Insurance - Pillai

8/8/2019 Insurance - Pillai

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Insurance Management



Agenda

What is insurance?

Types of insurance

Indian insurance industry - Important milestones

Indian Insurance ± Regulatory Framework

Principles of insurance

Underwriting

Reinsurance



Insurance???

Rabindranath Tagore wrote a short story titled Inheritanceabout an old miser who loved his money. Sick of this, his onlyson leaves him.

As the thought of preserving his wealth for his grandson seizesthe miser, he befriends a child playing on the street and lures

him to a desolate underground chamber containing his wealth.He then diabolically leaves the boy, removes the ladder, theonly means to exit the chamber, so that the boy could be the

Yaksha or the guardian of his wealth.

The man, however, soon finds out that the child he lured to

death was his only grandson, and this drives him insane. The story is about a time long gone. Mercifully, today we have

insurance that frees us from anxieties over various risks to ourassets. In the past six decades, the importance of insurance inour lives has gone up and more so, since 2001, when theprivate players allowed in the insurance sector.



Insurance in simple terms means a contract between the person who buys Insurance and an Insurance company whosells the Policy

By entering into contract, the Insurance company agrees to paythe Policy holder or his family mem bers a predetermined sumof money in case of any unfortunate event to the Policy holder at a predetermined fixed sum paya ble which is, in normalterms, called Insurance Premiums

A person who seeks protection against such loss is termed asinsured

The company that promises to honour the claim, in case suchloss, is termed as insurer

What is insurance? (Contd.)



Protection

Savings

Investment

Tax planning

At least two of these needs - savings and protection - becomestronger than ever before in uncertain times. That is whyreal insurance tends to be relatively recession proof

Fundamental reasons for buying insurance



Types of Insurance

Insurance

Life Non-Life

Fire Marine Misc.Human Life Value

Indemnity



Indian Insurance industry - Important milestones!!

1818 - 1st life insurance co., Oriental Life InsuranceCompany, Kolkatta

1850 ± 1st general insurance co., Triton Insurance Co. Ltd,Kolkatta

1870 ± Bom bay Mutual Life Assurance Society

1928 - Indian Insurance Companies Act 1938 ± Insurance Act

1956 - Nationalisation of life insurance business

1972 - Nationalisation of general insurance business

2000 ± Insurance sector opened for private players



Circa 1998

Life insurance ± LIC ; General insurance ± 4 general insurers;

Due to lack of savings instruments, products such as

endowment and money- back life policies were very popular.

However, term policies were availa b

le for no more than 7years

Industry provided as much variety to the product range &

services as was permissi ble in a highly regulated insurance

environment

There was no room to customise policy to suit specific needs±

or negotiate lower premiums

Hot pursuit of the friendly± but extremely slippery±

neigh bourhood insurance agent in order to buy the cover!!



Circa 1998- Highlights

Tax re bate, and not risk mitigation, was the major

motivation for buying life insurance

As car sales picked up in the 90s and in the last 8-9 years,

people had to mandatorily buy auto policies.

Few bought health insurance policies. Those who did, bought it for the annual Section 80D tax deduction of up to

Rs 10,000, a limit enhanced in Budget 2007.



Circa 2009-10 A promise of greater customer friendliness²something absent in the

monopoly era

Tyranny of choices ± in num ber of insurers as well as products and

add-ons on offer

Customisation of policies possi ble

Premiums driven down over the years due to b

roadening of the risk base of insurers, and their superior mortality experience

In the same period, the needs of Indian consumers changed

dramatically. Their incomes went up, and the new wealth was used to

acquire assets at a scorching pace. Suddenly, there was a lot that

needed protection² be it life, health, cars or homes.

On account of intense marketing strategies adopted by private

insurance players, the market share of state-owned insurance

companies like GIC, LIC have already come down to 70 % in last 4-5

years from over 97 %



After the entry of private companies in 2001, today there are 21 lifeinsurance players

The launch of ULIPs had been a turning point²80 % of the policies sold

today are ULIPs.

Ulips have brought transparency. A customer now knows where his

money is being invested.´ But, with this has come rampant mis-selling byagents who constantly urge investors to switch to new policies every three

years. This deprives the investor of the product¶s long-term advantages

Now, there are better-trained insurance advisors. You can also buy policies

from distri bution companies that sell policies only of a particular company

or from b

rokers with multi-company offerings The customer, too, has moved from where tax re bates triggered the

purchase of life insurance policies, to where there is value by way of

security and also gainful investment returns

Today ± Life Insurance



The general insurance sector had b

een relatively calm till January2007, when detariffing of fire, engineering and auto segments

freed companies to price premiums

Today, there is demand for insurance of assets because

entrepreneurs have realised the need for protection and not just

because their financiers mandated insurance Catastrophic events in the recent past have made people seek

protection for their lives as well as property

The demand for health insurance is also on the rise. The middle

class is looking more and more towards insurance to finance their

healthcare needs. Group health insurance covers have multiplied,with employers preferring insurance covers to in-house schemes

The demand for professional indemnity and other lia bility covers is

on the rise

TodayToday ± ± Non Life Insurance Non Life Insurance



More focus on retail customers Covers for health, personal accident, car and property to be

charged less premiums for good risks, such as a person with

no-accident record, and higher premiums for bad risks

More specialised and personalised products in health insuranceand pensions

Buying insurance on the Net, already striking roots in India,

expected to catch up

Better, technology- backed customer service also expected

TomorrowTomorrow



Insurance industry overall has registered a growth of 11.35% in

premium collection

The life insurance sector has grown by around 13% while the non-life

segment witnessed a growth of around 8% in the first-half of FY 10,

according to the IRDA

State-run LIC registered a growth of 35%. The 21 private life insurers

posted a negative growth of 15 % in fresh premium income

The pu blic sector continues to have its sway over the insurance

industry despite tough competition from the multiple players

± Of the new premium generated, 65% still goes to the LIC

± LIC services 23 crore individual policies, which account for 90%

of the total 25.93 crore such policies in the country

± LIC's assets of Rs 8.04 lakh crore account for 95% of the total

assets of Rs.8 47 lakh crore in the life insurance industry as a

whole

Industry Update



The benefits accruing to the government too are many. For instance,

± The corporation tax from LIC in 2007-08 was Rs 2,627 crore. This is

in addition to the dividend income and lakhs of crores of funds which

the government is a ble to use for infrastructure development etc. And

all this, against its miniscule investment of just Rs 5 crore in the giant

LIC

± Also, the four pu blic sector general insurance companies earned a

com bined profit of Rs.2,794 crore in 2007-08 and distri buted a

dividend of Rs.449.49 crore to the government of India where as the

government' stake in them is Rs.550 crore

The private sector insurance players have started exploring the rural

markets in which until recently the state-run companies had the monopoly

Industry Update



A noticea ble trend in the insurance industry in the last five years is the

rapid change in the knowledge level as well as expectations of the

customers

± With increasing awareness a bout the versatility of insurance, there has

been a shift, from traditional products to newer, more transparent

products such as ULIPs, as well as products that meet specific needs,

such as those for children's education and pension

Industry Update



As new insurance products become availa ble in simple form, and they are

readily accessi ble through convenient and credi ble distri bution channels

such as the friendly bank branches, the insurance penetration level in the

country is beginning to increase rapidly

Fruits of competition are visi ble in terms of

± wide range of innovative products

± better levels of customer service

± greater transparency and

± new distri bution models

Post liberalisation, whole approach of buying and selling insurance has

undergone a metamorphosis. The new trend or the new mantra iscustomisation and customer convenience

Thanks to the insurance awareness drive that some insurance companies

have taken upon them, customers are now keen to design their products

just the way we would choose our preferred toppings on the pizza

Current status of insurance industry




Principle legislation regulating

insurance

Insurance Act ± 1938 :

IRDA Act ± 1999 :

In addition, provisions of

Companies Act,1956

Indian Contract Act, 1872

and other su bordinate regulations framed by IRDA on

various su b jects are also applica ble




Currently, permitted FDI limit in insurance sector in India= 26%

Proposed hike = 49% «.Primary o b jective of this move is

to attract more investments in the private insurance sector..

Benefits of FDI ± Infusion of fresh capital

± Ena bles expansion through increased insurance penetration in the

country

± Strengthens distri bution network

± Develops technical competencies

± Encourages innovation and product development

± Facilitates transfer of knowledge, skills, technology, innovations in

products and production techniques



Why FDI??

Raising the cap will reduce the strain on Indian partners for capital,and there will be greater flow of technology and a greater commitment

on the part of the foreign partners

With FDI, the economy is better a ble to provide higher productivity

and bigger jo b pools. So, foreign capital will allow the people of this

country to enjoy higher rates of economic growth, employment and a

higher standard of living

To use a healthcare analogy, not all cholesterol is bad. FDI in sectorsof the economy that need capital infusion is like good cholesterol,

needed to clear the arteries. Hence should not be opposed




Life insurance is a long gestation business and requires significant amounts of capital. A significant portion of the capital deployed is put aside for maintainingthe required solvency margin. Some recent estimates reveal that to build acompany the size and reach of the Life Insurance Corporation of India wouldrequire anything between Rs 15,000 crore-Rs 20,000 crore. The total capitaldeployed by the dozen life insurance companies is around Rs 3,300 crore. Thepotential for growth is enormous and Indian capital markets are not deep

enough to support this exponential growth. FDI can effectively bridge that gap

India is a country that lacks social security systems and people are grosslyunder-insured. They have traditionally bought life insurance for tax-saving andinvestment purposes. The awareness that at its heart, life insurance is about securing the future of your family is just about beginning to seep in. Given that life insurance can save families from economic strife, there should be rapiddevelopment of this noble business.

Capital infused into life insurance businesses can be invested in long-terminfrastructure projects in the country and the need for investment into thoseprojects can scarcely be over-emphasised. Generation of employment bothdirect and indirect is remarkable enough.




Better roads, better ports, better telephony, assured supply of power...all thesehave huge externalities and could lead the country to that longed for double-digit growth. But these take years to construct and pay-back time comes muchlater.

The result is that infrastructure projects with their long gestation periods findfew takers. A banker who is willing to finance an automobile manufacturer willbalk at lending to a private company that is building a road where the pay-backperiod is typically far longer could be as much as 15-20 years. This is not surprising since his deposits are mostly short-term and he will have to return themoney to depositors well before the borrower repays.

Insurance companies, especially life insurance companies, have no suchproblem. They mobilise savings that are essentially long-term, say 20-25 yearsand need to invest in avenues that are equally long-term. Infrastructure projects

could be a perfect fit. But today, we have a peculiar situation. On the one handthere is a crying need for better infrastructure. On the other, even though fundsare available, the limited spread of the insurance sector means that companiesthat could channel these savings to infrastructure are not able to mop them up.



1 Insured

2 Insurance Act,1938

3 Human Life Value

4 Fire insurance

5 1870

6 Marine Insurance

7 Current FDI limit

8 Benefits of insurance

9 1956

10 1999

A Enhances credit worthiness

B 26%

C 1st type of insurance transacted in world

D Based on indemnity

E IRDA Act

F Basis of life insurance

G Principle regulation governing

insurance

H Person whose life/property is insured

I Bombay Mutual Life Assurance Soc.

J Nationalisation of life insurance sector

CRISS CROSS ± MATCH THE FOLLOWINGCRISS CROSS ± MATCH THE FOLLOWING



Principles of Insurance

Principle of Co-operation ± Co-operation is based on the co-operative principle

µone for all, and all for one¶

± E. g .: Diabetic with a higher risk pays more to nullifythe impact on the pool in case of death earlier than

assumed

Principle of Pro ba bility/Risk ± Su b ject matter should be exposed to the contingency of

loss or risk

± E. g : Marine Insurance ± Ship >> Loss by perils of the sea

Fire Insurance ± Property >> Loss by fire



Principles of Insurance (Contd..)

Principle of Utmost Good faith (U berrimae Fides) ± Disclosure of material facts important

± Accuracy of information in the proposal form

± Non-disclosure/Mis-match of information >> Claim rejection infuture

± E. g 1: Case of V Ramakrishna, Kumar ± E. g 2: Health Insurance policies

Principle of Insura ble Interest

± In order to have a valid policy of insurance, the policyholder must:

- Gain a benefit from the continued existence of the su b ject matter of the insurance or - Suffer a loss on its destruction

± Insurance without insura ble interest - Illegal &Void

Contd«



Principles of insura ble interest

Insura ble interest asks the question ±

³What financial loss would you suffer upon t he deat h of

t he insured/ or on t he destruction of t he property insured

or upon t he happening of t he peril against which t he

insurance has been taken?´ Who has insura ble interest?

± Self

± Blood or marriage

± Business relationships

± Property & lia bility insurance

Contd«



Who has insurable interest?

Life insuranceSelf: You have an unlimited insurable interest in your own life. Aperson, therefore, can obtain as much insurance as he wishes onhimself, subject to other limits an insurance company might have.

Blood or marriage: Husband-wife relationships and parent-childrelationships are almost always sufficient to create an insurable

interest. Grandparent-grandchild relationships and sibling relationshipsare also frequently considered sufficient for establishing an insurableinterest. The ties between cousins, aunts/ uncles and nieces/ nephews,and other more distant relatives don't automatically give rise toinsurable interests because their emotional and financial bonds may beweaker.

Contd«



Who has insurable interest?

Business relationships: An insurable interest may be created in anotherwise non-insurable interest relationship by the creation of a financialdependency or a business relationship between the parties. For example,creditors are allowed to take out life insurance on the lives of their debtors,with the debtors' consent, up to the limit on the debt. Employers can takeout key person life insurance on key employees, business partners can take

out on each other. Property & liability insurance:

Ownership gives the owner an insurable interest in that property. However,there are other factors that can also give rise to an insurable interest.- Secured creditors have an insurable interest in the property used assecurity for the property. For instance, almost all mortgage lenders requirethat the secured realty be insured, with the mortgagee (the lender) named

as the beneficiary.- Legal liability will also create an insurable interest. For instance, an autorepair shop can have insurance on the vehicles on its lot for possibledamage or theft, even though the shop does not own them.- A contractual right can create an insurable interest, such as the right topurchase property at some future date. Contd«




Principle of Insura ble Interest (Contd..) ± Essentials of a valid insura ble interest

There must be a su b ject matter to be insured

The insured should have monetary relationship with the su b ject

matter

The financial relationship between the insured and the su b ject

matter should be such that the insured is financially benefited

by its existence or survival and will suffer economic loss at the

destruction or death of the su b ject matter

The relationship between the insured and the su b ject matter

should be recognised by law i.e. there should not be any illegalrelationship between the insured and the su b ject matter




Principle of Indemnity ± Insured ± fully indemnified , but, never more than fully indemnified

± Loss compensated = Actual loss or Sum assured, whichever is lower*

± Loss compensated in proportion to the insurance cover in relation to

value of total assets

± E. g : Total value of asset is Rs 100,000/-

Insurance taken for Rs 80,000/-

In case of destruction of asset,if the loss is Rs 60,000;

C laim = 80% of Rs 60000/- i.e. Rs 48000/-

* Exceptions found in marine insurance policies




Principle of Su brogation ± A corollary to the principle of indemnity applica ble only to fire and

marine insurances

± Post loss indemnification, all rights and remedies that insured has against

third person, in relation to the su b ject matter insured, passes to the

insurer

± After claim settlement, if insured recovers the loss (in part or in full)

from a third party, insurer entitled to receive the amount

± E. g : A house is insured for Rs.2 lakhs against fire

The house is damaged by fire

The insurer pays the full value of Rs.2 lakhs to the insured

Later, the damaged house is sold for Rs.20, 000

T he insurer is entitled to receive t he sum of Rs.20, 000




Principle of Causa Proxima ± Insured perils, Excluded perils/Unmentioned perils

± Loss to be proximately caused by an insured peril withoutany break in the chain of causation

± In case of loss due to a remote cause not insured against; no

claim paya ble by insurer E g : In a marine policy, the goods were insured against

damage by sea-water . Some rats on board bored a hole in a zinc pipe in the bath which caused sea-water to pour out and damage the goods. The underwriters contented that as theyhad not insured against the damage by rats they were not bound to pay. It was held that the proximate cause of damagebeing sea-water the insured was entitled to damages, the ratsbeing the remote cause (Hamilton vs Pandrof)

± Determination of proximate cause




Principle of Warranties ± Conditions & promises in an insurance contract

± A warranty is that by which the assured undertakes that

some particular thing shall or shall not be done

Or that some conditions shall be fulfilled

Or where by he affirms or negatives the existence of a particular state of affairs

± Express warranties

Those stated in the contract

Eg: No goods of dangerous nature, to maintain proper electrical

fittings. in case of fire insurance ± Implied warranties

Those that are assumed by the parties to the contract

Eg: Sea-worthiness of ship, legality of voyage etc. in case of marineinsurance



Case study - 1

A ship insured against marine losses is sunk. The insurer pays the value in full. The ship is su bsequently salvaged.

Who is entitled to the sales proceeds of the salvaged ship?

The insurer ( as per su brogation)



Case study - 2

A house is insured against fire for Rs 50000. It is burntdown but is estimated that Rs 30000 would restore it to the

original condition. How much is the insurer lia ble to pay?

Only Rs 30000 ( as per indemnity)



Case study - 3

A insures his house against fire for Rs 40000 with B andfor Rs 60000 with C.. A fire occurs & the loss is estimated

at Rs 14000. A recovers Rs 14000 from B. What are the

rights of B against C?

B can claim Rs 8400 from C as loss of Rs 14000 will be borne by B& C in the ratio 2:3 ( as per contri bution)



Case study - 4

A contracted to build a house for B for which he was to be paid Rs 200000.. All the materials were to be supplied by

B. Can A insure the materials for the period during which

the building is being constructed?

A can insure the materials ( as per insura ble interest)



Underwriting

An insurance company's performance is judged among other things by its claim ratio -- the lower the ratio, the better is the

performance. To achieve this, the companies follow a stringent

underwriting process

Each insurer sets its own underwriting standards of what is

accepta ble, insura ble risk. Then each application for insurance

is reviewed to determine if the individual meets those standards

In life insurance, this decision process sometimes requires

medical evidence of the applicants to assess mortality risks and

determine appropriate premiums



Underwriting

Process of acquiring or writing b

usiness that will make moneyfor the insurer

Underwriting mainly involves determining

± Which risks to accept

± The price at which the risks can be insured

± The products to be offer ed

Tools used for Underwriting

± Proposal form

± Agent¶s report

± Medical reports in case of life insurance

± In any insurance policy, the sales personnel/agent is the

primary underwriter!!!



Underwriting

Factors that affect underwriting Age

Gender

Height and weight

Health history (often family health history)

The purpose of the insurance (estate planning, business or family

protection, etc)

Marital status and num ber of dependants such as children

The amount of insurance the applicant already has, and any additional

cover he proposes to buy

Occupation (some are hazardous, and increase the risk)

Income (to determine suita bility)

Smoking or to bacco use (smokers typically have shorter lives)

Alcohol (excessive drinking reduces life expectancy, too)



Underwriting

Proposal forms get classified under four common categories:

Preferred: If you are a better-than-average risk (i.e. in good

health, with no dangerous occupation or health history) you may

be charged the preferred or lowest rate.

Standard: If you are considered an average or typical risk, you

will be charged the standard rate.

Rated: If you pose an a bove-average risk (say you have high

blood pressure, smoke, or engage in skydiving every weekend),

you may be classified as an increased risk and charged a higher premium.

Declined: If you are rated as uninsura ble (perhaps due to a

serious illness), you may be denied coverage entirely.



Future of insurance industry

India is the 5th largest market in Asia by premium, followingJapan, Korea, China and Taiwan

Num ber of private insurers is expected to grow as various

foreign companies have announced intentions to esta blish joint

ventures

Private insurance is expected to see a growth rate of 140% as a

result of intensive marketing techniques adopted by them

Rural market provides enormous growth potential

Greater awareness of risk

Mix of new products customised as per customer needs




Private insurance companies have significantly increased the product profile and range in a very short span of time

± Products like lia bility insurance, directors & officers indemnity, loss of

profit policies, errors & omissions for technology companies, accident

& health, unit-linked products, weather insurance, customised travel

insurance policies for students, business travelers, etc, are now

availa ble in the country

± These unique risk mitigation products are ena bling Indian corporates

and individuals become stronger players in the glo bal marketplace

Private players have developed high service standards where

commitments are made for turnaround time for claim settlements.

Market development along these lines would continue to benefit the

Indian consumers significantly



Future of insurance industry Novelty and innovation in product design being used by companies to

mop up greater market share

± Eg: So far exercising helps maintain good health. But now it could also

help save money, not just on medical bills but also in the form of lower

health insurance premium and gym mem bership fee

Shift from a black-&-white risk assessment to a more accurate risk

assessment and a closer alignment of pricing with risk

± Higher the risk, more will be the premium charged instead of being

denied insurance

± However, lack of data in deciding the premium is the pro blem private

insurers face

Differentiation by gender

± Differential premiums are based on the internal assessment that women

have a longer life expectancy and lower mortality rates compared to men




Customer friendly product features in health & motor insurancesegments

Professions having a bearing on insurance premium

± White-collared workers such as doctors, lawyers, CAs, teachers, and

army personnel are generally very responsi ble and pay a lot of attention

to safety rules. HDFC ERGO offers discount on car insurance premiumto such people

Expansion of the rural insurance market is very crucial. Insurance

need to be brought to the common man



Time for recap««.

Insurance - Pillai

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