Insurance Industry in India. Features, Reforms and Outlook

Transcription

1 Insurance Industry in India Features, Reforms and Outlook By Uma Narang Associate Professor, Department of Commerce, Post-graduate Government College, Chändigarh. New Century Publications New Delhi, India

2 Contents in Brief Part I: Evolution, Significance and Principles of Insurance 1. Nature and Functions of Insurance Evolution and Public Controi of Insurance Services Significance of Insurance for Society Principles of Insurance Classification of Insurance Services Part II: Life Insurance 6. Life Insurance: History and Formation of Life Insurance Corporation (LIC) of India Life Insurance: Features and Products Life Insurance: Investment of Funds Life Insurance: Treatment of Risk, Premium Calculation and Policy Conditions Private Sector in Life Insurance Part III: General (Non-life) Insurance 11. General Insurance: An Introduction Marine Insurance: History, Definitions and Subject Matter Marine Insurance: Basic Principles Marine Insurance: Kinds and Conditions Marine Insurance: Payment of Premium and Settlement of Claims

3 viu Insurance Industry in India 16. Fire Insurance: Basic Principles Fire Insurance: Main Clauses of Policy Fire Insurance: Types of Policies and Settlement of Claims Health Insurance: Evolution and Government Schemes Health Insurance: Various Types of Policies Motor Insurance: Law and Procedures Personal Accident Insurance Agricultural Insurance: Classification and Types Micro Insurance: Benefits, Regulations and Kinds Miscellaneous Insurance Reinsurance: Meaning, Need and Methods Part IV: Globalization and Privatization of Insurance Industry and Summing Up 27. Globalization and Privatization of Insurance Services Summing Up Part V: Appendices, Glossary, Bibliography and Index Appendix 1: Major Recommendations of the Committee on Reforms in the Insurance Sector (Chairman: R.N. Malhotra) Appendix 2: Insurance Regulatory and Development Authority Act, Glossary of Insurance Terms Bibliography Index

4 Contents in Detail About the Book Author's Profile Contents in Brief. Authör 's Note on the Book. v vi vn-viu xxx-xxxu Part I: Evolution, Significance and Principles of Insurance 1. Nature and Functions of Insurance Definitions of Insurance Functional Definitions Contractual Definitions General Definitions 1.2 Forms of Insurance Life Insurance General (Non-life) Insurance 1.3 Nature of Insurance Sharing of Risks Cooperative Device Value of Risk Payment Made at Contingency Large Number of Insured Persons Spreading of Risk Amount of Payment Based upon Certain Principles 1.4 Functions of Insurance Primary Functions Secondary Functions Other Functions 1.5 Difference between Assurance and Insurance 2. Evolution and Public Control of Insurance Services Marine Insurance 2.2 Fire Insurance 2.3 Life Insurance

5 X Insurance Industry in India 2.4 Miscellaneous Insurance 2.5 Public Control of Insurance Rationale for Insurance Control Weapons of Insurance Control 2.6 Insurance Regulatory and Development Authority (IRDA) of India Registration/Licensing Product and its Pricing Investment of Funds Solvency Margin Appointment of Actuary Appointment to Chief Executive/Managing Director Power of Investigation and Inspection Accounts and Balance Sheets Intermediaries Surveyors and Loss Assessors Reinsurance 3. Significance of Insurance for Society Spread of Risk through Co-operation 3.2 Insurance and Business Removal of Uncertainties Stimulation for Business Continuation Promotion of Employees' Weifare Source of Credit Growth of Business Competition Business Stability Key Man Indemnification Human Resources Development Correct Distribution of Cost Productive Utilization of Fund Judicious Allocation of Factors of Production 3.3 Insurance and Society Economic Growth Educational Advancement Protection of Wealth Health Awareness 3.4 Insurance and Economic Development Capital Formation

6 Contents xi Long-term Financial Resources Complementarity between Insurance and Banking Promotion of International Trade 3.5 Insurance and the Individual Promotion of Saving Elimination of Werries and Fears Removal of Dependency Investment Channel Protection of Mortgaged Property Flanning for Future Exemption from Tax Liability 4. Principles of Insurance Uniqueness of Insurance Business 4.2 Insurance as a Contract 4.3 Elements of General Contract Agreement (Offer and Acceptance) Free Consent Parties Competent to Make Contract Lawful Consideration Legal Relationship Legal Object Certainty and Possibility of Performance 4.4 Fundamental Principles of Insurance Contract Utmost Good Faith Insurable Interest Indemnity Subrogation Proximale Cause Contribution 4.5 Warranties 4.6 Assignment or Transfer of Interest 4.7 Pricing the Insurance (Rate Making) Adequacy Equity Economic Feasibility Stability Flexibility 4.8 Designing of Insurance Products

7 xii Insurance Industry in India Identifying Needs of the Consumers Social Dimensions Adverse Selection Transparent Disclosure Pricing 4.9 Insurance and Information Technology (IT) Database Management Systems Data Warehousing Decision Support Systems Group Linking Software Imaging and Workflow Technologies Mapping Call Centre Technology Video Linking Cat Models Intranet, Extranet, Internet 5. Classification of Insurance Services 5.1 Classification on the Basis of Nature of Insurance Life Insurance Fire Insurance Marine Insurance Social Insurance Miscellaneous Insurance 5.2 Classification from Business Point of View Life Insurance Non-life or General Insurance 5.3 Classification from Risk Point of View Personal Insurance Property Insurance Liability Insurance Fidelity Insurance 5.4 Difference between Life and Fire Insurance Part II: Life Insurance 6. Life Insurance: History and Formation of Life Insurance Corporation (LIC) of India 6.1 Life Insurance: An Introduction

8 Contents xiii 6.2 History of Life Insurance Life Insurance in Modern India 6.3 Nature of Life Insurance Economic Aspects Legal Aspects 6.4 Formation of Life Insurance Corporation (LIC) of India Objectives of Nationalization Organisational Set up Functions of LIC Different Departments of LIC Structure of LIC 7. Life Insurance: Features and Products Salient Features of Life Insurance 7.2 Advantages of Life Insurance 7.3 Whole-life Policies Single Premium Whole-life Policy Continuous Premium Payment Whole-life Policy Limited Payment Premium Whole-life Policy Convertible Whole-life Policy 7.4 Term Insurance Policies Straight Term (Temporary) Insurance Renewable Term Policies Convertible Term Policies 7.5 Endowment Policies Ordinary Endowment Policy Pure Endowment Policy Double Endowment Policy Joint Life Endowment Policy Marriage Endowment Policy Educational Annuity Policy Triple Benefit Policy Anticipatory Endowment Policy Money Back Policy Jeevan Samriddhi Jeevan Rekha 7.6 Children's Insurance Policy Jeevan Sukanya Jeevan Kishore

9 xiv Insurance Industry in India Jeevan Chhaya 7.7 Jeevan Suraksha Annuity for Life 7.8 Jeevan Sneha 7.9 Jeevan Sanchaya 7.10 Unit Linked Insurance Policy (ULIP) Working of ULIPs 8. Life Insurance: Investment of Funds Reasons for Investment of Funds 8.2 Principles of Investment Principle of Safety Principle of Profitability Principle of Liquidity Principle of Diversification 8.3 Social Objectives 8.4 Problems of Investment 8.5 Statutory Requirements 8.6 Regulations of Investments Life Business Pension and General Annuity Business Unit Linked Life Insurance Business 8.7 Exposure/Prudential Norms 8.8 Investment Pattern of LIC 8.9 Present Scenario 9. Life Insurance: Treatment of Risk, Premium Calculation and Policy Conditions Concept of Risk 9.2 Purpose of Selection of Risks 9.3 Risk Selection Criteria 9.4 Sources of Risk Information 9.5 Classes of Risk 9.6 Exceptions to the General Rule 9.7 Uninsurable Risks 9.8 Methods of Risk Calculation 9.9 Premium Calculation 9.10 Factors Common to Calculation of Premiums 9.11 Conditions of Life Insurance Policy

10 Contents xv Conditions Relating to Commencement of Risk Conditions Relating to Premium Conditions Relating to the Continuation of Policy 9.12 Nomination and Assignment Nomination Assignment 9.13 Difference between Nomination and Assignment 9.14 Suicide by the Insured 10. Private Sector in Life Insurance Liberalisation of Insurance Markets 10.2 Number of Registered Insurers 10.3 List of Life Insurers (as in September 2012) 10.4 Insurance Business: From State Monopoly to Competition 10.5 Progress of Life Insurance Part III: General (Non-life) Insurance 11. General Insurance: An Introduction History of General Insurance 11.2 General Insurance Corporation (GIC) of India Domestic Reinsurer International Reinsurance 11.3 Arguments in Favour of Nationalization of General Insurance 11.4 Arguments against Nationalization of General Insurance 11.5 Role and Functions of GIC Statutory Roles and Functions Business-related Roles and Functions 11.6 Role and Functions of Subsidiary Companies 11.7 Investment of Assets 11.8 List of Approved Investments for General Insurance Business 11.9 Progress of Non-life Insurance 12. Marine Insurance: History, Definitions and Subject Matter History of Marine Insurance 12.2 Definition of Marine Insurance 12.3 Marine/Maritime Perils Insurer's Liability in Respect of General Average Loss

11 xvi Insurance Industry in India Insurer's Liability in Respect of Salvage Charges 12.4 Loss by Delay 12.5 Subject Matter of Marine Insurance Hull/Ship or Vessel Insurance Cargo Insurance Freight Insurance Liability Insurance Duty Insurance Increased Value Insurance 12.6 Miscellaneous Matters Claims Total Loss Particular Average General Average Salvage Loss Sue and Labour Charges Extra Charges 13. Marine Insurance: Basic Principles Features of a Valid Contract Proposal Acceptance Consideration Issue of Policy 13.2 Insurable Interest Exceptions According to Ownership Insurable Interest in Re-insurance Insurable Interest in other Cases 13.3 Utmost Good Faith Exceptions 13.4 Doctrine of Indemnity Exceptions 13.5 Doctrine of Subrogation 13.6 Warranties Seaworthiness ofship Legality of Venture Other Implied Warranties Exceptions

12 Contents 13.7 Proximale Cause 13.8 Assignment 13.9 Lloyd Organisation Lloyd's Brokers Lloyd's Agents 14. Marine Insurance: Kinds and Conditions 14.1 Marine Insurance Act, Different Types of Marine Policies Voyage Policy Time Policy Mixed Policy Valued Policy Unvalued Policy Floating Policy Wagering Policy Block Policy Single Vessel and Fleet Policy Ship Construction Policy Annual Policy Inland Transit Cargo Policy Inland Coast Ports Policy Inland Vessel Policy Package Policy Free on Board Policy Named Policy Currency Policy Special Declaration Policy Sailing Vessels Policy 14.3 Clauses in a Marine Policy Hull Clauses Cargo Clauses Freight Clauses Assignment Clause 'At and From' Clause Touch and Stay Clause Lost ornot Lost Clause Termination of Risk Clause Warehouse to Warehouse Clause

13 t xviii Insurance Industry in India Negligence or 'Inchmaree' Clause Valuation Clause Sue and Labour Clause Waiver Clause Running Down Clause Reinsurance Clause Continuation Clause Barratry Clause Free of Capture and Seizure Clause Hague Rules Jettison Clause 14.4 War Clauses Risks Covered Risks Covered By Institute Cargo Clauses 15. Marine Insurance: Payment of Premium and Settlement of Claims Payment of Premium When Premium is Payable Policy Effected Through Broker Effect of Receipt of Premium on Policy 15.2 Premium Calculation 15.3 Return of Premium By Agreement in the Policy For Reasons of Equity 15.4 Special Premium Rates for Different Purposes and Cargo Sailing Vessels Bullion and Speeles 15.5 Major Commodities Vessel Voyage Nature of Cargo Packing Insurance Cover 15.6 Procedure of Effecting Marine Insurance 15.7 Difference between Fire Insurance and Marine Insurance 15.8 Difference between Life Insurance and Marine Insurance 15.9 Losses/Claims Notice of Claim

14 Contents xix Documents Required for Claim Claims and Causa Proxima Marine Perils Total Loss Partial Loss Particular Average Losses Compensation of Particular Average Loss General Average Loss Elements/Essentials of General Average Contribution Difference between the General Average Loss and Particular Average Loss Types of General Average Losses General Average Sacrifice Sacrifice of Ship Sacrifices of Cargo and Freight General Average Expenses Salvage Charges 16. Fire Insurance: Basic Principles Whatis Fire? 16.2 Significance of Fire Insurance 16.3 Features of a Fire Insurance Contract 16.4 Duration of Cover Proposal Acceptance 16.5 Payment of Consideration and Commencement of Risk Cover Note Policy Who Can Purchase a Fire Insurance Policy? 16.6 Conditions of Fire Policy Informative Conditions Policy Conditions 16.7 Principles of Fire Insurance Insurable Interest Utmost Good Faith Contribution Subrogation Indemnity 16.8 Fire Insurance Business in India

15 XX Insurance Industry in India 16.9 Basis of Sum Insured Market Value Basis (for both current and fixed assets) Reinstatement Value Basis Partial Insurance Premium Rates Basis of Indemnity 17. Fire Insurance: Main Clauses of Policy Add on Covers in a Fire Policy Architects, Surveyor, and Consulting Engineer Fees Removal of Debris Deterioration of Stocks in Cold Storage Premises Due to Change in Temperature Escalation of Sum Insured Spontaneous Combustion Clause Omission to Insure Additions, Alterations or Extensions Start up Expenses Additional Expenses for Altemate Accommodation Temporary Removal of Stock Spoilage Material Damage Clause Average Clause Loss of Rent Clause 17.2 Other Terms Used in Fire Insurance Proximale Cause Concurrent Causes Remote Causes 17.3 Perils Relevant to Proximale Cause 17.4 Various Originating Hazards which Cause Fire 17.5 Rules for Cancellation of Fire Insurance Policy 17.6 Mid-term Revision of Sum Insured Silent Risk Arbitration Clause Impact of Fraud on Policy How Insurance May Cease Onus of Proof 17.7 Conclusion

16 Contents xxi 18. Fire Insurance: Types of Policies and Settlement of Claims Standard Fire and Special Perils Policy 18.2 Exclusions in a Fire policy 18.3 Valued Policy 18.4 Floating Policy Characteristics of a Floating Policy 18.5 Declaration Policy 18.6 Floater Declaration Policy 18.7 Loss of Profit Policy or Consequential Loss Policy Scope of Cover 18.8 First Loss Policy First Loss Insurance and the Average Clause 18.9 Long-term Policy for Dwellings Settlement of Claims under a Fire Insurance Policy Express Rights Appointment of Surveyors Making Payment and Provision for Replacement 19. Health Insurance: Evolution and Government Schemes Health Insurance Policy 19.2 Need of Health Insurance 19.3 Importance of Health Insurance 19.4 Evolution of Health Insurance in India 19.5 Third Party Administrator (TPA) 19.6 Central Government Health Scheme (CGHS) 19.7 Employees' State Insurance Corporation (ESIC) 19.8 Raj iv Gandhi Shramik Kalyan Yoj ana 19.9 Rashtriya Swasthya Bima Yojana (RSBY) Genesis of RSBY What is RSBY? Unique Features of RSBY 20. Health Insurance: Various Types of Policies Individual Health Insurance Policies Exclusions under the Policy Health Insurance Claims Procedure 20.2 Family Floater Health Insurance Policies 20.3 Group Health Insurance Policies

17 xxii Insurance Industry in India 20.4 Unit Linked Health Plans Hospital Cash Benefit Major Surgical Benefit 20.5 Jan Arogya Policy 20.6 Overseas Mediclaim Policy Sudden and Unforeseen Sickness (Section A) Personal Accident Cover (Section B) Loss of Checked Baggage (Section C) Delay of Checked Baggage (Section D) Loss of Passport (Section E) Personal Liability (Section F) General Exclusions Premium 20.7 Corporate Frequent Travellers Policy 20.8 Corporate Group Overseas Mediclaim Policy 20.9 Bhavishya Arogya Universal Health Insurance Scheine (UHIS) Premium Calculation by Health Insurance Companies Personal History Mortality Rate Administration and Marketing Expenses Savings Component Medical Underwriting Adjusted or Modified Community Rating Rating Bands Self-employed Women's Association (SEWA) Health Insurance Scheme Current Perspective 21. Motor Insurance: Law and Procedures Introduction 21.2 General Regulations (GR) of India Motor Tariff GR.3-Types ofpolicies GR.4-Extension of Geographica! Area GR.l 1-Period of Insurance GR. 17-Transfers GR.18-Change of Vehicle GR.19-Vehicles Subject to Hire Purchase Agreement GR.20-Vehicles Subject to Lease Agreement

18 Contents xxiii GR.21-Vehicles Subject to Hypothecation Agreement GR.24-Cancellation of Insurance and Double Insurance GR.25-Cancellation and Issuance of Fresh Certificate of Insurance GR.29-Discount for Vintage Cars GR.30-Discount for Anti-Theft Devices GR.37-Cover for Vehicles Imported without Customs Duty GR.38-Vehicles Requisitioned by Government 21.3 Motor Vehicles (MV) Act, Section 2 (28)-Motor Vehicle or Vehicle Section 4-Age Limit in Connection with Driving of Motor Vehicles Section 19-DisqualificationorRevocation of Driving Licence Section 21-Suspension of Driving Licence in Certain Cases Section 41(7)-Validity of Certificate of Registration Section 42-Special Provisions for Registration of Motor Vehicles of Diplomatie Officers Section 50-Transfer of Ownership Section 53-Suspension of Registration Section 55-Cancellation of Registration Section 140 Liability to Pay Compensation in Certain Cases on the Principle of No Fault Section 147-Requirements of Policies and Limits of Liability Section 148-Validity of Policies of Insurance Issued in Reciprocating Countries Section 15 7-Transferof Certificate of Insurance Section 163-Scheme for Payment of Compensation in Case of Hit and Run Motor Accidents Section 168-Award of the Claims Tribunal Section 184 Driving Dangerously 21.4 Types of Claims OwnDamage Claims Third Party Claims 21.5 Lok Adalats

19 xxiv Insurance Industry in India 22. Personal Accident Insurance Need for Personal Accident Insurance 22.2 Definitions of Certain Terms 22.3 Benefits and Features of Personal Accident Insurance 22.4 Policy Coverage and Exclusions 22.5 Types of Personal Accident Insurance Policies 22.6 Compensation Payable Additional Benefits at No Extra Premium 22.7 Rating 22.8 Group Personal Accident Insurance Policy Salient Features of Group Personal Accident (PA) Policy 23. Agricultural Insurance: Classification and Types Need for Insurance in Agricultural Sector 23.2 Classification of Agricultural Sector for Insurance Purpose Traditional or Subsistence Agriculture Semi-commercial and Emerging Sector Commercial Farming Sector Specialised Production Systems 23.3 Advent and Development of Agricultural Insurance in India 23.4 Comprehensive Crop Insurance Scheme (CCIS): Scope and Contents Drawbacks of CCIS Experimental Crop Insurance Scheme (ECIS) 23.5 National Agriculture Insurance Scheme (NAIS) Operational Modalities Modified National Agricultural Insurance Scheme (MNAIS) Critical Appraisal 23.6 Rainfall Insurance Scheme (Varsha Bima) 23.7 Pilot Scheme on Seed Crop Insurance 23.8 Farm Income Insurance Scheme (FIIS) 23.9 Livestock Insurance Non-crop Insurance Scheines Agriculture Insurance Corporation 24. Micro Insurance: Benefits, Regulations and Kinds Definition and Significance of Micro Insurance

20 Contents 24.2 Benefits of Micro Insurance Simplicity Basket Coverage Benefit in Cash or in Kind Cash-back Benefits 24.3 Disadvantages of Micro Insurance 24.4 Regulations Regarding Micro Insurance 24.5 Micro Insurance Products of LIC 24.6 Private Sector in Micro Insurance 24.7 Various Types of Micro Insurance Janata Personal Accident (Individual) Janata Personal Accident (Group) Gramin Personal Accident (Individual) Gramin Personal Accident (Group) Agricultural Pump Set Animal Driven Carts Insurance Hut Insurance Gobar Gas Insurance New Well Insurance Horse/Pony/Mule Insurance Pig Insurance Camel Insurance Rabbit Insurance Elephant Insurance Dog Insurance Livestock Insurance Master Policy Poultry Insurance Duck Insurance Brackish Water Prawn Insurance Inland Fish Insurance Policy Silk Worms Insurance Honey Bee Insurance 24.8 Prospects of Micro Insurance in India 25. Miscellaneous Insurance 25.1 Fidelity Insurance 25.2 Burglary Insurance Burglary Business Premises Insurance Policies Burglary Private Dwellings Insurance Policies

21 xxvi Insurance Industry in India All Risk Policies Baggage Insurance Policy Jewellery and Yaluable Insurance Policy 25.3 Credit Insurance Period of Guarantee Counter Guarantees and Tangible Security 25.4 Money in Transit Policy Salient Features Benefits Exclusions 25.5 Workmen's Compensation Insurance 25.6 Travel Insurance 26. Reinsurance: Meaning, Need and Methods Reinsurance: Meaning and Need What Reinsurance Does? What it Does not Do? Why There is a Need for Reinsurance? 26.2 How Reinsurance Works? Risk Transfer Income Smoothing Surplus Relief Product Development Source of Profit Arbitrage Reinsurer's Expertise Managing Cost of Capital for Insurance Company 26.3 Methods of Reinsurance Shopping or Street Reinsurance Facultative Reinsurance Automatic or Treaty Reinsurance Pool or Syndicate Method 26.4 Types/Forms of Reinsurance Proportional Reinsurance Non-proportional Reinsurance 26.5 Reinsurance Brokers 26.6 Reinsurance Corporation of India Limited 26.7 Global Reinsurance Market 26.8 What India Needs to Do?

22 Contents xxvii Part IV: Globalization and Privatization of Insurance Industry and Summing Up 27. Globalization and Privatization of Insurance Services Globalization and Insurance Industry 27.2 Liberalization of Indian Insurance Sector Setting up of Malhotra Committee Why Liberalization of Insurance Sector? 27.3 Entry of Private Sector in Insurance Business 27.4 Increasing Market Share of Private Sector Players Leverage Operational Flexibility Innovations Strong Infrastructure and Systems Claims Settlement Distribution 27.5 Opportunities for Insurance Industry Untapped Market Mandatory Insurance More Products Offered Growth of Economy Opportunity for Banks Better Customer Services 27.6 Challenges before the Insurance Industry New Insurers Expectation of the Consumers Premium on Customer Service Distribution Channels Consumer Education Consumer Grievance Redressal Positioning of Insurance Products Tapping of Rural Areas Information Technology 27.7 Strategies to be Adopted Environmental Analysis Restructuring Organisation Speed, Cost-effectiveness and Innovations Human Resource Development

23 xxviii Insurance Industiy in India Efficiency in Distribution Risk Management Ethical Issues 27.8 Factors for the Success of Insurance Industry Change in the Attitüde of the Population Open and Transparent Environment Created under the IRDA Well-established Distribution Network Trained Professionals to Build and Seil the Product Rationale Approach to the Investment Criteria Stringent Accounting Practice to Prevent Failures amongst the Insurers Level Playing Field 28. Summing Up Nationalisation of Insurance Business in India after Independence Nationalisation of Life Insurance (1956) Nationalisation of General Insurance Business Reinsurance Business 28.2 Weaknesses of Insurance Industry Prior to Reforms of Late 1990s Low Productivity Lack of Information Technology Limited Availability of Insurance Products Poor Quality of Insurance Services 28.3 Committee on Reforms in Insurance Sector, Regulations and Controls 28.5 Post-liberalisation Developments in Insurance Business Changes in the Nature and Structure of Products Broad-based Marketing of Insurance Products Rising Service Levels Increased Penetration in the Rural and Social Sectors Investment in Infrastructure and Social Sectors Health Insurance Micro Insurance Deposit Insurance System 28.6 FDI in the Insurance Sector

24 Contents xxix Part V: Appendices, Glossary, Bibliography and Index Appendix 1: Major Recommendations of the Committee on Reforms in the Insurance Sector (Chairman: R.N. Malhotra) Appendix 2: Insurance Regulatory and Development Authority Act, 1999 Glossary of Insurance Terms Bibliography Index