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INSURANCEINSURANCE&&

RISKRISKMANAGEMENT MANAGEMENT

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RISKRISKRisk is the uncertainty associated with the end ofRisk is the uncertainty associated with the end of

a period value of an investment.a period value of an investment.

Risk is the uncertainty of a financial loss.Risk is the uncertainty of a financial loss.

Every risk involves the loss of one or other kind.Every risk involves the loss of one or other kind.

The risk cannot be averted but loss occurring dueThe risk cannot be averted but loss occurring dueto certain risk can be distributed amongst theto certain risk can be distributed amongst theagreed persons.agreed persons.

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INSURANCEINSURANCE

Insurance is defined as a cooperative device toInsurance is defined as a cooperative device tospread the loss caused by a particular risk overspread the loss caused by a particular risk overa number of persons who are exposed to it anda number of persons who are exposed to it andwho agree to ensure themselves against thatwho agree to ensure themselves against that

risk.risk.The function of insurance is to spread the lossThe function of insurance is to spread the loss

over a large number of persons who are agree toover a large number of persons who are agree tococo--operate each other at the time of loss.operate each other at the time of loss.

The insurance is also defined as a social device toThe insurance is also defined as a social device toaccumulate funds to meet the uncertain lossesaccumulate funds to meet the uncertain lossesarising through a certain risk to a personarising through a certain risk to a personinsured against the risk.insured against the risk.

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The Definition of insurance can be madeThe Definition of insurance can be madefrom two pointsfrom two points--

1.1. Functional definitionFunctional definition

2.2. Contractual definitionContractual definition

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11. Functional definition. Functional definitionInsurance is a coInsurance is a co- -operative device to spreadoperative device to spreadthe loss caused by a particular risk over athe loss caused by a particular risk over anumber of persons, who are exposed to itnumber of persons, who are exposed to itand who agree to insure themselves againstand who agree to insure themselves against

the risk.the risk.

Thus insurance isThus insurance is--

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A coA co--operative device to spread the riskoperative device to spread the risk

The system to spread the risk over aThe system to spread the risk over anumber of persons who are insurednumber of persons who are insuredagainst the riskagainst the risk

The principles to share the loss of eachThe principles to share the loss of eachmember of the society on the basis ofmember of the society on the basis ofprobability of loss to their risk,probability of loss to their risk,

The method of provide security againstThe method of provide security againstlosses to the insured.losses to the insured.

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2.2. Contractual definitionContractual definitionThe insurance is contract between insurer andThe insurance is contract between insurer and

insuree. Thus insurance is a contract whereby,insuree. Thus insurance is a contract whereby,Certain sum, called premium, is charged inCertain sum, called premium, is charged inconsideration,consideration,

Against the said consideration, a large sum is Against the said consideration, a large sum isguaranteed to be paid by the insurer who receivedguaranteed to be paid by the insurer who receivedthe premium,the premium,

The payment will be made in a certain definitionThe payment will be made in a certain definitionsum, e.g., the loss or the policy amount whicheversum, e.g., the loss or the policy amount whichevermay be,may be,The payment is made only upon a contingencyThe payment is made only upon a contingency

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NATURENATURE

OF OF

INSU RANCE INSU RANCE

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1.1. Sharing of riskSharing of risk

2.2. CoCo--operative deviceoperative device3.3. Value of riskValue of risk

4.4. Payment at contingencyPayment at contingency5.5. Amount of paymentAmount of payment

6.6. Large number of insured personsLarge number of insured persons7.7. Insurance is not gamblingInsurance is not gambling

8.8.Insurance is not charityInsurance is not charity

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Functions of InsuranceFunctions of Insurance

The Functions of insurance can be studiedThe Functions of insurance can be studiedinto two partsinto two parts- -

Primary functionsPrimary functions

Secondary functionsSecondary functions

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(a) Primary Functions(a) Primary Functions

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1. Insurance provides certainty1. Insurance provides certainty

The risk will occur or not, when will occur,The risk will occur or not, when will occur,how much loss will be there? Nobodyhow much loss will be there? Nobodyknows so Insurance provides certainty ofknows so Insurance provides certainty ofpayments at the uncertainty of loss.payments at the uncertainty of loss.

The uncertainty of loss can be reduced byThe uncertainty of loss can be reduced bybetter planning and administration, butbetter planning and administration, butthe insurance relives the person from suchthe insurance relives the person from suchdifficult task.difficult task.

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2. Provides protection2. Provides protection

The main function of insurance is to provideThe main function of insurance is to provideprotection against the probable chancesprotection against the probable chancesof loss.of loss.

The insurance guarantees the payment ofThe insurance guarantees the payment ofloss and thus protects the assured fromloss and thus protects the assured fromsuffering from sufferings.suffering from sufferings.

The insurance cannot check the happeningThe insurance cannot check the happeningof risk but can provide for losses at theof risk but can provide for losses at thehappening of the risk.happening of the risk.

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3. Risk3. Risk--sharingsharing

When risk takes place, the loss is shared byWhen risk takes place, the loss is shared byall the persons who are exposed to theall the persons who are exposed to the

risk.risk.

In todays scenario risk sharing is done onIn todays scenario risk sharing is done on

the basis of probability of risk.the basis of probability of risk.

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1. Prevention of Loss1. Prevention of Loss

The insurance joins hands with those institutionsThe insurance joins hands with those institutionswhich are engaged in preventing the losses ofwhich are engaged in preventing the losses of

the society because the reduction in loss causesthe society because the reduction in loss causesless payment to the assured and so moreless payment to the assured and so moresaving is possible which will assist in reducingsaving is possible which will assist in reducingthe premium.the premium.

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2. Provides Capital2. Provides Capital

The insurance provides capital to theThe insurance provides capital to thesociety.society.

The accumulated funds are invested inThe accumulated funds are invested inproductive channel.productive channel.

The industry, the business and the individualThe industry, the business and the individualare benefited by the investment and loansare benefited by the investment and loansof the insurers.of the insurers.

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3. Improves efficiency3. Improves efficiency

The insurance eliminates worries andThe insurance eliminates worries andmiseries of losses at death and destructionmiseries of losses at death and destructionof property.of property.

The carefree person can devote his bodyThe carefree person can devote his bodyand soul together for better achievement.and soul together for better achievement.

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4. It Helps in Economic progress4. It Helps in Economic progress

The insurance by protecting the society fromThe insurance by protecting the society fromhuge losses of damage, destruction andhuge losses of damage, destruction anddeath provides an initiative to work harddeath provides an initiative to work hardfor the betterment of the masses.for the betterment of the masses.

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PrinciplesPrinciplesofof

Life InsuranceLife Insurance

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The insurance business has its importantThe insurance business has its important

principles in economic development.principles in economic development.

The important principles of life insuranceThe important principles of life insurance

are given asare given as--

(1) To spread life insurance and provide life(1) To spread life insurance and provide life

insurance protection to the masses atinsurance protection to the masses atreasonable cost.reasonable cost.

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(2) To mobilize peoples savings through(2) To mobilize peoples savings throughinsurance linked savings schemes.insurance linked savings schemes.

(3) To invest the funds to serve the best(3) To invest the funds to serve the bestinterests of both the policy holders andinterests of both the policy holders andthe nation.the nation.

(4) To conduct business with maximum(4) To conduct business with maximumeconomy.economy.

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(5) To act as trustee of the policy holder(5) To act as trustee of the policy holder

and protect their individual and collectiveand protect their individual and collectiveinterests.interests.

(6) To innovate and adopt to meet the(6) To innovate and adopt to meet thechanging life insurance needs of thechanging life insurance needs of thecommunity.community.

(7) To involve all the people working in the(7) To involve all the people working in thecorporation to ensure efficient andcorporation to ensure efficient andcourteous services to the insured public.courteous services to the insured public.

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K indsK indsof of

Insurance Insurance

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The insurance can be classified from twoThe insurance can be classified from two

anglesangles--

From the Business point of viewFrom the Business point of view

From the Risk point of viewFrom the Risk point of view

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(a) From the Business point of view(a) From the Business point of viewFrom this point of view, business can beFrom this point of view, business can bedivided in the following categoriesdivided in the following categoriesnamelynamely--

Life insuranceLife insurance

General insuranceGeneral insurance

Social insuranceSocial insurance

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1. Life Insurance 1. Life Insurance

It is different from other insurance in theIt is different from other insurance in thesense that the subject matter of insurancesense that the subject matter of insuranceis life of human being.is life of human being.

The insurer will pay the fixed amount ofThe insurer will pay the fixed amount ofinsurance at the time of death or at theinsurance at the time of death or at theexpiry of certain period.expiry of certain period.

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This insurance provides protection to theThis insurance provides protection to thefamily at the premature death or givesfamily at the premature death or givesadequate amount at the old age whenadequate amount at the old age whenearning capacities are reduced.earning capacities are reduced.

The business of life insurance is wholly doneThe business of life insurance is wholly doneby the life insurance corporation of India.by the life insurance corporation of India.

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2 . General Insurance 2 . General Insurance

This insurance includes property insurance,This insurance includes property insurance,liability insurance and other forms ofliability insurance and other forms of

insurance. Motor, theft, fidelity andinsurance. Motor, theft, fidelity andmachine insurances include the extent ofmachine insurances include the extent ofliability insurance to a certain extent.liability insurance to a certain extent.

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3 . Social Insurance 3 . Social Insurance

The social insurance is to provide protectionThe social insurance is to provide protectionto the weaker section of the society whoto the weaker section of the society whoare unable to pay the premium forare unable to pay the premium foradequate insurance.adequate insurance.

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Pension plans, unemployment benefits,Pension plans, unemployment benefits,

disability benefits sickness insurancedisability benefits sickness insuranceand industrial insurance are the variousand industrial insurance are the variousform of insurance.form of insurance.

With the increase of social ideas, the socialWith the increase of social ideas, the socialinsurance is an obligation duty to theinsurance is an obligation duty to the

nation.nation.

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(b) From the Risk point of view (b) From the Risk point of view

From this point of view, insurance can beFrom this point of view, insurance can beclassified in to the following waysclassified in to the following ways--

(1) Property insurance(1) Property insurance--Marine insuranceMarine insuranceFire insuranceFire insuranceMiscellaneous insuranceMiscellaneous insurance

(2) Liability insurance(2) Liability insurance(3) Other forms(3) Other forms

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( 1) Pr op erty Insurance ( 1) Pr op erty Insurance --

Un der t he p r op erty insurance p r op erty o f a Un der t he p r op erty insurance p r op erty o f a p ers o n is insure d a ga inst a certa in p ers o n is insure d a ga inst a certa in s p ec ifie d r is k.s p ec ifie d r is k.

The r is k may be fi re o r mar ine p er ils , t he f t The r is k may be fi re o r mar ine p er ils , t he f t o f p r op erty o r goo ds , da ma ge t o p r op erty o f p r op erty o r goo ds , da ma ge t o p r op erty at acc ident .at acc ident .

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Marine InsuranceMarine Insurance--

It provides protection against the loss ofIt provides protection against the loss ofmarine perils. the marine perils are collisionmarine perils. the marine perils are collisionwith rock, or ship attacks by enemies, firewith rock, or ship attacks by enemies, fireand capture by pirates, etc.and capture by pirates, etc.

So marine insurance insures ship, cargo andSo marine insurance insures ship, cargo andfreight etc.freight etc.

The marine insurance has been divided intoThe marine insurance has been divided intotwo categoriestwo categories- -

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(1)(1) Oc ean marine insuran c e Oc ean marine insuran c e-- In this formatIn this format

the insurer insures only the marine perils.the insurer insures only the marine perils.

(2)(2) Inland marine insuran c e Inland marine insuran c e-- This formatThis format

covers inland perils which may arise withcovers inland perils which may arise withthe delivery of cargo (goods) from thethe delivery of cargo (goods) from thego down of insured and may extend up togo down of insured and may extend up to

the receipt of the cargo by the buyerthe receipt of the cargo by the buyer(importer) at his godown.(importer) at his godown.

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Fir e I nsuranc eFir e I nsuranc e

It covers the risk of fire.It covers the risk of fire.

With the help of fire insurance the losses,With the help of fire insurance the losses,arising due to fire are compensated and thearising due to fire are compensated and thesociety is not losing much.society is not losing much.

The individual is protected from such lossesThe individual is protected from such lossesand his property or business or industry willand his property or business or industry willremain approximately in the same position inremain approximately in the same position inwhich it was before the loss.which it was before the loss.

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Miscell ane ous I nsuranc eMiscell ane ous I nsuranc e

The property, goods, machine, furniture,The property, goods, machine, furniture,automobile, valuable articles, etc. can beautomobile, valuable articles, etc. can beinsured against the damage or destructioninsured against the damage or destructiondue to accident or disappearance due todue to accident or disappearance due totheft.theft.

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(2) Liab ility Insuran c e (2) Liab ility Insuran c e The general insurance also includes liabilityThe general insurance also includes liabilityinsurance whereby the insured is liable to payinsurance whereby the insured is liable to paythe damage of property or to compensate thethe damage of property or to compensate the

less of personal injury or death.less of personal injury or death.

This insurance is seen in the form of fidelityThis insurance is seen in the form of fidelityinsurance, automobile insurance and machineinsurance, automobile insurance and machineinsurance etc.insurance etc.

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(3) O ther forms(3) O ther forms

There are certain other insurances whichThere are certain other insurances whichare included under general insurance.are included under general insurance.

TheThe example example of such insurances areof such insurances areexportexport--credit insurances, state employeescredit insurances, state employees

insurance, etc. whereby the insurerinsurance, etc. whereby the insurerguarantees to pay certain amount at theguarantees to pay certain amount at thecertain events.certain events.

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HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE

OFOF

INSURANCE BUSINESSINSURANCE BUSINESSININ

INDIAINDIA

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K inds of Insuran c e from Risk point of view K inds of Insuran c e from Risk point of view

INSURANCEINSURANCE

Personal insu. Property insu. Liability insu. Fidelity insu.Personal insu. Property insu. Liability insu. Fidelity insu.

LifeLife Insurance Personal Accident HealthInsurance Personal Accident HealthInsurance InsuranceInsurance Insurance

Marine Fire Automobile Cattle Crop Machinery TheftMarine Fire Automobile Cattle Crop Machinery TheftInsu. Insu. Insu. Insu. Insu. Insu. Insu.Insu. Insu. Insu. Insu. Insu. Insu. Insu.

Third party Employees Motor ReThird party Employees Motor Re- -insuranceinsuranceInsu. Insu. Insu.Insu. Insu. Insu.

Fiduciary insurance Credit insurance Privilege insuranceFiduciary insurance Credit insurance Privilege insurance

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( 1 ) Personal Insuran c e ( 1 ) Personal Insuran c e

The personal insurance includes insurance ofThe personal insurance includes insurance ofhuman life which may suffer the loss due tohuman life which may suffer the loss due todeath, accident and disease.death, accident and disease.

Therefore the personal insurance is furtherTherefore the personal insurance is furtherclassified into life insurance, personalclassified into life insurance, personalaccident insurances and health insurance.accident insurances and health insurance.

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(a) Life(a) Life InsuranceInsurance

It is defines as a contract whereby theIt is defines as a contract whereby theinsurer in consideration of a premiuminsurer in consideration of a premiumundertakes to pay a certain sum of moneyundertakes to pay a certain sum of moneyeither on the death of the insured or oneither on the death of the insured or onthe expiry of a fixed period.the expiry of a fixed period.

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(b) Personal Accident Insurance(b) Personal Accident Insurance

It is a kind of insurance whereby theIt is a kind of insurance whereby theinsurer gets the benefits under theinsurer gets the benefits under the

condition of accidental and death cases.condition of accidental and death cases.This insurance provide the safety for injury,This insurance provide the safety for injury,disability and death case.disability and death case.

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(c) Health Insurance(c) Health Insurance

It is a personal insurance that covers theIt is a personal insurance that covers thecost of hospital and medical expensescost of hospital and medical expensesarising from illness or injury. Benefits arearising from illness or injury. Benefits arepaid as a lump sum or as a proportion ofpaid as a lump sum or as a proportion ofactual treatment costs.actual treatment costs.

It includes individually hospital cash, criticalIt includes individually hospital cash, criticalillness and disability benefits.illness and disability benefits.

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(2) Property Insuran c e (2) Property Insuran c e

Under the property insurance property of aUnder the property insurance property of aperson is insured against a certainperson is insured against a certain

specified risk.specified risk.

The risk may be fire or marine perils, theftThe risk may be fire or marine perils, theft

of property or goods, damage to propertyof property or goods, damage to propertyat accident.at accident.

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(a) Marine Insurance(a) Marine InsuranceIt provides protection against the loss of marine perils.It provides protection against the loss of marine perils.

The marine perils are collision with rock, or shipThe marine perils are collision with rock, or shipattacks by enemies, fire and capture by pirates,attacks by enemies, fire and capture by pirates,etc. so marine insurance insures ship, cargo andetc. so marine insurance insures ship, cargo andfreight etc.freight etc.

The marine insurance has been divided into twoThe marine insurance has been divided into twocategoriescategories--

(1)(1) Oc ean marine insuran c e Oc ean marine insuran c e

(2)(2) Inland marine insuran c e Inland marine insuran c e--

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(b) Fire Insurance(b) Fire Insurance

It covers the risk of fire.It covers the risk of fire.With the help of fire insurance the losses,With the help of fire insurance the losses,

arising due to fire are compensated andarising due to fire are compensated and

the society is not losing much.the society is not losing much.

The individual is protected from such lossesThe individual is protected from such losses

and his property or business or industryand his property or business or industrywill remain approximately in the samewill remain approximately in the sameposition in which it was before the loss.position in which it was before the loss.

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(c) Automobile Insurance(c) Automobile InsuranceThis insurance comes under the category of motorThis insurance comes under the category of motor

insurance whereby the number of kind ofinsurance whereby the number of kind ofinsurance has divided.insurance has divided.

It covers the insurance f various vehicle which isIt covers the insurance f various vehicle which isgenerally used by the people.generally used by the people.

The categories of vehicle are commercial, NonThe categories of vehicle are commercial, Non- -commercial, and other vehicle.commercial, and other vehicle.

It also includes the insurance of first, second andIt also includes the insurance of first, second andthird party.third party.

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(d) Cattle Insurance(d) Cattle Insurance

This insurance provides cover against deathThis insurance provides cover against deathof animal, like buffaloes, cows, horses etc.of animal, like buffaloes, cows, horses etc.arising as a result of accident, disease, orarising as a result of accident, disease, orpregnant condition as the case may be.pregnant condition as the case may be.

The number of animals covered by cattleThe number of animals covered by cattleinsurance in India has increased from 2.10insurance in India has increased from 2.10lakhs in 1976 to 256..22 lakhs in 1988lakhs in 1976 to 256..22 lakhs in 1988- -89.89.

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(e) Crop Insurance(e) Crop Insurance

The crop insurance is part of agricultureThe crop insurance is part of agricultureinsurance.insurance.

It is the main rural insurance wherein the product,It is the main rural insurance wherein the product,price and income risks are insured.price and income risks are insured.

If the farmers do not get a standard amountIf the farmers do not get a standard amount

of product, required price and income fromof product, required price and income fromthe farms, they are compensated bythe farms, they are compensated byinsurance companies under the cropinsurance companies under the cropinsurance.insurance.

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(f) Machinery Insurance(f) Machinery InsuranceThis insurance covers the insurance ofThis insurance covers the insurance of

various machines and equipments which arevarious machines and equipments which areessential production and other works.essential production and other works.

It takes into account the kind ofIt takes into account the kind ofmachineries which are different in theirmachineries which are different in theirnature.nature.

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(g) Theft Insurance(g) Theft Insurance

Under this insurance, the goods and theUnder this insurance, the goods and theother properties are insured against theother properties are insured against thetheft.theft.

There are some of the categories of goodsThere are some of the categories of goodswhich are insured for this insurance.which are insured for this insurance.

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(3) Liab ility Insuran c e (3) Liab ility Insuran c e

This insurance covers the risks of thirdThis insurance covers the risks of thirdparty, compensation to employees, liabilityparty, compensation to employees, liabilityof the automobile owners and reinsurances.of the automobile owners and reinsurances.

This insurance is seen in the form of fidelityThis insurance is seen in the form of fidelityinsurance, automobile insurance andinsurance, automobile insurance andmachine insurance etc.machine insurance etc.

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(a) Third party Insurance(a) Third party Insurance

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(b) Employees Insurance(b) Employees Insurance

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(c) Motor Insurance(c) Motor Insurance

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(d) Re(d) Re--insuranceinsurance

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(4) Fidelity/Guarantee Insurance(4) Fidelity/Guarantee Insurance

It covers the loss arising due to dishonesty,It covers the loss arising due to dishonesty,disappearance and disloyalty of thedisappearance and disloyalty of theemployers.employers.

The party must be a party of the contract.The party must be a party of the contract.His failure causes loss to the first party.His failure causes loss to the first party.

E xample E xample -- In export insurance, the insurerIn export insurance, the insurerwill compensate the loss at the failure ofwill compensate the loss at the failure ofthe importers to pay the amount of debt.the importers to pay the amount of debt.

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(a) Fiduciary Insurance(a) Fiduciary Insurance

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(b) Credit Insurance(b) Credit Insurance

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(c) Privilege Insurance(c) Privilege Insurance

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The insurance business was regulatedThe insurance business was regulatedthrough the insurance act 1938.through the insurance act 1938.

The life insurance services have been inThe life insurance services have been inexercise in India since 1818 when the firstexercise in India since 1818 when the firstinsurance company namely, Oriental lifeinsurance company namely, Oriental lifeinsurance company was established ininsurance company was established inCalcutta.Calcutta.

The general insurance services has beenThe general insurance services has beenavailable since 1950 when the first tritanavailable since 1950 when the first tritaninsurance company was established, againinsurance company was established, againin Calcutta.in Calcutta.

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Till 1956, for Life Insurance and 1972 forTill 1956, for Life Insurance and 1972 forGeneral Insurance, industry has grown inGeneral Insurance, industry has grown interms of the member of companiesterms of the member of companiesproviding those services, the volume ofproviding those services, the volume ofpremium, investible resources, and so on.premium, investible resources, and so on.

Till 1956/1972 there were a large numberTill 1956/1972 there were a large numberof insurance companies (total 352of insurance companies (total 352comprising 245 life and 107 generalcomprising 245 life and 107 generalinsurance) and all of them were in theinsurance) and all of them were in theprivate sector.private sector.

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In 1956, 245 Indian and foreign life insurance andIn 1956, 245 Indian and foreign life insurance andprovident societies were nationalize and a newprovident societies were nationalize and a newsingle entity namely, Life Insurance Corporationsingle entity namely, Life Insurance Corporation(LIC) was established by passing the LIC Act(LIC) was established by passing the LIC Act1956.1956.

Similarly in 1972, 107 general insurance companiesSimilarly in 1972, 107 general insurance companieswere nationalized through the passing of generalwere nationalized through the passing of generalinsurance business (nationalization) Act, 1972.insurance business (nationalization) Act, 1972.

Then 107 companies amalgamated and grouped intoThen 107 companies amalgamated and grouped intofive companies namely,five companies namely,--

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National insurance company (NIC)National insurance company (NIC)New India assurance company (NIAC)New India assurance company (NIAC)Oriental insurance company (OIC)Oriental insurance company (OIC)United India insurance company (UIIC)United India insurance company (UIIC)General insurance company (GIC)General insurance company (GIC)

Thus in 1956 and 1972 the private insuranceThus in 1956 and 1972 the private insuranceindustry was transformed into monopolisticindustry was transformed into monopolisticand oligopolistic state or public sectorand oligopolistic state or public sectorinsurance industry in India.insurance industry in India.

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Insurance Sector reform in IndiaInsurance Sector reform in India

The insurance regulatory and developmentThe insurance regulatory and developmentauthority (IRDA) bill was passed by theauthority (IRDA) bill was passed by theIndian parliament in December 1999.Indian parliament in December 1999.

The IRDA become a statuary body in AprilThe IRDA become a statuary body in April2000 and has been framing regulations and2000 and has been framing regulations andregistering the private sector insuranceregistering the private sector insurancecompanies.companies.

The insurance sector was opened for privateThe insurance sector was opened for privatesector in august 2000.sector in august 2000.

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There were about 7 general and 11 life insuranceThere were about 7 general and 11 life insurancecompanies operating in the private sector in Indiacompanies operating in the private sector in Indiain the early part of 2004.in the early part of 2004.

Taking into account LIC, GIC and its fourTaking into account LIC, GIC and its four

subsidiaries, there are 24 organizations doing lifesubsidiaries, there are 24 organizations doing lifeand general insurance business in India in 2004.and general insurance business in India in 2004.

In addition there is post office life insuranceIn addition there is post office life insurancebusiness also.business also.

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Insurance Sector in India /Conceptual FrameworkInsurance Sector in India /Conceptual FrameworkInsurance industry

Public sector Private sector

Life General Life(11 Companies)

General

(7 Companies)

GIC and its

4 subsidiaries

LIC Post officeInsurance

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The below mentioned table shows the shareThe below mentioned table shows the shareof private insurance companies in the totalof private insurance companies in the totallife insurance premium was only 0.54 % inlife insurance premium was only 0.54 % in20012001--02, and the LIC accounting for the02, and the LIC accounting for theremaining 99.46 %.remaining 99.46 %.

In the general insurance field also, theIn the general insurance field also, theshare of private insurance companies in theshare of private insurance companies in thetotal premium was only 3.76% in that year,total premium was only 3.76% in that year,and the four GIC subsidiaries accountedand the four GIC subsidiaries accountedfor the remaining 96.24% of the premium.for the remaining 96.24% of the premium.

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The total life and general insurance premiumThe total life and general insurance premiumincome was Rs. 62477 crore in 2001income was Rs. 62477 crore in 2001- -02 in02 inwhich the share of life insurance andwhich the share of life insurance andgeneral insurance was Rs. 50094 croregeneral insurance was Rs. 50094 crore(80.18%) and Rs. 12383 crore (19.82%)(80.18%) and Rs. 12383 crore (19.82%)respectively.respectively.

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Similarly the total investment by both theSimilarly the total investment by both the

insurance companies were Rs. 273242insurance companies were Rs. 273242crore in 2001crore in 2001--02 in which the share of life02 in which the share of lifeinsurance was Rs. 246869 crore (90.35)insurance was Rs. 246869 crore (90.35)

and Rs. 26373 crore (9.65) respectively.and Rs. 26373 crore (9.65) respectively.

The share of insurance sector in householdThe share of insurance sector in household

financial savings has increased from 7.6 %financial savings has increased from 7.6 %during 1980s to 12% in 2000during 1980s to 12% in 2000--01.01.

S f I B i i I diS f I B i i I di

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S ummary of I nsuranc e Busine ss in I ndiaS ummary of I nsuranc e Busine ss in I ndiaI t e mI t e m 20002000--0101 20012001--0202

(A) (A) Lif e insurance Lif e insurance

Pre miu m 36070 50094Pre miu m 36070 50094Of whic h pri va t e insurers 7 273Of whic h pri va t e insurers 7 273Tot a l in ves tmen t s 194010 246869Tot a l in ves tmen t s 194010 246869Of whic h govt. & other Of whic h govt. & other --

--a ppr ove d securi t ies 132177 100037a ppr ove d securi t ies 132177 100037

Oth er th an a ppr o. I n ves t. 18584 16521Oth er th an a ppr o. I n ves t. 18584 16521( B ) ( B ) Genera l insurance Genera l insurance

Gr oss direc t p re miu m inc ome 10087 12383Gr oss direc t p re miu m inc ome 10087 12383Of whic h pri va t e insurers 7 466Of whic h pri va t e insurers 7 466Tot a l in ves tmen t s 24462 26373Tot a l in ves tmen t s 24462 26373Of whic h govt. & other Of whic h govt. & other --

--guaran t ee d securi t ies 7703 15910guaran t ee d securi t ies 7703 15910

Oth er th an a ppr ove d securi t ies 3761 2972Oth er th an a ppr ove d securi t ies 3761 2972

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G overnanceG overnanceof of

Insurance BusinessInsurance Business

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Corporate GovernanceCorporate Governance

The Corporate governance is mainly concern withThe Corporate governance is mainly concern withhow ownership influence, promoting corporatehow ownership influence, promoting corporatefairness, transparency and accountability.fairness, transparency and accountability.

In simple words, corporate governance means doingIn simple words, corporate governance means doingeverything to improve relationship betweeneverything to improve relationship betweencompanies and their shareholders to improve thecompanies and their shareholders to improve the

quality.quality.Insurance companies are important constituent ofInsurance companies are important constituent ofcorporate governance.corporate governance.

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Corporate governance becomes an organizeCorporate governance becomes an organizesystem when companies are directed andsystem when companies are directed andcontrolled by the management in the bestcontrolled by the management in the bestinterest of the stakeholders and insuringinterest of the stakeholders and insuringgreater transparency and financialgreater transparency and financialreporting.reporting.

Corporate governance in insurance companiesCorporate governance in insurance companiesmakes corporate entities, institutionalmakes corporate entities, institutionalinvestment and business opportunity.investment and business opportunity.

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C OMPO N E NT S OF C O R PO R AT E G OV E R N AN CE C OMPO N E NT S OF C O R PO R AT E G OV E R N AN CE

Insurance companies are important constituent ofInsurance companies are important constituent ofcorporate governance.corporate governance.

Keeping and open mind, listening and learning fromKeeping and open mind, listening and learning from

other, ready to share ideas and thoughtsother, ready to share ideas and thoughtsrecognizing and rewarding cooperation's andrecognizing and rewarding cooperation's andfranchisees, development skill of employees.franchisees, development skill of employees.

The components of corporate governance are asThe components of corporate governance are asfollowsfollows--

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11-- T rans p arency T rans p arency

The I ns urer s hould de ve lop t rans p arency ofThe I ns urer s hould de ve lop t rans p arency offinanc ia l res ources .financ ia l res ources .

The ins urance c omp an ies are direc tly & in direc tly The ins urance c omp an ies are direc tly & in direc tly lin k with ban kin g in dus t ry , financ ia l mar ke t s an dlin k with ban kin g in dus t ry , financ ia l mar ke t s an dth e in dus t r ia l an d a gr ic ultura l de ve lop men t a lon gth e in dus t r ia l an d a gr ic ultura l de ve lop men t a lon gwith th e p olicy holder s in t eres t.with th e p olicy holder s in t eres t.

Exa mp le of t rans p arency p resen t i n p ublic sec to r Exa mp le of t rans p arency p resen t i n p ublic sec to r i.e ., LIC an d GIC ha ve been a guide line fo r th e i.e ., LIC an d GIC ha ve been a guide line fo r th e p r iva t e ins urers .p r iva t e ins urers .

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2 . E ff icient and Inde p endent Direct o rs 2 . E ff icient and Inde p endent Direct o rs

Direct o rs are lin k bet ween po lic yho lders and Direct o rs are lin k bet ween po lic yho lders and s hare ho lders .s hare ho lders .There p ri mar y d ut y is t o mo nit o r mana ge ment o n There p ri mar y d ut y is t o mo nit o r mana ge ment o n

be ha lf of t he s hare ho lders as we ll as fo r t he be ha lf of t he s hare ho lders as we ll as fo r t he interest of po lic yho lders .interest of po lic yho lders .

Direct o rs s up er vise and a pp r o ved f inancia lDirect o rs s up er vise and a pp r o ved f inancia lo bjecti ves , ma jo r strate gies and p lans . The yo bjecti ves , ma jo r strate gies and p lans . The yha ve t o re vie w t he interna l c o ntr o l s yste m t o ha ve t o re vie w t he interna l c o ntr o l s yste m t o miti gate ris k e xpo s ures .miti gate ris k e xpo s ures .

The bo ard s ho uld ha ve in fo r mati o n a bo ut f inancia lThe bo ard s ho uld ha ve in fo r mati o n a bo ut f inancia lstate ments , mar ket inte lli gence , c o mp etit o rs state ments , mar ket inte lli gence , c o mp etit o rs r o le re gulati o ns meas ures , mana ge ment ,r o le re gulati o ns meas ures , mana ge ment ,p er fo r mance .p er fo r mance .

Need of Corporate Governance in InsuranceNeed of Corporate Governance in Insurance

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Need of C o r po rate G ov ernance in Insurance Need of C o r po rate G ov ernance in Insurance Industry Industry

Insurance industry bears a f iduciary Insurance industry bears a f iduciary re lati o ns hi p wit h po licy re lati o ns hi p wit h po licy --ho lders and has lo n gho lders and has lo n gter m p er fo r mances .ter m p er fo r mances .

The ho nesty and inte grity of insurers are p ara mo unt The ho nesty and inte grity of insurers are p ara mo unt i mpo rtant as t he industry has t he f inancia li mpo rtant as t he industry has t he f inancia lf uncti o ns .f uncti o ns .

The need of c o r po rate gov ernance is rea li zed The need of c o r po rate gov ernance is rea li zed fo r c o n f idence bui ldin g, c han ge mana ge ment ,fo r c o n f idence bui ldin g, c han ge mana ge ment ,in v est ment , and v ia bi lity .in v est ment , and v ia bi lity .

Need of c o r po rate gov ernane re quired t he fo llo win gNeed of c o r po rate gov ernane re quired t he fo llo win gpo ints po ints --

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11 -- Con fide n c e Con fide n c e

Insurance is based on confidence. long termInsurance is based on confidence. long termcontract is built only on the confidence.contract is built only on the confidence.

New insurance companies can develop onlyNew insurance companies can develop onlyif the old insurance companies haveif the old insurance companies havedemonstrated honestly and integrity. Fordemonstrated honestly and integrity. For

E xample E xample -- LIC has proved the insurance hasLIC has proved the insurance hassovereign guarantee.sovereign guarantee.

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2 2 -- C hang e Ma n a g eme n tC h a ng e Ma n a g eme n tInsurance companies are facing several changes inInsurance companies are facing several changes in

the society.the society.

They have to cope with the changes and comeThey have to cope with the changes and comeforward to challenge the changes.forward to challenge the changes.

The insurance companies have to manage themThe insurance companies have to manage them- ---selves for maintaining safety and solvency.selves for maintaining safety and solvency.

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3 3 -- I n vestme n tI n vestme n t

Insurance companies manage their funds throughInsurance companies manage their funds throughinvestment which involves safety solvency riskinvestment which involves safety solvency riskmanagement and protection of policy holdersmanagement and protection of policy holdersinterest.interest.

There is need of good governance standard againstThere is need of good governance standard againstwhich the companies conduct and perform wouldwhich the companies conduct and perform wouldget measured against these backdrops.get measured against these backdrops.

SEBI has formulated several rules and regulationsSEBI has formulated several rules and regulationswhich have to be followed by the insurer.which have to be followed by the insurer.

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