Comparative Study of Life Insurance

A Project Report On “A COMPARATIVE STUDY OF LIFE INSURANCE WITH REFERENCE TO LIC AND HDFC LIFE INSURANCE”

Prepared By Kunjal Shah Roll No : 41 Under Guidance Of Prof. Mrs. Shruti Chavarkar

Submitted In Partial Fulfillment Of Required For Qualifying B.F.M Part 1 Examination Bachelor of Financial Market University Of Mumbai S.K Somaiya Collage Of Arts, Science, and Commerce, Vidhyavihar (East) Mumbai-40077 Year 2014-2015 ACKNOWLEDGEMENT 1

This project report on study of traditional and modern investment avenue”is a result of cooperation, hard work and good wishes of many people. I would sincerely like to give my heartfelt acknowledgement and thanks to my parents. Any amount of thanks given to them will never be sufficient. I would like to thank the University of Mumbai, for introducing Bachelor of Financial Markets Course, there by giving the student a platform to abreast will changing business scenario, with the help of theory as a base and practical as a solution. I would sincerely like to thank our principal Mrs. Sangeeta Kohli. I would also like to thank my project guide & our coordinator Mrs. Shruti Chavarkar for her valuable support and guidance whenever needed. I also feel heartiest sense of obligation to my library staff members for helped in collection of data and also in processing as well as in drafting manuscript and I express my deepest regards to all staff members for helping us and giving us their valuable time and providing all the needed facilities. Last, but not least, I would like to thank my friends and colleagues for always being there

Executive Summary 2

Life insurance in its modern form came to India from England in 1818 with the formation of Oriental Life Insurance Company. The Government of India nationalized the life insurance industry in January 1956 by merging about 245 life insurance companies and forming Life Insurance Corporation of India (LIC), which started functioning from 01.09.1956. For years thereafter, insurance remained a monopoly of the public sector. It was only after seven years of deliberation and debate that R. N. Malhotra Committee report of 1994 became the first serious document calling for the re-opening up of the insurance sector to private players. The sector was finally opened up to private players in 2001.The Insurance Regulatory and Development Authority, an autonomous insurance regulator set up in 2000, has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. Insurance is a federal subject in India. There are two legislations that govern the sectorThe Insurance Act-1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again.

Objectives:  To compare cost efficiency and financial performance of Life Insurance Corporation of India and private sector life insurance companies in India.  To understand the concept and mechanism of insurance  To predict the volume of new business and total premium of life insurance sector in India.  To encourage the expansion of capital markets,  To enable the investors to take a close view of the fund performance over the years,  To monitor the insurance schemes transactions.

INDEX 3

Sr no.

Chapter names 1 Introduction 1.1 Brief history of Insurance 1.2 Principles of Insurance 1.3 Functions of Insurance

Page no. 6-17 9 10 16

2 Regulatory Authority of Insurance 2.1 Malhotra Committee 2.2 Insurance Act 2.3 Insurance Regulatory and Development Authority

1823 19 21 22

3 Life Insurance 3.1 Life Insurance in India 3.2 Features of Life Insurance Contract 3.3 Types of Life Insurance Policies 3.4 Profile of Life Insurance Companies in India

2432 25 28 29 32

4 Life Insurance Corporation of India

3336

(Public sector company)

5 HDFC Life Insurance 4

3739

(Private sector company)

6 Data Analysis of Life Insurance Companies 6.1 Market share based on Premium and Policies 6.1.1 Market share based on Total Premium 6.1.2 Market share based on Renewal Premium 6.1.3 Market share based on Total Policies 6.1.4 Market share based on New Business

4056 4148 41 43 45 47

4955 6.2 Prediction of New Business & Total Premium 49 6.2.1 Prediction of New Business for Public Sector 6.2.2 Prediction of New Business for Private Sector 50 6.2.3 Prediction of Total Premium for Public Sector 52 6.2.4 Prediction of Total Premium for Private Sector 54 6.3 Cost efficiency of Life insurnce Companies

56

7 Swot Analysis of Insurance Industry in India 7.1 Strengths / opportunities of Insurance Industry 7.2 Weakness / Challenges of Insurance Industry

5759 58 59 60

8 Conclusion

61

Biblography 5

CHAPTER 1. INTRODUCTION

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Insurance is a mechanism of collecting money from a larger group in small amounts called premium and compensating few people who are victims of losses and damages. The concept of insurance involves paying a premium to the insurance company to provide cover on a certain risk.

An individual buys an insurance policy

Individual pays a premium to the insurance company

The insurer agrees to pay a specified amount of money in case of loss

Insurance refers to the market for insurance in India which covers both the public and private sector organisations. It is listed in the Constitution of India on the in the Seventh Schedule meaning it can only be legislated by the central government.

Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for payment. It is a form of risk management primarily used to hedge against the risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is the person or entity buying the insurance policy. The amount of money to be charged for a certain amount of insurance coverage is called the premium. Risk management, the practice of appraising and controlling risk, has evolved as a discrete field of study and practice. The transaction involves the insured assuming a guaranteed and known relatively small loss in the form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the insured in the case of a financial (personal) loss. The insured receives a contract, called the insurance policy, which details the conditions and circumstances under which the insured will be financially compensated.

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The insurance sector has gone through a number of phases by allowing private companies to solicit insurance and also allowing foreign direct investment. India allowed private companies in insurance sector in 2000, setting a limit on FDI to 26%, which was increased to 49% in 2014. [1]

However, the largest life-insurance company in India, Life Insurance Corporation of India is

still owned by the government and carries a sovereign guarantee for all insurance policies issued by it.

Definition In financial sense: According to Reegel and Miller, “Insurance is a social device whereby the uncertain risks of individuals may be combined in a group and thus made more certain,small periodical contributions by the individuals providing a fund,out of which,those who suffer losses may be reimbursed.”

In legal sense “Insurance is a contracted agreement whereby one party agrees in consideration of the price paid to him (premium) to compensate another party for losses.”

A contract (policy) in which an individual or entity receives financial protection or reimbursement against losses from an insurance company. The company pools clients' risks to make payments more affordable for the insured

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1.1 BRIEF HISTORY OF INSURANCE The Indian life insurance industry has its own origin and history, since its inception. It has passed through many obstacles, hindrances to attain the present status. Insurance owes its existence to 17th century England. In fact, it took shape in 1688 at a rather interesting place called Lloyd's Coffee House in London, where merchants, ship-owners and underwriters met to discuss and transact business. The first stock companies to get into the business of insurance were chartered in England in 1720. The year 1735 saw the birth of the first insurance company in the American colonies in Charleston. In 1759, the Presbyterian Synod of Philadelphia sponsored the first life insurance corporation in America for the benefit of ministers and their dependents. Life insurance in its modern form came to India from England in 1818 with the formation of Oriental Life Insurance Company (OLIC) in Kolkata mainly by Europeans to help widows of their kin. Later, due to persuasion by one of its directors (Shri Babu Muttyal Seal), Indians were also covered by the company. However, it was after 1840 that life insurance really took off in a big way. By1868, 285 companies were doing business of insurance in India. Earlier these companies were governed by Indian company Act 1866.

By 1870, 174 companies ceased to exist, when British Parliament enacted Insurance Act 1870. These companies however, insured European lives. Those Indians who were offered insurance cover were treated as sub-standard lives and were accepted with an extra premium of 15% to 20%. By the end of the 18th century, Lloyd's had brewed enough business to become one of the first modern insurance company.

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1.2 PRINCIPLES OF INSURANCE A contract of insurance may be defined as a contract between two parties whereby a person undertakes in consideration of a fixed sum of money to pay to the other a fixed amount of money on the happening of a certain event ( death or maturity of policy) or to pay the amount of actual loss when it takes place through a risk insured ( in case of property). Following are the important principles of insurance contract: 1. 2. 3. 4. 5. 6.

Principle of utmost good faith. Principle of insurable interest. Principle of indemnity. Principle of subrogation. Principle of contribution. Principle of proximate cause.

Principle of utmost good faith. The principle of utmost good faith also known as “Uberrimae Fedei”. The contract of insurance is a contract based on utmost good faith. It is duty bound on the parties to disclose all material facts and figures relating to the subject matter of the insurance contract. A material fact is one which affects the judgement or decision of both the parties in entering into the contract. If this principle is not observed by either party, the contract may be avoided by the other. The duty of disclosure is absolute and positive. Most of the coomercial contracts are subject to the doctrine of ‘Caveat empter’ ( let the buyer beware ) which does not prevail in the insurance contract. In the above doctrine it is the duty of the buyer to satisfy himself, the genuineness of the subject matter and the seller is under no obligations to supply information about it. But in the insurance contract both the parties should disclose in the form in which it really exist and there should be no concealment, misrepresentation, mistake, or fraud about the material facts. Even though, the principle is equally applicable to both the parties, the onus of 10

making a full disclosure of al material facts rests primarily on the insured. Examples of material facts are: a) In life insurance : Information relating to age, income, health, diseases, family history, nature of business or profession. b) In fire insurance, it is relating to activities of firm, condition of godown, the detailsof the goods stored, whether such goods are of hazardous nature. In motor insurance, details of the drivers, condition of vehicle etc.

The whole truth must be disclosed about the subject matter of insurance, so that the underwriter may know the extent of his risk and the amount he must charge for the insurance policy as a premium. It is the duty of the insurer to disclose all the relevant facts about the policy conditions and benefits. The facts should be disclosed at the time of entering into the contract and if there are some changes subsequently, then the same should be intimated to the insurer by the insured.

Principle of insurable interest: The contract is valid only when the insured possess an insurable interest in the subject matter to be insured. The insurable interest is the pecuniary interest in the property to be insured whereby the insured is benefited by the existence of the subject matter and will suffer financial loss on the death or damage of the subject matter. In the words of Reegel and Miller, “An insurable interest is an interest of such a nature that the possessor would be financially injured by the occurrence of the event insured against.

The essentials of a valid insurable interest are the following: a) There should be subject matter to be insured. b) The relationship between the subject matter and the policy holder must be recognised by 11

law. c) The policy holder should have monetary relationship with the subject matter and the insured risk must be capable of financial evaluations. d) The relationship between the policy holder and the subject matter should be such that the insured is economically benefited by the survival existence of the subject matter or will suffer economic loss by the death or non- existence of the subject matter. e) The insurable interest must exist both at the time of the proposal and at the time of claims in the fire insurance but in the case of life insurance it may not be present at the time of claim, if the policy is assigned. In case of marine insurance it must exist at the time of claim. Insurable interest is the basis of legality of insurance contracts. In the absence of the insurable interest, the insurance contract becomesvoid and such void contracts are contracts against public interests.

Principle of indemnity: The very foundation of every rule which has been applied to insurance law is that the contract of insurance contained in a marine or fire policy is a contract of indemnity only. If ever a preposition is brought forward which is in variance with it, that is to say, which either will prevent the assured from obtaining a full indemnity or which gives the assured more than a full indemnity, that proposition must certainly be wrong. The principle of indemnity implies that on the happening of an event insured against, the insurer undertakes to place the insured, in the same pecuniary (monetary) position that he occupied immediately before the event. Indemnity means the exact financial compensation, which is paid to the insured. According to this contract, the insured should be neither better off nor worse off after receiving the insured amount in case of loss due to eventualities. The main object of this principle is to ensure that the insured is not able to use this contract for speculation or gambling. The indemnity prevents the insured from benefiting under the contract and to reduce the impact of moral hazards. The principle is applicable to all types of contract except life insurances, personal accident and sickness insurance. Under the contract of 12

insurance, the sum assured will be paid by the insurer when the person dies, due to the fact that life cannot be indemnified. The principle of indemnity does not apply to personal insurance because the amount of loss is not easily calculable there. The measure of indemnity is decided, at the time of entering into the contract itself. In the event of claim the insured must: a) Prove that he / she has sustained a monetary loss. b) Prove the extent and value of his / her loss. c) Transfer any rights which he / she may have for recovery from another source to the insurer, if he / she has been fully indemnified.

Principle of subrogation: This principle is also a corollary to the principle of indemnity. Subrogation may be defined as the transfer of rights and remedies of the insured to the insurer who has compensated the insured in respect of the loss. a) It literally means, “to stand in place of”. It is the right of one person to stand at law in the place of another and to avail all rights and remedies of that other person. b) Often when a claim occurs there may be two avenues of recovery. Suppose “A” drives negligently and causes an accident damaging B’s car. If B’s car is insured then two options are open to “B” to recover his loss. “B” can sue “A” for damages or he can claim from his insurer. If B pursues both avenues he will receive double compensation. To prevent B from profiting from his loss subrogation is used in terms of which once the insurer has paid B the insurer assumes all B’s rights to sue A. this ensure that principle of indemnity is preserved.

Subrogation has a number of sub-principles namely:

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a) The insurer cannot be subrogated to the insured’s right of action until it has paid the insured and made good the loss. b) The insurer can be subrogated only to actions, which the insured would have brought him. c) The insurer must not prejudice the insurer’s right of subrogation. Thus the insured may not compromise or renounce any right of action he has against the 3 rd party, if by doing so he could diminish his loss. d) Subrogation against the insurer. Just as insured cannot profit from his loss the insurer may not make a profit from the subrogation rights. The insurer is only entitled to recover the exact amount they paid as indemnity nothing more. If they recover more the balance should be given to the insured. e) Subrogation gives the insurer the right of salvage.

Principle of Contribution: The principle is applicable to all types of insurance contracts, except life insurance. Where an insurer gets the subject matter insured with more than one insurer, in case of loss or damage to the insured property, the insurers shall contribute towards the claim in proportion to the sum assured with each. Contribution condition is a corollary to the principle of indemnity. If an insured obtains more than one policy covering the same risk, he cannot recover in total more than a full indemnity. The essentials of this principle are: a) b) c) d)

The policies covers the same perils. The policies cover the same subject matter. The policies should be in force when loss occurs. The policies cover a common interest

Principle of proximate cause: Proximate cause can be defined as “ The active efficient cause that sets in motion a chain of events which brings about a result, without the intervention of any new force started 14

and working actively from a new independent source.” a) In Insurance the rule is that for a loss to be paid or compensated under a policy of insurance, it must have been caused by an insured peril. Unless the loss is proximately caused by an insured peril the policy does not pay or respond. b) The onus of proving that the loss was proximately caused by an insured peril rests with the insured. c) If the insured makes a prima-facie case that the loss was proximately caused by an insured peril the insurer is obliged to indemnify unless they can prove that an exception applies. This principle keeps the scope of the insurance within the limits intended by the insured and the insurer when the contract was made. It also helps in giving effect to the real meaning and intention of insurance contract. In the absence of this rule, every loss could be claimed by the insured and the insurer could reject every loss. Thus, the principle serves not only to define the scope of coverage under the insurance contract but also to protect the rightsof the parties to the contract. A proximate cause is the first event in a chain of events that gives rise to a claim of the insurance.

1.3 FUNCTIONS OF INSURANCE The functions of Insurance can be bifurcated into three parts: (a) Primary Functions 15

(b) Secondary Functions (a) Primary Functions The primary functions of insurance include the following:  Provide Protection The primary function of insurance is to provide protection against future risk, accidents and uncertainty. Insurance cannot check the happening of the risk, but can certainly provide for losses of risk. Insurance is actually a protection against economic loss, by sharing the risk with others.  Assessment of risk Insurance determines the probable volume of risk by evaluating various factors that give rise to risk. Risk is the basis for determining the premium rate also.  Collective bearing of risk Insurance is a device to share the financial loss of few among many others. Insurance is a mean by which few losses are shared among larger number of people. All the insured contribute premiums towards a fund, out of which the persons exposed to a particular risk are paid.  Savings and investment Insurance serves as a tool for savings and investment, insurance is a compulsory way of savings and it restricts the unnecessary expenses by the insured. For the purpose of availing income-tax exemptions, people invest in insurance also. (b) Secondary Functions The secondary functions of insurance include the following:  Prevention of Losses Insurance cautions individuals and businessmen to adopt suitable device to prevent unfortunate consequences of risk by observing safety instructions; installation of automatic sparkler or alarm systems, etc. Reduced rate of premiums stimulate more business and better protection to the insured.  Small capital to cover large risks

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Insurance relieves the businessmen from security investments, by paying small amount of premium against larger risks and uncertainty.  Contributes towards the development of large industries Insurance provides development opportunity to large industries having more risks. Even the financial institutions may be prepared to give credit to sick industrial units which have insured their assets including plant and machinery.  Source of Earning Foreign Exchange Insurance is an international business. The country can earn foreign exchange by way of issue of insurance policies.  Risk Free Trade Insurance promotes exports insurance, which makes the foreign trade risk free with the help of different types of policies under marine insurance cover.

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CHAPTER 2 REGULATORY AUTHORITY OF INSURANCE

2.1 Malhotra Committee In 1993, Malhotra Committee- headed by former Finance Secretary and RBI Governor R.N. Malhotra- was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and 18

competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognising that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and some of the key recommendations included: (i) Structure Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate. (ii) Competition Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state. (iii) Regulatory Body The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance- a part of the Finance Ministry- should be made independent. 33 (iv) Investment Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (their current holdings to be brought down to this level over a period of time) (v) Customer service LIC of India should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in the insurance industry. The committee emphasised that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the 19

minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body- The Insurance Regulatory and Development Authority.

2.2 INSURANCE ACT,1938 The Insurance Act,1938 and its subsequent amendments in 1950 and 1999 are serious attempts to address various issues relating to the business.Some of them are:   

Protection of policy holder interest. Limiting the expenses of insurance organizations. Establishment of tariff advisory committee. 20

  

Solvency levels to be maintained Creation of insurance organization. Defining the roles and responsibilities of various functionaries associated with the business.

Features of Insurance Act 1938: 1. The Act applies to all types of insurance business- life,marine etc done by companies incorporated in India. 2. The insurer carrying on the business of life insurance,general insurance or re-insurance shall be registered only if: a) A paid up capital or rupees one hundred crores,in case of a person carrying on the business of life insurance or general insurance;or b) A paid up capital of rupees two hundred crores,in case of a person carrying on exclusively the business as a reinsurer. 3. Regarding deposits,to prevent the growth of insurers of small financial resources or speculative concerns,the Act provided for registration of all insurers and a substantial deposit with the Reserve Bank. 4. No company can carry on the insurance business unless he has obtained from the Authority a certificate of registration for the particular class of business 5. The audited accounts and balance sheet and actuarial report and abstract and four copies thereof shall be furnished as returns to the Authority. 6.

2.3 The Insurance Regulatory and Development Authority (IRDA) Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents.

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The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products. The regulatory body for insurance IRDA has been established with the following mission: To protect the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.‟

Duties, Powers and Functions of IRDA Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA: (1) Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. (2) Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include: (a) Issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; (b) Protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; (c) Specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; (d) Specifying the code of conduct for surveyors and loss assessors; (e) Promoting efficiency in the conduct of insurance business; (f) Promoting and regulating professional organizations connected with the insurance and reinsurance business; (g) Levying fees and other charges for carrying out the purposes of this Act; (h) Calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business; (i) Control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); (j) Specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; (k) Regulating investment of funds by insurance companies; (l) Regulating maintenance of margin of solvency; (m)Adjudication of disputes between insurers and intermediaries or insurance intermediaries; 22

(n) Supervising the functioning of the Tariff Advisory Committee; (o) Specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f); (p) Specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and (q) Exercising such other powers as may be prescribed.

CHAPTER 3 LIFE INSURANCE

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3.1 Life Insurance in India Life insurance in the modern form was first set up in India through a British company called the Oriental Life Insurance Company in 1818 followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All these companies operated in India but did not insure the lives of Indians. They insured the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians, as they were treated as “substandard”. Substandard in insurance parlance refers to lives with physical disability. Pioneering efforts of reformers and social workers like Raja Rammohan Ray, Dwarakanath Tagore, Ramatam Lahiri, Rustomji Cowasji and others led to entry of Indians in insurance business. The first Indian insurance company under the name „Bombay Life Insurance Society‟ started its operation in 1870, and started covering Indian lives at standard rates. Later „Oriental Government Security Life Insurance Company‟, was established in 1874, with Sir Phirozshah Mehta as one of its founder directors. Insurance in India can be traced back to the Vedas. For instance, yogakshema, the name of Life Insurance Corporation of India's corporate headquarters, is derived from the Rig Veda. The term suggests that a form of „community insurance‟ was prevalent around 1000 BC and practiced by the Aryans. Insurance business was conducted in India without any specific regulation for the insurance business. They were subject to Indian Companies Act 1866. After the start of the „Be Indian Buy Indian Movement‟ (called Swadeshi Movement) in 1905, indigenous enterprises sprang up in many industries. It was during the swadeshi movement in the early 20th century that insurance witnessed a big boom in India with several more companies being set up. Not surprisingly, the Movement also touched the insurance industry leading to the formation of dozens of life insurance companies along with provident fund companies (provident fund companies are pension funds). In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There are several striking features of these legislations. They were the first legislations in India that particularly targeted the insurance sector. They did not include general insurance business. The government did not feel the necessity to regulate general insurance. They restricted activities of the Indian insurers. As these 24

companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into investments, expenditure and management of these companies' funds. In 1914 there were only 44 companies; by 1940 this number grew to 195. Business in force during this period grew from Rs.22.44 crores to Rs.304.03 crores (1628381 polices). Life fund steadily grew from Rs.6.36 crores to Rs.62.41 crores. In 1938, the insurance business was heavily regulated by enactment of insurance Act 1938 (based on draft bill presented by Sir N.N.Sarcar in Legislative Assembly in January 1937). From here onwards the growth of life insurance was quite steady except for a setback in 1947-48 due to aftermath of partition of India. In 1948, there were 209 insurances, with 712.76 crores business in force under 3,016, 000 policies. The life fund by then grew to 150.39 crores. By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country's life insurance scene. However, in the absence of regulatory systems, scams and irregularities were almost a way of life in most of these companies. Despite the mushroom growth of many insurance companies, the per capita insurance in Indian was merely Rs.8.00 in 1944 (against Rs.2,000 in US and Rs.600 in UK), besides some companies were indulging in malpractices, and a number of companies went into liquidation. Big industry houses were controlling the insurance and banking business resulting in interlocking of funds between banks and insurance companies. This shook the faith of the insuring public in insurance companies who were seen as custodians of their savings and security. The nation under the leadership of Pandit Jawaharlal Nehru was moving towards socialistic pattern of society with the main aim of spreading life insurance to rural areas and to channelize huge funds accumulated by life insurance companies to nation building activities. The Government of India nationalized the life insurance industry in January 1956 by merging about 245 life insurance companies and forming Life Insurance Corporation of India (LIC), which started functioning from 01.09.1956. After completing the arduous task of integration of about 245 life insurance companies, LIC of India gave an exemplary performance in achieving various objectives of nationalization. The non-life insurance business continued to thrive with the private sector till 1972. Their operations were restricted to organized trade and industry in large cities. The general insurance industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies- National Insurance Company, New India Assurance Company, Oriental Insurance 25

Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC). For years thereafter, insurance remained a monopoly of the public sector. It was only after seven years of deliberation and debate that R. N. Malhotra Committee report of 1994 became the first serious document calling for the re-opening up of the insurance sector to private players. The sector was finally opened up to private players in 2001.The Insurance Regulatory and Development Authority, an autonomous insurance regulator set up in 2000, has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

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3.2 LIFE INSURANCE CONTRACT 1. Elements of valid contract: Since the life insurance contract is a contract between the insured and the insurer, it is governed by the Indian Contract Act. The contract of insurance must contain the essential elements of a valid contract ( offer and acceptance, legal consideration, competency of the parties, free consent and legal object). 2. Insurable interest: The insured must have an insurable interest in the life to be insured. The insurable interest must exist at the time of the contract of insurance. The risk against this policy is the death of the insured. I. Insurable interest in own’s life II. Insurable interest in other’s life

3. Utmost good faith: The principle of utmost good faith should be observed by both the parties in life insurance. At the time of taking a policy, the policy holder should disclose 27

all the material facts. Similarly the insurer is bound to exercise same good faith in disclosing facts. 4. Warranties: Warranties are an important feature of life insurance contract. Warranties are integral part of contract i.e. they form the basis of the contract between proposer and insurer. The contract shall become null and void if any statement whether material or non material facts are untrue. The policy insured will contain that the proposal and the personal statement will form part of the policy and be the basis of the contract. 5. Assignment and nomination: Assignment and nomination are essential features of life insurance policy. In the case of nomination, a person or persons to whom the money secured by the policy shall be paid on the death of insured against but the rights of insured are not transferred. In the case of assignment, the rights are transferred to the assignee for some legal cconsideration or love and affection. 6. Premium: Premium is the price paid by the insured for the risk or loss undertaken by the insurer. The premium is paid monthly, quarterly, half yearly or in annual instalment for a certain period. 7. Certainty of event: In life insurance policy the insurer has to pay the insured amount at the time of death of the insured or at maturity which is certain.

3.3Types of Life Insurance Policies A life insurance policy could offer pure protection (insurance), another variant could offer protection as well as investment while some others could offer only investment. In India, life insurance has been used more for investment purposes than for protection in one‟s overall financial planning. Followings are the types of life insurance policy:  Term Life Insurance Policy As its name implies, term life insurance policy is for a specified period. It depends on the length of time. It has one of the lowest premiums among insurance plans and also carries an added advantage of fixed payments that do not increase during the term of the policy. In case of the policy holder's untimely demise, the benefit amount specified in the insurance agreement goes to the nominees.  Whole Life Insurance Policy

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Whole life insurance policies do not have any fixed term or end date and is only payable to the designated beneficiary after the death of the policy holder. The policy owner does not get any monetary benefits out of this policy. Because this type of insurance involves fixed known annual premiums, it's a good option to ensure guaranteed financial benefits for surviving family members.  Money Back Plan With a money back plan, policyholder receives periodic payments, which are a percentage of the entire amount insured, during the lifetime of policy. It's a plan that offers insurance coverage along with savings. These policies provide for periodic payments of partial survival benefits during the term of the policy itself. A unique feature associated with this type of policies is that in the event of death of the insured during the policy term, the designated beneficiary will get the full sum assured without deducting any of the survival benefit amounts, which have already been paid as money-back components. Moreover, the bonus on such policies is also calculated on the full sum assured.  Pension Plan Pension plans are different from other types of life insurance because they do not provide any life insurance cover, but ensure a guaranteed income, either for life or for a certain period. The Policyholder makes the investment for a pension plan either with a single lump sum payment or through installments paid over a certain number of years. In return, he gets a specific sum every year, every half-year or every month, either for life or for a fixed number of years. In case of the death of the insured, or after the fixed annuity period expires for annuity payments, the invested annuity fund is refunded, usually with some additional amounts as per the terms of the policy.  Endowment Policy It is the most popular life insurance plan. This policy combines risk cover with objective of savings and investment. If the policy holder dies during the policy period, he will get the assured amount. Even if he survives he will receive the assured amount. The advantage of this policy is if the policy holder survives after the completion of policy tenure, he receives assured amount plus additional benefits like bonus from the insurance company. Designed primarily to provide a living benefit, along with life insurance protection, the endowment

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policy makes a good investment if policyholder wants coverage, as well as some extra money.

There are two types of Endowment policy: (a) Without-profit endowment plan (b) With- profit endowment plan (a) Without profit endowment plan These plans do not participate in the profits the insurance company makes each year. Apart from the sum assured, the policyholder could possibly get a loyalty bonus, which is a one time payout. (b) With-profit endowment plan These plans share the profits the insurance company makes each year with the policyholder. So they offer more returns than without-profit endowment plans and are more expensive i.e. the premiums will be higher than without-profit endowment plans.  Unit-linked insurance plan (ULIP) Unit-linked insurance plans gives a policyholder greater control on where premium can be invested. The annual premium is invested in various types of funds that invest in debt and equity in a proportion that suits all types of investors. A policyholder can switch from one fund plan to another freely and can also monitor the performance of his plan easily. ULIP is suitable for those who understand the stock market well.

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3.4 Profile of Life Insurance Companies in India All private life insurance companies and public sector company operating in India during 200001 to 2009-10 were taken for the study. Life Insurance Corporation which is the only public sector life insurer and twenty two private sector life insurers, most of them joint ventures between Indian groups and global insurance giants, were taken for the study.

PUBLIC SECTOR Life Insurance Corporation of India Life Insurance Corporation of India (LIC) is an autonomous body authorized to run the life insurance business in India with its Head Office at Mumbai. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident fund societies were operating in India at the time of nationalization. Nationalization was accomplished in two stages; initially the management of the companies was taken over by means of an Ordinance, and later, the ownership by means of a comprehensive bill. The Parliament of India passed the Life Insurance Corporation Act on the 19 th of June 1956, and the Life Insurance Corporation of India was created on 1 st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.

PRIVATE SECTOR The Government having tried various models for the insurance industry such as privatization with negligible regulation (pre 1956) and nationalization (1956-2000) and having observed sub optimal performance of the sector, resorted to adopting a hybrid model of both these, resulting in privatization of the sector with an efficient regulatory mechanism (post 2000). This was initiated 31

with the aim of making the industry competitive so that there are more players offering a greater variety of products over a large section of the population. The following companies are entitled to do insurance business in India.

CHAPTER 4 LIFE INSURANCE CORPORATION OF INDIA ( Public sector company)

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Life Insurance Corporation of India (LIC) is an Indian state-owned insurance group andinvestment company headquartered in Mumbai. It is the largest insurance company in India with an estimated asset value of 1560482 crore (US$240 billion).[2] As of 2013 it had total life fund of Rs.1433103.14 crore with total value of policies sold of 367.82 lakh that year. The company was founded in 1956 when the Parliament of India passed the Life Insurance of India Act that nationalised the private insurance industry in India. Over 245 insurance companies and provident societies were merged to create the state owned Life Insurance Corporation. History The Oriental Life Insurance Company, the first company in India offering life insurance coverage, was established in Calcutta in 1818 by Bipin Behari Dasgupta and others. Its primary target market was the Europeans based in India, and it charged Indians heftier premiums. Surendranath Tagore (son of Satyendranath Tagore) had founded Hindusthan Insurance Society, which later became Life Insurance Corporation. The Bombay Mutual Life Assurance Society, formed in 1870, was the first native insurance provider. Other insurance companies established in the pre-independence era included 

Postal Life Insurance (PLI) was introduced on 1 February 1884



Bharat Insurance Company (1896)



United India (1906)



National Indian (1906)

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

National Insurance (1906)



Co-operative Assurance (1906)



Hindustan Co-operatives (1907)

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Indian Mercantile

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General Assurance



Swadeshi Life (later Bombay Life)



Sahyadri Insurance (Merged into LIC, 1986)

The first 150 years were marked mostly by turbulent economic conditions. It witnessed, India's First War of Independence, adverse effects of the World War I and World War II on the economy of India, and in between them the period of world wide economic crises triggered by the Great depression. The first half of the 20th century also saw a heightened struggle for India's independence. The aggregate effect of these events led to a high rate of and liquidation of life insurance companies in India. This had adversely affected the faith of the general public in the utility of obtaining life cover. Nationalisation in 1955 In 1955, parliamentarian Amol Barate raised the matter of insurance fraud by owners of private insurance agencies. In the ensuing investigations, one of India's wealthiest businessmen, Sachin Devkekar, owner of the Times of India newspaper, was sent to prison for two years. Eventually, the Parliament of India passed the Life Insurance of India Act on June 19, 1956 creating the Life Insurance Corporation of India, which started operating in September of that year. It consolidated the life insurance business of 245 private life insurers and other entities offering life insurance services, this consisted of 154 life insurance companies, 16 foreign companies and 75 provident companies. The nationalisation of the life insurance business in India was a result of the Industrial Policy Resolution of 1956, which had created a policy framework for extending state control over at least seventeen sectors of the economy, including life insurance. Growth as a monoply From its creation, the Life Insurance Corporation of India, which commanded a monopoly of soliciting and selling life insurance in India, created huge surpluses, and by 2006 was contributing around 7% of India's GDP The Corporation, which started its business with around 300 offices, 5.7 million policies and acorpus of INR 45.9 crores (US$92 million as per the 1959 exchange rate of roughly 5 for

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US$1),[5] had grown to 25,000 servicing around 350 million policies and a corpus of over 800000 crore (US$130 billion) by the end of the 20th century. Liberalisation post 2000s In August 2000, the Indian Government embarked on a program to liberalise the Insurance Sector and opened it up for the private sector. Ironically, LIC emerged as a beneficiary from this process with robust performance, albeit on a base substantially higher than the private sector. In 2013 the First Year Premium compound annual growth rate (CAGR) was 24.53% while Total Life Premium CAGR was 19.28% matching the growth of the life insurance industry and also outperforming general economic growth.

Awards and recognitions 

The Economic Times Brand Equity Survey 2012 rated LIC as the No. 6 Most Trusted Service Brand of India.



From the year 2006, LIC has been continuously winning the Readers' Digest Trusted brand award.



Voted India's Most Trusted brand in the BFSI category according to the Brand Trust Report for 4 continuous years - 2011-2014 according to the Brand Trust Report

Employees and Agents As on 31 March 2014, LIC had 1,20,388 employees, out of which 24,867 were women (20.65%).

Category of employees

Total Number

35

No. of Women

Class-I Officers

31,420

6,292

Development Officers

26,621

1,033

Class III/IV employees

62,347

17,542

Total

1,20,388

24,867

Agency LIC had 11,95,916 agents as on 31 March 2014, out of which the number of active agents were 11,32,677 (94.71%)

As per IRDA Annual Report 2012-13 the Total Life Fund of the Life Insurance Industry was Rs.17,44894 crore. The increase in Life Funds during 2013-14was Rs.1,94,300 crore compared to Rs.1,80,000 crore in 2012-13 showing a growth of 7.94 %

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CHAPTER 6 HDFC Life Insurance ( Private sector company )

HDFC Life (HDFC Standard Life Insurance Company) is a long-term life insurance provider with its headquarters in Mumbai, offering individual and group insurance. It is a joint venture between Housing Development Finance Corporation Ltd (HDFC), one of India's leading housing finance institution and Standard Life plc, leading well known provider of financial

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savings & investments services in the United Kingdom. HDFC Ltd. holds 72.37% and Standard Life (Mauritius Holding) Ltd. holds 26.00% of equity in the joint venture, while the rest is held by others.

Corporate History The Insurance Regulatory and Development Authority (IRDA) was constituted in 1999 as an autonomous body to regulate and develop the insurance industry. The IRDA opened up the market in August 2000 with the invitation for application for registrations. HDFC Life was established in 2000 becoming the first private sector life insurance company in India By 2001, the company had its 100th customer, strengthened its employee force to 100 and had settled its first claim. HDFC Life launched its first TV advertising campaign 'Sar Utha Ke Jiyo' in 2005. In 2006, a study conducted by the Brand Equity – Economic Times had put HDFC Life at 29th rank in the most trusted Indian Brands amongst the Top 50 Service Brands of 2010 The Insurance Regulatory and Development Authority (IRDA) gave accreditation to HDFC Life for 149 training centres housed in its branches to cater to the mandatory training required to be given as well as for other sales training requirements in 2009. In 2012, it the first private life insurance company to bring back pension plans under the new regulatory regime, with the launch of two pension plans - HDFC Life Pension Super Plus and HDFC Life Single Premium Pension Super.

Presence & Distribution HDFC Life has about 400+ branches and presence in 980+ cities and towns in India. The company has also established a liaison office in Dubai. HDFC Life distributes its products through a multi channel network consisting of Insurance agents, Bancassurance partners (HDFC Bank, Saraswat Bank, Indian Bank), Direct channel, Insurance Brokers & Online Insurance Platform.

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CHAPTER 6 DATA ANALYSIS FOR LIFE INSURANCE COMPANIES.

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6.1 Market share based on premium and policies. 6.1.1 Market Share based on Total Premium The most important indicator to assess life insurers is the amount of premium collected. The sum assured is fragmented into installments of premium. In other words, premium is the fragmented value of the Sum Assured of policy, payable continuously at regular intervals until the maturity of the policy. The total premium consists of first year premium, Renewal Premium and Single Premium. The amount of premium otherwise called premium rate, depends on: Mortality experience of insured lives Expenses incurred by the company in administrating the life fund Yield on investments of life fund Besides these three, the premium rates may also be affected by other factors namely interest rates and taxation rates.

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This table shows the market share of public and private sector life insurance companies based on total premium. The total premium of Life Insurance Corporation of India increased continuously since 2000-01 to 2009-10.However a significant decline is noticed in market share from 99.98% in 2000-01 to 70.10% in 2009-10. While in case of private sector, the total premium income and market share of total premium have both increased. The market share of private sector life insurance companies on the basis of total premium has increased from 0.02% in 2000-01 to 29.90% in 2009-10. It reflects that the private sector has been successful in capturing the market share from Life Insurance Corporation of India.

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6.1.2 Market Share based on Renewal Premium Premium collected on business in force is called renewal premium. Increase in the renewal premium is a good measure of quality of the business underwritten by the insurer. It reflects increase in their persistency ratio and enables insurers to bring down overall cost of doing business.

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This table shows the market share of public and private sector life insurance companies based on Renewal premium. The public sector recorded 99.99% market share based on renewal premium in the year 2000-01 but it has decreased to 73.64% in the year 2009-10. While that of the private sector recorded 0.01% in the year 2000-01 which increased to 26.36% in the year 2009-10. Private sector has managed to take away nearly 26% of the market share from LIC of India. LIC of India is still the market leader in this segment.

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6.1.3 Market Share based on Total Policies The life insurance contract provides elements of protection and investment. After getting insured, the policy-holder feels a sense of protection because he shall be paid a definite sum at death or maturity. Since a definite sum must be paid, the element of investment is also present. In other words, life insurance provides against pre-mature death and a fixed sum at maturity of policy. The two elements of protection and investment exist in various degrees in different types of policies. The older the policy, the lesser the element of protection and higher the element of investment and vice-versa is also true. Having different elements in different policies, the policy-holders are free to choose the best policies according to their requirements. It should be known that no one policy is the best policy for all the policy-holders due to variance in cost, elements of investments and protection, requirements of the policy-holders and availability of the policy. Life insurance policies are divided on the basis of duration of policy, method of premium payments and participation.

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This table shows the market share of both the public and the private sector life insurance companies based on total policies. The market share of LIC of India was 99.23% in the year 2000-01.It has decreased to 73.02% in the year 2009-10. While that of the private sector was 0.77% in the year 2000-01 and increased to 26.98% in the year 2009-10. There are concerns over Life Insurance Corporation of India’s declining market share based on total policies and concurrent rise of private insurers who have just entered ten years ago. Innovative products, smart marketing and aggressive distribution channels has enabled private life insurance companies to sell policies. As of today, Life Insurance Corporation of India has retained the market share based on total policies.

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6.1.4 Market Share based on New Business Premium collected on the new business is called first year premium. It also includes single premium. It is the first Premium collected by the insurance companies from policy holders.

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This table shows the market share of public and private sector life insurance companies based on New Business. The market share of Life Insurance Corporation of India on the basis of the first year premium in the year 2000-01 was 99.93% but it declined to 60.89% in 2008-09 and has slightly risen to 65.08% in 2009-10 while the market share of private sector life insurance companies was only 0.07% in 2000-01, which increased up to 39.11% in 2008-09 and slightly declined to 34.92% in 2009-10.The growth in first year premium of private sector was fuelled by sales of unit linked products.

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6.2 Prediction of New Business & Total Premium of Life Insurance Sector for the Year 2015

6.2.1 Prediction of New Business for Public Sector

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6.2.2

Prediction of New Business for Private Sector

50

51

6.2.3

Prediction of Total Premium for Public Sector

52

53

6.2.4

Prediction of Total Premium for Private

Sector

54

55

6.3 Cost efficiency of Life Insurance Companies. Cost Efficiency Score

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CHAPTER 7 SWOT ANALYSIS OF INSURANCE INDUSTRY IN INDIA

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7.1 Strengths/Opportunities of Insurance Industry 1. The intense competition brought about by deregulation has encouraged the industry to innovate in all areas; from underwriting, marketing, policy holder servicing to recordkeeping. 2. The existence of stringent licensing requirements ensure that only adequately capitalized and professionally managed companies are eligible to carry out insurance and reinsurance. 3. The Insurance Regulatory Development Authority of India’s (IRDA) emphasis on quarterly reporting/monitoring of insurer solvency has enhance capital adequacy and transparency. 4. Aggressive marketing strategies by private sector insurers will buoy consumer awareness of risk and expand the markets for products. 5. Competition in a deregulated environment will allow market forces to set premiums that are appropriate for exposure and push insurers to differentiate their products and services. 6. Innovations in distribution and improvements in market penetration will follow as public and private insurers compete to market their products. Allowing insurers to issue their own policy wordings and set their own rates will enable underwriters to tailor products to meet client needs. Range of available products will increase because foreign companies bring with them a wide range of products and product development expertise. 7. Licensed brokers are very much part of the intermediary structure and only those with adequate capital, professional experience and expertise will be licensed by IRDA . 8. Capital structure of entire insurance industry will improve as foreign companies bring fresh capital with them. 9. Market efficiency will improve due to information dissemination, global operating knowledge and increased competition. 10. Management efficiency will increase because foreign companies bring with them global experience and management innovation. 11. Customers’ service will improve competition. which will finally benefit the consumers. Globalization will also improve Regulatory and Governance system. It will also improve market conduct and Ethical Business Standard.

7.2 Weaknesses/Challenges of Insurance Industry 58

1. Premiums rates will remain under pressure due to intense competition on more profitable lines. Falling premium income without a corresponding reduction in claims is likely to drive down profits. 2. Public and private sector insurers’ greater reliance on their investment portfolios to generate sufficient income and gains for net profits would subject them to the volatility of the financial markets. 3. Private insurers need to raise more capital otherwise growth could be constrained since reliance on reinsurance for capital relief is not always viable or available. 4. Traditional distribution channels, especially tied agents, need to improve to match the new product offerings. 5. There is general lack of transparency as financial and operational data for insurers are not readily available as none of India’s insurers are directly listed on stock exchanges. 6. Like all developing economies on a fast track, the shortage of trained insurance professionals and technicians at all levels cannot be remedied in the short term. 7. Natural catastrophes will always be present; the Indian sub-continent is vulnerable to cyclones, floods, hurricanes and earthquakes, and until there is a national capacity (similar to the terrorism pool) to manage losses, dependence on overseas reinsurers will continue.

CONCLUSION 59

Insurance plays an important role in general life. Risk exist every where, to cover these risk Insurance is very important. But the method or procedure of insurance need to be change. As days goes needs & requirements of the people get change. Insurance includes different-different products to fulfill the need of the people.

In our daily lives we encounter lot of risks which results in fiscal losses. One of the excellent ways to safeguard these losses is through insurance. The insurance firms in India take entire charge of any such losses against the payment forfeited every month in the form of premium. Insurance is a commercial means for relocating risks and covering fiscal losses.

Insurance is an integral part of any personal financial plan. The type of insurance and the amount of coverage you obtain all depends on your unique financial and family circumstances, and must be evaluated carefully.

Thus Insurance is a needy financial instrument that every individual should pursue for covering the risk of his life and providing safety against life, property, liability, disability, etc.

Bibliography

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Books/ Journals / Bulletins 1) The ICFAI University Press on Insurance – Indian Insurance Environment – by. K.B.S Kumar 2) Insurance ( Fund ) Management – by Aarthi Kalyanraman N. Lakshmi Kavitha 3) Basic of Insurance Industry - by N.M. Mishre

Webliography 1) 2) 3) 4)

www.insuremagic.com www.finance.cch.com www.wikipedia.com www.IRDA.org.in

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