ESSENTIAL FUNCTIONS OF A FINANCIAL INTERMEDIARY

INSURANCE
2005 Anand Avaknavar 2007 Ashish Baghel 2027Sandeep K Biswal

What is in store
Origin and history Global scenario Indian context Essential functions Indian insurance market Case studies

What is Insurance?
Insurance is a contract in which a sum of money is paid to the assured as consideration of insurers incurring the risk of paying a large sum upon a given contingency
- Justice Tindal

Category
Insurance Life General

Auto
Business

Health
Fire

Life Insurance
Life insurance is a written contract between the insured and the insurer, that provides for the payment of the insured sum on the date of the maturity of the contract or on the unfortunate death of the insured, whichever occurs earlier.

General Insurance
General insurance or non-life insurance policies, including automobile and homeowners policies, provide payments depending on the loss from a particular financial event. General insurance typically comprises any insurance that is not determined to be life insurance.

Health Insurance
Just like one looks to safeguard ones wealth, these policies ensure guarding the insurer's health against any calamities that may cause long term harm to ones life and even hamper ones earning ability for a lifetime. Some examples of this type of policy are mediclaim policy, personal accident, group accident, traffic accident, etc.

Business Insurance
Risks of loss of profits/business, goods, plant and machinery are most profound in case of business. Under this head they cover the most widely used policies that cover a business from any loss of the above kind. Some of these policies are burglary insurance, shopkeepers insurance, key-man insurance, marine insurance, public liability insurance, workmen compensation insurance, air transit insurance, fidelity guarantee insurance etc.

Automobile Insurance

Auto Policy is required to be taken to cover the risks that arise to the owner, vehicle and third party. This includes the Compulsory Vehicle Policy (In India, by the Motor Vehicles Act, every car owner is required to covered against Act risks) and the Comprehensive Vehicle Policy.

Fire Insurance

This policy is required to be taken to prevent any loss of profits / property from incidental fire. Eg: fire insurance and fire consequential loss policy.

The beginning and thereafter

1688, Lloyds coffee house, London 1753, birth of first insurance company 1759, the Presbyterian synod of Philadelphia sponsored the first life insurance corporation 1840, insurance took off in a big way, after the infamous New York fire

Global insurance industry

Asset under management in the global insurance sector is more than $19 trillion and its close to 12% of global financial assets Insurance premium volume is 7% of global GDP Life insurance accounts for 58.2% of total premium Europe is the worlds largest market for insurance

Insurance in India - History

Phase
Phase I a. Life Insurance

Period
1818 to 1956 (about 138 yrs)

Industry
Many (245) private sector companies only, competitive market.

b. General Insurance
Phase II a.Life Insurance

1850 to 1972 (about 122 yrs)

1956 to 2000 (about 44 yrs) 1972 to 2000 (about 28 yrs)

Many (107) private sector companies only, competitive market.

Nationalization, public sector monopoly, only one company. or State

b.General Insurance

Nationalization, public sector monopoly, only one company with its four subsidiaries. Opened to the entry of private domestic and foreign companies, mixed sector of public and private sector units, oligopoly of public sector companies (14 life insurance and 12 general 13 insurance companies)

Phase III Life Insurance and General Insurance

After 2000
5/2/2012

Overview
Total asset under management is around $334 bn Total premium collection stood at $28.24 bn Over all growth rate is around 16% Close to 24.6% of expenses by GoI is funded by LIC Industry penetration rate is about 20% in life segment Insurance density stood at around $70

Major players

Six essential functions

Transfer of resources across time and space Allocation of risk Economics of pooling Payment system Informational role of asset prices Managerial incentives and decision making

Transfer of resources across time and space

Collection of premium upfront Deposits

Insurer
Calculating risk Hold cash in hand Make investment Decisions

Secured Investments Loan and Development Sector

Customer (Surplus unit)

Financial Markets (Deficit unit)

Allocation of risk
Diversification is the main tool Reinsurance Hedging Insurance linked securities Asset-Liability management Regulatory requirements

Economics of pooling

Law of Large Numbers

Payment System

Providing information on asset prices

Terms and conditions of the policy Investment Return calculation on term to maturity policies Risk and probability description to customers Tax benefits

Dealing with incentive problems

Misusing confidential information and colluding with fraudsters In india 29% fraud are in collusion with agents and 24% are due to fake documents insurance\intermediaries\agents Fake claims (cashless transactions) Introduction of non regulated products

Too big to fail

Case Study 1

Case Study 2

THANK YOU

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