individual who now have wider
choices, to theeconomy, which see increased savings, to the infrastructure sector, which can look
forward to long termfunding being available. In an under-insured economy, newer channels of
distribution have to be utilizedto intensify the reach of insurance both in urban and rural markets.
This will create huge employmentopportunities not only within insurance companies but also as
agents and consultants of insurancecompanies.Marketing Mix PoliciesDifferent companies can
choose to position themselves differently and hence the Marketing Mix isdifferent. However,
there are certain common characteristics that one can cull out from the possiblestrategies that
companies adopt.
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Product:The development of flexible products to suit individual requirements is what will

differentiate thewinners from the also-rans. The key to success is in providing insurance
solutions, not standardizedinsurance products. The concept of riders/optional benefits has already
been a huge innovation broughtabout by the new players, which has led to customization of
products for individual needs. However,companies may differentiate themselves on the basis of
product segments that they choose to focus onand excel in.Place:Different companies may
however choose different channels and different geographies to focus on. Thechannel options are
- tied agency force, corporate agents and brokers and this is an area where differentcompanies
will make different choices. Many companies like HDFC Standard Life are focusing
on allchannels whereas companies like Max New York Life are focusing on the tied agency
force only.Customer interface will be a key challenge for life insurance companies and includes
every thatinteraction that the customer has with the company, such as sales, new business
underwriting, policyservicing, premium payments, claim processing and so on. Technology can
play a crucial role indelivering the highest standards of service set by the company and it will be
imperative for any serious player to excel in all of these.Price:Price is a relevant differentiator
only in two segments - pure term insurance and in pure annuities. Heretoo, service delivery and
financial strength will need to be present at a minimum acceptable level for price to be a
relevant differentiator. In case of savings oriented products, long-term returns generated aremore
relevant than just the price of the product. A focus on generating good investment
performanceand keeping a tight control on costs help in generating good long-term maturity
value for customers. Norms have been laid down on all of these by IRDA and adhering to these
while delivering good returnswill be a challenge.Promotion and Advertising:The level of demand
is latent and will have to be activated considerably. The market needs to bedeveloped. Greater
awareness of insurance and the need to have it as a protection tool rather than as atax planning
measure needs to be appreciated by the Indian people. Various communication tools
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including advertising, direct marketing and road shows contribute to all this and different
companiestake different approaches on these.Process: Cashless settlement:One of the most
defining and customer-friendly changes that we’ve seen in recent years relates to theway claims
settlements are made. The advent of the third-party administrator (TPA) regime hasfacilitated the
transition to the hugely convenient era of cashless settlement of health and auto insuranceclaims.
TPAs are entities who process claims on behalf of insurers: the IRDA licenses them after it
issatisfied that they have the financial strength, the trained manpower, the infrastructure and the
skills toundertake this activity. Likewise, with auto insurance, the TPA ties up with garages
and authorizedservice centers for cashless settlement of auto insurance claims.Lower
premiums:The spirit of competition and the broadening of the risk experience of insurance
companies havecontributed to a fall in premiums over the years. That’s because, other things
being equal, an insurer who covers the lives just of 10 people bears a higher risk than an insurer
who covers the lives of, say,100 people. Further, a broader base will provide greater efficiencies
on costs such as distribution,management and claims. A broad basing of the mortality
experience, therefore, gives insurers theelbowroom to compete by lowering premiums, and that
trend is expected to continue.Premium payment flexibility:Insurers have imparted certain
flexibility to premium payment options in order to address this concern.For instance, one now
have the option to pay your premiums upfront, which is then carried forward for the tenure of the
policy. The yearly premiums are drawn from the initial corpus. Insurers have alsointroduced the
concept of ‘automatic cover maintenance’ to protect your policy from lapsing owing toyour
omission to pay your premium on time. Under this, in the event of your not paying the
premium,the insurer dips into your investment account to the extent of the premium. Of
course, this comes withan in-built drawback: your investment portion diminishes year on year
to the extent of the amount paidto cover your risk.Physical Evidence:
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This can play a significant role for marketing in the Indian scenario. Since Internet users
arecomparatively lesser than countries such as US, the offline mode will be preferred in India.
Although thedistribution model is largely agent-based, wherever the customer is in contact with
the company, thisfactor can play a significant role in luring the customer.People:The most
important factor that materializes sales and maintains customer relationships on a long-term basis
is this factor. No matter what distribution strategy a company adopts, customer relationship
has to be taken care of in order to maintain the customer base on a long-term basis.
DISTRIBUTION CHANNELS IN INSURANCE SECTOR:-
An insurance cover is an intangible product evidenced by a written contract known as the
‘policy’.Insurers market various insurance covers either directly or through various distribution
Channels— individual agents, corporate agents (including Bancassurance) and Brokers. The
marketer in thedistribution network is in direct interface with the prospect and the customer.Life
insurance products aresold through individual agents and many of them have this as their only
career occupation. Generalinsurance products are sold through individual agents, corporate
agents and brokers.Distributionchannels such as agents are licensed by the IRDA. To get an
agency license, one has to have certainminimum qualifications; practical training in insurance
subjects and pass an examination conducted bythe Insurance Institute of India.IRDA regulations
on licensing of agents/brokers lay down the code of conduct for individual agents, corporate
agents and brokers. A separate note on the code of conduct isappended to this note.Thus it is
seen that the dos and don’ts for these intermediaries are given clearly atthe point of sale as well
as in the event of a claim. Service does not end with the customer receiving hisdocument; it in
fact only begins here. After sales service is as important or even more important – likewhen a
refund has to be made or when a claim has to be made.One of the issues that is of great
concernaffecting professionalism in insurance activities is resorting rebating by intermediaries.
Rebating is prohibited as per Section 41 of the Insurance Act, 1938 and the public are advised
not to deal withintermediaries offering rebate of any kind.
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Rebating means a share of commission receivable by the agent/broker is given to the

prospect/client.This is done to attract the client in the purchase of insurance contract by offering
cash. Competitionamong agents/brokers is so cut-throat, some agents indulge in such unethical
practices. Public areadvised not to ask for any prohibited rebates in premium since commission
payment to an agent is theonly income for some to take care of their families. Similarly, agents
are also advised not to indulge insuch practices which could cause them loss of agency
income.Why there is need for alternate distribution channels?1. To increase insurance
penetration in the country.2.To differentiate on basis of customer service. To retain and attract
new customers soas to expand business3. To increase insurance awareness and knowledge
among people.4. To satisfy the needs of more demanding customers.5. To improve cost
efficiency in insurance distribution.6. What determines choice of distribution channel for an
insurance company?7. Where are the customers?8. What is target customer profile?9. Which
product (linked, traditional, term etc.) can be sold through distribution channel?10. Which
channel provides best buying experience and value to target customer segment?11. The customer
preferences vary by market segment like geography, age, income, life style etc, andmarket
characteristics change over time.THE EMERGENCE OF NEW DISTRIBUTION
CHANNELS:There was a time when captive agents wrote the bulk of an insurance company’s
business. Butincreasingly people are buying insurance products from independent producers and
institutionalchannels such as banks, broker-dealers, IFAs and wire houses. In a way, this is
good news for insurancecompanies. Managing a captive agency force is an expensive business.
Studies estimate that insurancecompanies invest anywhere between $65,000 and $200,000 in
training each agent. This investment oftendoes not deliver the desired return because there is a
great deal of attrition among agents. Besidestraining, there are huge operational overheads
attached to maintaining a captive force.Independent
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producers and institutional channels are likely to bring new efficiencies into the distribution
framework and corner a larger percentage of the policies written. For instance, banks and large
broker-dealersalready have huge networks in place, existing relationships with customers and
brand equity. If insurance companies are able to position themselves as preferred partners with
these channels, theycould quickly increase their market share and at the same time bring
down their cost per businessacquisition.THE CONSUMER IS EVOLVING AND SO ARE HIS
NEEDS:The way consumers look at insurance products today is completely different from how
they looked atthem a few years ago. Insurance products are no longer about just covering risks
and lives. Since the1980s insurance in many markets has increasingly become a wealth-
management product. Consumersare seeking variety and customizability in their investment
portfolios. The demographics are also infavor of insurance companies. The average lifespan is
increasing and so are standards of living. This iscreating demand for products that not only offer
protection but also double up as investments. Insurancecompanies have an opportunity to bring
innovation into their product mix. They can gain a competitiveadvantage by quickly launching
innovative products that are aligned with evolving consumer needs. Todo this, insurance
companies must be able to understand consumer needs better and have agile systemsthat let them
launch products quickly. To capitalize on these opportunities, however, insurancecompanies
must get closer to the customer by expanding their distribution network. They have toincorporate
new and alternative channels, arm the sales forces with effective sales tools and
positionthemselves as preferred partners with their channels.In most markets, except
Asia, insurance carriersgenerate more than 80% of their business through alternative distribution
channels such as bancassurance, broker-dealers, wire houses and IFAs. The key challenge for
insurers is to attract andretain these distribution channels by:• Making it easy for channels to do
business with them• Providing good and quick underwriting support• Delivering differentiated
service to top performers.• Providing proactive service• Launching incentive plans and contests•
Managing commissions in a more efficient manner in a marketplace where products are
increasingly becoming commoditized, the big differentiator that insurers can offer their channels
is ease of doing business.
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Insurance companies can position themselves as preferred providers by delivering on key areas
such as:• New business and underwriting support• Marketing and sales support• Underwriting
speed• Client services• Commission rate -at how insurance companies can streamline their
distribution networks, address the business and technological challenges and capitalize on the
opportunities. Changes in distribution pattern of Life Insurance after IRDA came into
existence.“MULTIPLE
CHANNELS”BANKSCORPORATESBROKERSTELEMARKETING/WORK-SITE
MKTG.INTERNET6. OTHER DISTRIBUTION CHANNEL-Other distribution channels that
have promise are
•
Department stores
•
Post offices
•
Retail chain
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. Basically, these channels provide the convenient features and simple underwriting. These
channels canalso be used to generate leads for a more complex sale.7. INVISIBLE INSURER In
this model, the insurance company or its representative is not the entity marketing the products.
Theinsurance cover is sold by an automobile /credit card company as an add-on product
leveraging the brand of the retailer. The risk is carried by the insurance company, which
underwrites it. . Products likecreditor insurance, automobile insurance, and credit card related
insurance could be distributed usingthis channel. This model can be adopted in all market
segments for the lines of business mentioned. It isalready prevalent in some areas like credit card
insurance and crop insurance for agricultural loans. Thenew players are also attempting this
model.Essence The success of marketing insurance depends on understanding the social and
cultural needs of the target population, and matching the market segment with the suitable
intermediary segment. In addition amajor segment of the Indian population has low disposable
income, meaning that every penny won will be obtained after a lot of persuasion and the
expected value for money is high. All intermediaries can'tsell all lines of business profitably in
all markets. There should be clear demarcation in the marketingstrategies of the company from
this perspective. Clients should also receive price differentials for usingdifferent channels. This
is not a new concept, as the Public sector Property & Casualty companies aregiving discounts in
lieu of agency commission. The channel composition should not be homogeneous but should
reflect the larger society. For example:•Agents from different economic, social strata and
different age and gender.•Bancassurers ranging from multinational banks to micro credit lending
agencies.•Brokers stretching from corporates to NGOs to milk co-operatives
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These intermediaries need to be empowered with the right learning, training and sales tools
andtechnology enablers. Coupled with the right product mix, this will help the insurers to survive
andflourish in this competitive market.The players have started exploring new channels of
distribution just the way the developed economieshave done it in the past. Some of the new
channels of distribution are marketing through a dedicated (a)Sales force (tied agents),(b)
Corporate agents (DSA like),(c) Bancassurance,(d) Work-site marketing,(e)Independent
financial advisors (individual qualified agents) telemarketing (DM),(f) Retail chains,(g)Internet,
(h) NGOs,(i) Brokers etc.The mantra is innovation and diversification. Distribution is
morecrucial for the life insurer, which needs to have a mass retail base to minimize the chances
of beingadversely affected by any casualty.The companies are using different models each model
has its prosand cons, the bancassurance model is cost-effective and is also quite efficient for
market penetration.This is for the simple reason that since the banking and insurance industry
share a common target of financial services customers, the existing customer base of banks can
be targeted rather than building anew one. Private players are currently following various
permutations and combinations of the abovementioned distribution strategies and trying to grab
the market share in the country.Distribution channels preferred by consumersMany People still
rely on traditional means to get Insurance Policies i.e. Agent though they are alsotapping on new
means like Banks & Cell phone.