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Insurance

Category : Banking

 

Insurance

 

Insurance is a means of protection from any financial loss. Under an insurance contract; a insurer indemnifies the other insured party against specific amount of loss, occurring from specified eventualities within a specific period, provided a fee called premium is paid.

 

Since the inception of the insurance sector, the number of participants in the insurance industry has gone up from 7 insurers in 2000 to 60 insurers as on 30th Sep, 2015.

 

Insurance Sector in India

Insurance industry includes two sectors, i.e. life insurance and general insurance. Life insurance relates to the life of the policy holder. General insurance deals with everything else. This type of insurance typically covers' Losses caused by theft or damage.

Health and property insurance come under general insurance. Life insurance in India was introduced by Britishers. A British firm in 1818, established the Oriental Life Insurance Company at Calcutta (now Kolkata).

 

General Insurance Corporation

In 1972, the government nationalised the 107 private sector companies in the general insurance segment and a government company called the General Insurance Corporation of India (GIC). It was formed in 1972.

 

Main Holding Companies

Company

Place

National Insurance Company  Limited

Kolkata, Headquarters

New India Assurance Company Limited           

Mumbai, Headquarters

Oriental Insurance Company Limited                   

New Delhi, Headquarters

United India Insurance  Company Limited             

Chennai Headquarters

 

A number of economic reforms were introduced in Nov, 2000 and the GIC was notified as the Indian Reinsurer on 1 April, 2003. In March, 2002, the GIC was withdrawn from the holding company status of the 4 Public Sector General Insurance companies.

 

Life Insurance Corporation of India (LIC)

LIC was established on 1st Sep, 1956, which set the pace of nationalisation of the insurance sector under the Stewardship of CD Deshmukh. It has head office at Mumbai and eight zonal offices, the newest being at Patna. LIC is also operating internationally through branch offices in Fiji, Mauritius and UK and through joint venture companies in Bahrain, Nepal, Sri Lanka, Kenya and Saudi. Arabia. In 2008, its wholly owned subsidiary was opened in Singapore. It also extends assisiance for development of infrastructure facilities like housing, rural electrification, water supply, sewerage, etc,

In addition, it extends resource support to other financial institutions through subscription to their shares and bonds, etc.

Nationalised Insurance Companies

Life Insurance Corporation of India

  • General Insurance Corporation of India
  • National Insurance Co. Ltd.
  • Oriental insurance Co. Ltd.
  • New India Assurance Co. Ltd,
  • United India Insurance Co. Ltd.

 

Entry of Private Company in Insurance

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor RN Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The A4alhotra Committee was setup with the objective of complementing the reforms initiated in the financial sector.

The Government of India liberalised the insurance sector in March, 2000 with the message of the Insurance Regulatory and Development Authority (IRDAI) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership- The IRDAI attempted to raise the foreign direct investment (FDI) limit in the insurance sector to 49% from its current 26%. The FDI limit in the sector was raised to 100% in June, 2016

As per the Government of India Notification dated 3rd Aug, 2000 specifying 'insurance’ as a permissible form of business that could be undertaken by banks under Section 6(1) of the Banking Regulation Act, 1949.

 

Insurance Regulatory and Development Authority of India (IRDAI)

The IRDA has changed. Its name to IRDAI. The change of name was effected in the insurance laws (Amendment) Ordinance, 2014 and was promulgated by the President of India on 26th Dec, 2014. IRDAI was established in the year 1999, by the Indian Government, for two reasons –to safeguard the interest of the policy holders and for the up gradation of the entire insurance sector. Right from the approach adopted by the existing insurance companies towards their shareholders to the eradication of the shortcoming of the industry. The organisation was setup under the guidelines of the Insurance Regulatory and Development Authority Act. 1999.

 

Functions of IRDAI

The IRDAI ensures and safeguard the interests of policy holders through various ways as follows

  • Nomination, by policy holders
  • Settlement of insurance claim
  • Practical training for insurance agents and other intermediaries
  • Insurable interest
  • Surrender value of policy holders
  • Code of conduct of insurance intermediaries
  • Assistance in gaining correct information about policies
  • Creation of management information system
  • Promotion of self-regulation within the insurance sector

 

Insurance Law (Amendment) Bill 2015

The Insurance Laws (Amendment) Bill 2015 was passed by the Lok Sabha and the Rajya Sabha. The passage of the bill thus paved the way for major reform related amendments in the

  • Insurance Act, 1938, General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act 1999.
  • The Insurance Laws (Amendment) Act, 2015 to be so enacted, will seamlessly replace the Insurance Laws (Amendment) Ordinance, 2014 which came into force on 26th Dec, 2014.
  • The Amendment Act will remove archaic and needless provisions in the legislations and incorporates certain provisions to provide Insurance Regulatory and Development Authority of India (IRDAI) with the flexibility to discharge its functions more effectively and efficiently.

 

Main Points of the Bill

  • The total foreign investment bill limit in the insurance sector has been raised from 26% to 49%.
  • Provision for the establishment of Life Insurance Council and the General Insurance Council. These councils will act as self-regulating bodies for the insurance sector.
  • Provision of 10 yr imprisonment for the sale of insurance policy without registration with regulatory.
  • Insurance company restricted after the three years of sale insurance policy.

 

Bancassurance

Bancassurance is a French term referring to the selling of insurance through a bank's established distribution channels. Bancassurance is the selling of insurance and banking products through the same channel, most commonly through bank branches. Selling insurance means distribution of insurance and other financial products through Banks.

 

Advantages of Bancassurance

The following factors have mainly led to success of bancassurance.

  • Pressure on bank's profit margins. Bancassurance offers another area of profitability to banks with little or no capital outlay. A small capital outlay in turn means a high return on equity.
  • A desire to provide one-stop customer service. Today, convenience is a major issue in managing a person's day-to-day activities. A bank, which is able to market insurance products, has a competitive edge over its competitor. It can provide complete financial planning services to its customers under one roof.
  • Bank aims to increase percentage of non-interest fee income.
  • Cost effective use of premises.

In India a number of insurers have already tied up with banks and some banks have already flagged off bancassurance through select products. Bancassurance has become significant. Banks are now a major distribution channel for insurers, and insurance sales a significant source of profits for banks.

 

Status of Bancassurance in India

Reserve Bank of India (RBI) has recognized 'bancassurance' wherein banks are allowed to provide physical infrastructure within their select branch premises to insurance companies for selling their insurance products to the banks' customers with adequate disclosure and transparency, and in turn earn referral fees on the basis of premia collected. This would utilise the resources in the banking sector in a more profitable manner.

 

RBI Guidelines

The new guidelines allow banks to act as brokers permitting them to sell insurance policies of different insurance companies.

Seeking to increase insurance penetration in the country, the Reserve Bank allowed banks to act as brokers for insurers, set up their own subsidiaries and also undertake referral services for multiple companies. They can also act as corporate agents without seeking prior approval from the RBI.

However, they will have to comply with IRDAI guidelines. Under existing bancassurance guidelines, a bank can act as a corporate agent and sell policy of only one life insurer and one non-life insurance company. At present, 104 commercial bank are working in India with more than 1.2 lakh branches.

 

IRDAI Guidelines

Insurance sector regulator IRDAI is evaluating fresh norms for banks to act as intermediaries for insurers, following recent changes in law brought through an ordinance by the government.

Under existing bancassurance guidelines, a bank can act as a corporate agent and sell policy of only one life insurer and one non-life insurance company.

But, the new guidelines will allow banks to act as brokers permitting them to sell insurance policies of different insurance companies. As per the changes made through the Insurance Ordinance, the categorisation of Banks (Corporate Agents), brokers and agents has been altered and all of them have been now termed as Insurance Intermediaries.

 

General Insurance Companies

General Insurance or non-life insurance provides insurance of property against fire, burglary, etc., personal insurance such as Accident and Health Insurance, and liability insurance which covers legal liabilities. Errors and Omissions insurance for professionals, credit insurance, etc., are also covered in the policy.

 

Public Sector Insurance Companies

  • National Insurance Company
  • New India Assurance
  • The Oriental Insurance Company
  • United India Insurance Company
  • Indian Agriculture Insurance Company

 

Private Sector Insurance Companies

  • Bajaj Allianz General Insurance
  • HDFC ERGO General Insurance Company
  • ICICI Lombard General Insurance Co. Ltd.
  • Max Bupa Health Insurance Company Ltd.
  • Rehgare Health Insurance Company Ltd.
  • Shriram General Insurance Company Ltd.

 

Specialize

  • General Insurance Corporation of India.
  • Expert Credit Guarantee Corporation.

 

Export credit guarantee insurance company (Public sector)

  • Export Credit Guarantee Corporation of India

 

Public Sector Insurance Companies

  • Life Insurance Corporation of India

 

Private Sector Insurance Companies

  • Bajaj Allianz Life Insurance
  • ICICI Prudential Life Insurance
  • SBI Life Insurance Company

 

Health Insurance Companies

  • Star Health and Allied Insurance
  • Religare Health Insurance

 

Reinsurance Companies (Public Sector)

  • GIC Reinsurance

 

Unit Linked Insurance Plan

A Unit Linked Insurance Plan (ULIP) is a product offered by insurance companies that, unlike a pure insurance policy, gives investors both insurance and investment under a single integrated plan.

A portion of premium goes towards mortality charges, i.e. providing life cover. The remaining portion gets invested in funds of policyholder's choice. Invested funds continue to earn market linked returns.

ULIP policy holders can make use of features such as top-up facilities, switching between various funds during the tenure of the policy, reduce or increase the level of protection, options to surrender, additional riders to enhance coverage and returns as well as tax benefits.

 

Mutual Fund

It is a body corporate registered with SEBI (Securities Exchange Board of India) that pools money from individuals/corporate investors and invests the same in a variety of different financial instruments or securities such as equity shares, government securities, bonds, debentures, etc. Mutual funds can thus be considered as financial intermediaries in the investment business that collect funds from the public and invest on behalf of the investors.

Mutual funds issue units to the investors. The appreciation of the portfolio or securities in which the mutual fund has invested the money leads to an appreciation in the value of the units held by investors.

The investment objectives outlined by a mutual fund in its prospectus are binding on the Mutual Fund Scheme. The investment objectives specify the class of securities. A mutual fund can invest in various asset classes like equity, bonds, debentures, basics of financial markets.

 

Types of Mutual Fund

According to the time of closure, schemes are classified as follows

  • Open-ended Schemes These are allowed to issue and redeem units any time during the life of the scheme. But close-ended funds cannot issue new units except in case of bonus or rights issue. Therefore, unit capital of open-ended funds can fluctuate on daily basis (as new investors may purchase fresh units).
  • Close-ended Schemes New investors can join the scheme by directly applying to the mutual fund at applicable net asset value related prices in case of open-ended schemes, but not in case of close-ended schemes. In case of close-ended scheme, new investors can buy the units only from secondary markets.

 

Comparison between Unit Linked Insurance Plans and Mutual Funds

 

ULIP Description

Mutul Fund

Unit Linked Insurance Plans are offered by insurance companies These plans allow investors to direct part of their premiums into different types of funds (equity, debt, money market, hybrid, etc.)

A mutual fund pools the money from investors and uses it to invest in various securities according to a prespecified investment objective

Benefit Snapshot

 

Dual benefit of investment and insurance,

Investment tool suitable for short to medium term.

Suitable for the long term.

Easy exit possible.

Option to switch between the funds is permitted

Tax benefit available only on tax saving funds.

 

Offers tax benefits.

 

  

Mutual Funds in India

The first Indian mutual fund was setup in 1963, when the Government of India created the Unit Trust of India (UTI). Until 1987, UTI enjoyed a monopoly in the Indian mutual fund market and sold a range of mutual funds through a network of financial intermediaries.

At the end of 1988, UTI had ` 6700 crore of assets under management, in 1993, with the creation of SEBI and better regulation, transparency and liberalisation of capital markets (which included the creation of the NSE and the NSDL), the private sector was allowed to enter the mutual fund industry.

Mutual Fund Regulations

The erstwhile Unit Trust of India (UTI) was setup by the Reserve Bank of India in 1963 and it functioned under its regulatory and administrative control till 1978, the Industrial Development Bank of India (IDBI) took over regulatory and administrative control of the UTI thereafter,

The Government of India enacted the Securities and Exchange Board of India Act, 1992 on 4th April, 1992 which created the Securities and Exchange Board of India (SEBI). SEBI issued a comprehensive set of regulations in 1993 and revised them again in 1996.

 

Net Asset Value (NAV)

It is the value of an entity's assets less the value of its liabilities, often in relation to open-end or mutual funds, since shares of such funds registered with the US Securities and Exchange Commission are redeemed at their net asset value. Net asset value may represent the value of the total equity or it may be divided by the number of shares outstanding held by investors and thereby, represent the net asset value per share.

 

Depository System

'A depository is a file or a set of files in which data is stored for the purpose of safe keeping or identity authentication', defined by Germany Depository.

In India, the Depositories Act, 1996 defines a depository to mean 'A company formed and registered under the Companies Act, 1956 and which has been granted a certificate of registration under Sub-Section (1A) of Section 12

of the Securities and Exchanges Board of India Act, 1992’.

 

Depository System in India

In order to put a check on seams after the 1992 stock market seam, the depository system was adopted in the recommendation of a technical committee.

The main objective of the recommendation of the depository system were.

(i) Maintenance of accounts

(ii) To keep transfer (of funds) in electronic accounts.

(iii) To enable trade possible without the certificate so that there is no risk in the trade.

Under the depository act 1996, SEBI registered two companies namely

(i) National Security Depository Ltd. (NSDL) and

(ii) Central Depository services India Ltd. (CSDL). The necessity of the certificates was abolished by- registering the shares through depository into electronic accounts. This process is known as D-materialisation of shares.

 

NSDL and CSDL

NSDL was registered by the SEBI on 7th. June, 1996 as India's first depository to facilitate trading and settlement of securities in the demat form. It is promoted by IDBI.UTI, NSE.

CSDL commenced its operations during February, 1999 and was promoted by Stock Exchange Mumbai in association with Bank of Baroda, Bank of India, SBI and HDFC Bank.

 

Types of Depository System

The two types are as follows

 

Securities Immobilisation System of Depository

Under this system, certificates of securities are securely deposited in the depository and its complete detail is taken into a computer. Once some certificate is taken into a computer, then the total business related to them can be done only through electronic accounting system unless the Securities are taken out from the depository.

 

Securities Dematerialisation System of Depository

Dematerialisation is the process by which a client can get physical certificates converted into electronic balances. An investor intending to dematerialise its securities needs to have an account with a DP. The client has to deface and surrender the certificates registered in its name to the DP. After intimating NSDL electronically, the DP sends the securities to the concerned Issuer/ R&T agent.

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