Insurance Business Environment an Introduction

Subject : Insurance Business Environment Topic : Insurance Business Environment

Subject Course Semester Topic

CLASS NOTES Insurance Business Environment BBA Banking and Insurance Fourth Insurance Business Environment

These notes include following topics:    

Meaning of Insurance Nature and significance of insurance Insurance as social security tool Insurance Business Environment

The Concept of Insurance dates back to the ancient times. The reference of insurance is found in ‘Rig-Veda’, the most sacred book of India with the name ‘Yogakshema’, more or less related to the well-being and security of people. Hummurabiand Manu’s codes also had recognized the advisability of provision for sharing the future losses. But insurance in its present form was not practiced prior to the twelfth century. Meaning of Insurance Insurance is such a method which provides security and protection against financial loss upto some limit. It is a means of shifting the risks to insurer in consideration of a nominal cost called premium. Risks may be transferred in two ways. A person may seek to transfer the activity or avoid such event which creates the risk; for example, a civil engineering contractor may give sub-contract to another person. Alternatively, contractual agreement may be made to shift responsibility for any losses attributable to the occurrence of specified uncertain event to the other person who is party to the contract. Exclusion and indemnity clauses in clauses in contracts of sale, building, transport means and similar other contracts are a few good examples. In fact, the most important form of risk transfer is insurance. Dictionary meanings of the word ‘insurance’ is an undertaking by a company, society or the state, to provide or safeguard against loss, provision against sickness, death, etc., in return for regular payments (Premium).

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Definition of Insurance Insurance may be defined in two ways: (1) Functional Definition. (2) Legal Definition. Functional Definitions “Insurance is a process in which uncertainties are made certain.” -Mac Gill “Insurance is a plan wherein persons collectively share the losses of risks.” -John Megi “Insurance is a source of distribution of loss of few persons into many persons.” -Rock Fell “The function of insurance is primarily to decrease the uncertainty of events.” -Reigel and Mille “The collective bearing of risk is insurance.” -William Beveridge “Insurance as a plan by which large number of people associate themselves and transfer, to the shoulders of all, risks attached to individual.” -D. H. Mage Ghosh and Aggarwal have defined Insurance as a co-operative form of distributing a certain risk over a group of persons who are exposed to it. On the basis of above functional definitions, we may conclude that: (1) Insurance is a co-operative device by which risks are distributed among large number of persons. (2) Insurance provides security against losses or risks. (3) Based on the law of probability, contribution of each person is calculated and a common fund is raised out of which losses are compensated. (4) Insurance is a plan in which losses (outcomes) of uncertain events are secured. Legal Definitions Like other forms of business, the business of insurance is based on Law of Contract under which one person agrees to secure the other persons against their financial losses resulting from the happening of uncertain events. “Insurance is a contract by which one party, for a compensation called the premium, assures particular risks of the other party and promises to pay to him or his nominee a certain or ascertainable sum of money on a specified contingency.” -E. W. Patterson “Insurance is a contract in which sum of money is paid by the assured in consideration of the insurer’s incurring the risk of paying a large sum upon a given contingency.” -Chief Justice Tindal “Insurance is a form of contract or agreement under which one party agrees in return

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for a consideration to pay an agreed amount of money to another party to make good a loss, damage or injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. It is a device by which the loss likely to be caused by an uncertain event is spread over a number of persons who are exposed to it and who propose to insure themselves against such an event.” –Dictionary of Business and Finance From the above definitions we can conclude that Insurance is a form of contract or agreement under which one party agree in return of a consideration (Premium) to pay an agreed amount of money to another party to make good for a loss, damage, injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. Nature of Insurance On the Basis of the definitions of insurance discussed above we can discuss the nature of insurance as: 1. Offer and Acceptance. In order to create a valid insurance contract, there should be a lawful offer by applicant and lawful acceptance of the same by the insurer. Term lawful means offer and its acceptance must confirm to the rules laid down in the Indian contract act regarding valid offer and acceptance. 2. Lawful Object. Insurance contract will be valid if the object of insurance is illegal or against public policy. So the object of the object of the insurance contract should be legal. It means insurance policy cannot be taken against unlawful object. For example, the policy, if taken for the purpose of murder will be lawful and the murder shall be disqualified from inheriting the policy amount of the person murdered. 3. Contract. Insurance is a form of contract under which one party agrees in return of a consideration to pay an agreed amount of money to another party to make good for a loss, damage, injury to something of value in which the insured has a pecuniary interest as a result of some uncertain event. So it is a contract between the insurer and the insured in which insured makes a valid offer and insurer accepts his offer. The contract between two is always made in writing. It means verbal contract cannot be made under this. 4. Consideration. Consideration is an essential element in an insurance contract. Promise made for nothing is unenforceable under the Indian Contract Act. So insurance is a contract by which one party in a consideration called Premium, takes over a particular risk of the other party and promises to pay to the insured or his nominee a certain sum or ascertainable sum of money on the happening or occurrence of an uncertain event.

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5. Co-operative Device. Insurance is a contract in which a large number of people associate themselves and transfer their individual risks to the association so formed. Under this a group of persons who agree to share financial loss may be brought together voluntarily by the insurer. So, by insuring a large number of persons, insurer is able to pay the amount of loss easily. As such, insurance is a co-operative device of bearing the risks of individuals. 6. Protection of financial risks. Insurance covers only such risks which can be measured in money terms i.e., financial loss or risks. It cannot check the happening of event but guarantees the payment of loss and protects the assured from economic sufferings. 7. Investment Portfolio. As we know Insurance Companies collects premium initially and compensated to the insured event occurs. So insurer maintains the initial premiums collected in an investment portfolio, which generate a return. So Insurance Companies has two sources of income, first is the insurance premium, and second is the investment income, which occurs over a time. 8. Good faith. The contract of insurance is included in the class of the “uberrima fides contracts”, which require absolute and utmost good faith on the party’s contract. Both parties of the insurance contract must be of the same mind, same understanding at the time of entering into a contract. There should not be any misrepresentation, non-disclosure, or fraud concerning the material facts. It is the duty of both the parties to disclose all the relevant facts relating to contract to each other. 9. Contract of indemnity. All contracts of insurance, except the life insurance contract, are contracts of indemnity. The basic object of the insurance is to shift the loss of a person to the insurance company which can easily be distributed among large number of persons. 10. Contract and Contingency. Life insurance contract of certainty because death or expiry of the term of policy will certainly occur so the payment is certain. Whereas in other insurance contracts, the contingency is the fire, theft, earthquake, accident, or the marine perils etc. may or may not occur. So if the contingency occurs payment is made otherwise no amount is paid to the insured. 11. Insurance is not Gambling. The contract of insurance is not gambling because the insurer is assured to get his loss indemnified only in the event of occurrence of such uncertain event as stipulated in the contract of insurance, whereas the game of gambling may either result into profit or loss. So insurance is based on certainty on uncertain events. 12. Assessment of risk in advance. Insurance is a contract in which insurances are risk bearers and they evaluate the risk before insuring to charge the amount of share of an insured called premium. In this theory of probability is used to evaluate the risk.

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13. Subrogation. Contract of general insurance comes under the doctrine of subrogation because after the insured is compensated for the loss caused by the damage to the property insured by him, the right of ownership of such property passes on to insurer. If the damaged property has any value left or the lost property is recovered, that cannot be allowed to remain with the insured because in that case he will realize more than the actual loss which is against the principle of indemnity. 14. Insurable interest. No person can make or enter into a contract of insurance unless he has insurable interest in the subject matter of insurance. One can have an insurable interest only when one would be put to a financial loss by the happening of the event against which a thing or a life has been insured. In the case of life insurance, the insured has an insurable interest in his own life as well as in lives of other persons by whose death he may be prejudiced financially. In the case of general insurance a person has an insurable interest in the property which is owned by him. 15. Insurance cannot be named as Charity. It cannot be treated as charity because charity is given without consideration but insurance is not possible without premium. Insurance provides safety and security to the policy holders because in consideration of premium it guarantees the payment of loss. So premium is the consideration for one party and to pay compensation against loss is the consideration for other party. FUNCTION OF INSURANCE Insurance performs a variety of functions which are advantageous to the common people, directly or indirectly. As such, functions of insurance can be divided into three categories: (i) (ii) (iii) (i)

Primary functions. Secondary functions. Other functions. Primary Functions. The main functions which are performed by the insurance are detailed as below: 1. It provides certainty. The main function of insurance is to reduce the risk or uncertainties of events. Risks involve usually when how much and to whom one will lose on the occurrence of an uncertain event. Insurance is a means to indemnify or compensate the losses caused by the uncertain events. The insured converts his uncertainties into certainties by paying premium to the insurer. J.H. Megyhas rightly pointed out that function of insurance is to provide certainties. 2. It distributes risks. The concept of insurance is based on the law of cooperation. D.S. Hansel mentioned that the primary function of insurance is the

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(ii)

spread of financial losses of insured members over the whole of the insuring community and D.H. Magee has described insurance as a plan by which large number of people associate themselves and transfer, to the shoulders of all, risks that attach to individuals. As such, insurance is a means of distributing the losses of uncertain events among a large number of persons covered under the insurance. 3. It provides security. Another function of the insurance is to provide security to the persons against the risks to uncertain events. Under the contract of insurance, the insurance company guarantees the insured person to compensate or indemnify the losses on the occurrence of an uncertain event, in consideration of premium paid by the insured. Hence, the insurance provides the feeling of security against the evil effects of the uncertain events i.e., risks. Secondary functions. Insurance performs numerous other important functions classified under the category of secondary functions. These are explained as: 1. It provides capital. It provides capital, a scare source of production, to the industry in various forms. First, it reduces financial risks and losses by providing facilities of core capital investments in various giant organizations. Secondly, the amount received on account of premium by various insurance companies is made available for the industrial development of the country in various financing forms such as, by providing of share capital, providing long term loans to companies and, term loans and loans to the state to invest in the country’s public sector industries. Thirdly, insurance makes the company or organization to avail loans on easy terms by hypothecating the insurance policies. In these days, financial institutions and banks have imposed conditions that assets must be insured if one wants to get loan against that assets. 2. It increases efficiency. Insurance by reducing the risks or fear of losses increases efficiency in business. It provides feeling of security in the business community, which in turn becomes a source for the growth and diversification of the industry. Management is relieved of the various risks involved in uncertainties, becomes able to give due attention to other factors which effect the total efficiency of the organization such as, labour force, material management, marketing etc. As such insured persons can work better for profit maximization. 3. It helps in judging the viability of major projects. Before insuring the assets or property of any organization the insurer, generally, conducts as investigation of the assets or project as a whole with a view to judge the profitability of the

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(iii)

project. Unprofitable projects or organizations are denied the benefit of insurance. Hence, the management may drop such projects or units in advance in order to prevent losses. 4. Insurance helps in loss reduction. Insurance company not only secures the losses but also advises the adoption of various methods and techniques which help in reducing the risks or losses. For example, under fire insurance, stress is laid on prevention of fire and use of fire-fighting means. In India, Loss Prevention Association has been established with the objective to suggest the public various techniques which helps in reducing the losses and accidents caused by uncertain events. Other functions. In addition to above primary and secondary functions, insurance companies perform various other functions which prove beneficial to the common man, business community and the nation as a whole. A few are mentioned here as under: 1. Economic development. The insurance sector as source of funds, provides capital, social security, and protecting the society from huge losses of damage, destruction etc. So it helps the country in economic development and overall progress of the society. 2. Expansion of foreign trade. Insurance provides security to the international traders, shippers and banking or financing institutions which are the main functionaries to foreign trade. Marine and fire insurance play a vital role in this regard by providing needed protection against the perils of sea. 3. It provides funds to invest. Insurance companies collect funds by way of premium and employ or invest it profitably in the industrial development of the country. In India, Life Insurance Corporation along with other insurance companies, provides large sums to various industrial and business concerns. 4. Encouraging savings. In these days insurance is considered to be better alternative technique of making savings. Under the contract of insurance, the insured has to pay a definite premium compulsorily. At the initial stage it seems to be forced saving but later on it becomes the habit of the insured to save a certain sum periodically so as to pay premium regularly. As such forced saving curbs the unnecessary expenses of the individuals. 5. It checks inflation. Insurance is an important yardstick to check inflation. It curbs the circulation of money and saves it from its ill effects. Compulsory savings in the form of premium reduces the spending volume of the individuals and this scarce source of production is utilized in a better way by investing for the national development.

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6. Self-confidence and Goodwill. Insurance, by providing a feeling of security among the insured, also creates self-confidence in them. Thus, insurance not only provides protection against risks but also provides capital to the insured which becomes a source of financial stability and strength. Credit is also advanced on insured property or assets because insurance works as a security of the loan. As such insurance increases self-confidence, reputation, and goodwill of the insured. 7. Social security. Insurance provides an instrumental force to fight against evils of poverty, unemployment, disease, old age, fateful accidents of person and property and similar other calamities of nature. Insurance has helped in a greater way by establishing or devising various types of insurance in our country like Employee’s State Insurance Act, Provident Fund Act, 1932, Workmen’s Compensation Act etc. 8. Credit facilities. Above all businessmen are in a position to raise loans and get credit facilities from various financial institutions and banks by pledging their insurance policies and in case the insured trader becomes unable to return the loan or credit, then the financial institutions can recover their amount out of the policy’s surrender value. So no Bank or Financial institution would advance loans on property unless it is insured against or damage by insurable perils. IMPORTANCE OF INSURANCE The importance of insurance may be studies under four heads: (A) Importance to an individual (B) Importance to special group of individuals i.e. business (C) Importance to commerce and industry (D) Importance to society. (A) IMPORTANCE TO AN INDIVIDUAL 1. Insurance provides security and safety. It provides financial security and safety nets to an individual. It ensures financial protection against large and uncertain losses to the lives and properties in consideration of a small amount of premium. In case of life insurance payment is made, when death occurs or the term of insurance policy expires. In case of personal accident and sickness, financial protection is given when the individual is unable to earn. Fire insurance protects against losses due to fire while marine insurance provides protection and safety against loss of ship and cargo. In other insurances relevant policies provide the necessary financial protection against the loss of a given contingency. 2. It provides peace of mind. Every person faces the risk of living too long or living too short or disability caused by accident or by sickness leading to loss of income.

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3.

4.

5.

6.

7.

A sense of security against these losses removes all tensions and fears. Insurance by providing financial protection and promise to compensate losses stimulates more and better work performance of an individual. It eliminates dependency. In the event of death of a bread-winner of the family or disability of work due to involvement in any fatal accident or sickness, the family of an insured is affected. Insurance attempts to help the family to get relieved of heavy financial burden. After the death of a bread-winner of the family, the family is left with no or low income. During this period of dependency, life insurance funds provide regular source of income to the family. As such, insurance assists the family and provides adequate funds. It serves as a source of savings. Every reasonable man wants his children to get good education and settle in life. All these require money. For this a man must plan to save regularly to provide for all the above requirements. Life insurance plays a very important role to plan individual’s savings by investing in various insurance plans. Insurance schemes promote systematic savings in the form of regular premiums. Moreover, like bank deposits, the amount deposited as insurance premium cannot be withdrawn regularly. As such, it is the best method of individual savings. Life insurance as a sound investment. The regular investment in the form of periodic payments of premium with high returns is available in insurance. High returns in the form of periodical bonus and maturity bonus provide with high return on one’s investments in case the funds are invested in insurance policies. In India, various insurance policies carry special and very attractive exemptions from income tax, wealth tax and estate duty etc. It protects mortgaged property. Most of the middle class policy holders acquire or construct their houses or purchase assets by borrowing money from the insurance companies. A best way to provide for repayment of mortgaged loan is life insurance. It helps an individual to keep other assets of the family intact. So insurance companies give loan for purchasing or constructing the house. Others uses to an individual. Life insurance fulfills the following needs of an individual person: (a) Family needs (b) Old age needs (c) Re-adjustment needs (d) Needs for education, marriage and settlement of children (e) Income for widow and widower (f) Clean-up funds and clean-up expenses, such as for ritual ceremonies, payment of taxes etc.

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Insurance also helps to meet requirement of funds in emergencies and in the event of unwanted losses in the form of compensation. (B) IMPORTANCE TO BUSINESS Insurance has been of tremendous use to the business society in many ways: 1. Financial help. It provides financial assistance to business enterprise. The modern industry involves heavy capital investment in building, machinery, plant equipment, raw materials and acquisition of technical knowhow. Insurance companies finance various capital projects in the form of equity participation and by granting loans and advances to the business enterprise. 2. Reduces uncertainty and business losses. Business investments are exposed to loss or damage by fire, theft, accidents, and other perils. So the great risks are involved in day-to-day functioning. The owner of the business enterprise, by acquiring an insurance policy, reduce uncertainty of business losses and be sure of his future earnings and smooth running of his business. 3. It improves efficiency. Uncertainty about future is a handicap to economic progress associated with the future because there are chances of losses due to calamity=ties. So by taking an insurance policy, a man gets freedom from unnecessary worries and can use more care and energy to maximize his earnings. 4. Indemnification. Insurance ensures the compensation to the dependents of deceased employees and indemnifications of loss of damaged properties. Insurance enables the business to operate in the event of loss of properties and human lives as loss is finally indemnified. 5. Grant of credit facilities. An entrepreneur can obtain credit by pledging the insurance policies as collateral securities for the loan. Businessman may take loan on the basis of insurance getting credit. But now besides these, life insurance and credit guarantee insurance have also become most important basis of granting credit t the business persons. 6. Continuous business. Damage to the buildings, plant and machinery not only cause material loss to the business but also disturbs the continuance of a business. So there are chances of loss of profit and loss of assets. All such insurance scheme make it possible to run the business uninterrupted and smoothly by giving compensations against these losses. 7. Employee’s security. Insurance provides adequate provisions for the grant of social security and welfare measures such as, Employees State Insurance, life policies, old age pensions and accident policies for the benefit of employees. Due to these provisions employees take more interest in the workings of the enterprise. (C) IMPORTANCE TO COMMERCE AND INDUSTRY

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1. Economic development. Insurance plays an important role to the industrial agricultural and commercial development. It is very helpful for to increase the national productivity. Insurance covers almost all the risks relating to agriculture, Commerce and Industry. For example, agriculture will experience protection against losses of cattle, machines, crops, tools and equipment. In trade there is risk in transit, godown etc. and also in industry there is risk of loss of goods, machinery, building etc. So, insurance protects from these types of risks and such types of protection are helpful to increase production in agriculture, in agriculture, in industry etc. So, these types of insurance plans led stability to the industry and commerce. 2. Earns Foreign Exchange. Insurance sector has a good ranking with export, shipping, banking services as earner of foreign exchange to the country. Insurance sector plays the important role in more than 30 countries through agencies, branches subsidiaries, or associate companies. So by their operations. It helps to earn the foreign exchange for our country. 3. Source of capital formation. Insurance sector invest their surplus funds in bonds and securities of the other companies. By the result insurance becomes the source of capital formation for the country because it is a major institution for the mobilization of savings of people, particularly from the middle and lower income groups. These savings are channelized into investment for economic growth. 4. Source of income. Insurance Companies collect premiums initially and make payments later on when insured event occurs so insurance companies maintain the initial premiums collected in an investment portfolio, which generates a good return. So from this we can say Insurance Companies have two sources of income as insurance premium and the investment income which occurs in future. So we can say insurance meets all the requirements of the economic growth of the country. (D) IMPORTANCE TO SOCIETY Insurance is useful to the society in the following ways: 1. Protection to society’s wealth. Insurance attempts to provide protection to living and non-living wealth of the society. Life insurance protects against financial losses. Loss of damage to property can also to be indemnified by the property insurance. As such property and life insurance are protections to stabilize business conditions and financial position. 2. Economic growth of the country. For economic growth of the country, insurance provides strong hand and sound mind, protection against loss of property and capital to produce more wealth. It provides protection against losses. Welfare of employees creates a conducive atmosphere to work.

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3. Standard of living. Insurance helps the number of persons who are rendered destitute through misfortune. They are able to maintain the standard of living due to high returns. By getting a life insurance policy insured get financial protection and high return in form of Bonus. So insurance gives the financial protection to insured which is helpful to raise the standard of living. 4. Social security benefits. Insurance fulfills certain needs for which state might have to provide. The provision for old age, sickness, and disability of persons in general. Some who have their insurance do not become a burden on stat insurance plan? In case of fire, defalcations, failure, explosions, tornadoes, and other calamities that would tend to impoverish (render poor) families would have been relieved of the financial shock if adequate insurance had been maintained. 5. Equitable distribution of loss. Insurance tends to distribute equitably the cost of accidental events. In the absence of insurance this would have been paid in a haphazard manner. For example, the cost of ire insurance is reflected in house rent. In the absence of insurance some tenants would pay higher rents than others. 6. Removal of social evils. All forms of insurance tend to reduce extent of evils they are meant to alleviate. The most effective argument for reduction of ire losses is that smaller losses will make smaller premiums possible. 7. Accelerate the production cycle. Adequate capital from insurance companies accelerates the production cycle in the country. Economic growth of the country is not only assured but the process of growth is accelerated which is more essential in a country like India when the population is fast increasing. 8. Reducing in inflation. Insurance reduces the inflationary pressure by extracting money in supply to the amount of premiums collected. It provides sufficient funds for production and narrow down the inflationary gap. So insurance helps to reduce inflation. 9. Huge funds. Insurance accumulates from the small deposits of many persons, a large fund that may be invested and used in the development of industry and society. Huge funds are made available as capital which otherwise would never be brought together in one place. The collection in form of premium from life, fire, and marine insurance represent the contribution in millions. Each of these contributions is insignificant independently, but in total they amount to a gigantic amount. These sums are invested in the government and non-government enterprises to create assets for the benefit of the society.

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INSURANCE AS A SOCIAL SECURITY TOOL The United Nations Declarations of Human Rights 1948 provides that “Everyone has a right to a standard of living adequate for the health and well-being of himself and his family, including food, clothing, housing and medical care and necessary social services and the right to security in the event of unemployment, sickness, disability, widowhood or other livelihood which are lacking in circumstances beyond his control”. For this insurance is the answer because it looks after the interests of people from uncertainty by providing certainty of compensation at a specific contingency. Insurance provides an instrumental force to fight against evils of property and similar other calamities of nature. So we can say Insurance acts as a social security tool at individual as well as business level in the following manner: (a) Security and safety: Life and General Insurance plays an important role in it. In life insurance, payment is made either on maturity of policy or date of death whichever is earlier. As we know when the bread winner of family dies, with that financial position of the family also adversely affected, unless other alternate arrangement is not made. So life Insurance plays an important role as an alternate arrangement because it contains the element of investment and safety. So the financial loss to the family at a premature death and payment in old age are reasonable provided by the life insurance, which shows life insurance provides security to insured and his family members. Similarly general insurance also compensated the losses against which the policies are taken. The society can get various types of policies against the various risks. By getting various types of policies they feel more secure than others. (b) Pearce of mind: In this world of uncertainties, we daily come across different types of uncertainties such as fire, floods, death, accidents, theft, earthquake, storms etc., and losses arising out of such acts of great volume and create a great discouragement and disappointment in this society. Hence, every common man has a fear for such acts which may occur at any time. By taking insurance policies to cover such types of risks policy holders feel more secure and feeling of insecurity may be eliminated which results into peace of mind. (c) Encourage savings: In these days insurance is considered to be a better alternate technique to create savings. Under the contract of insurance, the insured has to pay a definite premium compulsorily. At the initial stage it seems to be forced saving but later on it becomes the habit of the insured to save a certain sum periodically so as to pay premium regularly. As such forced saving curbs the unnecessary expenses of the individuals. (d) Life insurance provides investment element: In the life insurance, the insured is required to pay the premium. The premium is a kind of investment. This premium is

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returned to the insured along with additional bonus amount after the expiry of the period of contract or date of death of insured whichever is earlier. Similarly insurance policies carry special tax exemptions from income tax, wealth tax, gift tax with enough of security and profitability. The life insurance fulfills all these requirements. (e) Life insurance meets various needs: A suitable insurance plan or a combination of different plans can be taken out in life insurance to meet the specific needs that are likely to arise in future, such as children’s education, marriage provision etc. Similarly, maturity value on insurance policy can be so arranged to be made available at the time of one’s retirement from service to be used for any specific purpose, such as for the purchase of plot or for other investments. (f) Insurance helps in loss reduction. Insurance company not only secure the losses but also advises the adoption of various methods and techniques which help in reducing the risks or losses. For example, under fire insurance, stress is laid on prevention of fire and use of fire-fighting means. In India, Loss Prevention Association has been established with the objective to suggest and to publicize various techniques which help in reducing the losses and accidents caused by uncertain events. (g) It increases efficiency. Insurance by reducing the risks or fear of losses increases the efficiency in business. It provides the feeling of security in the community, which in turn becomes a source for the growth and diversification of the Industry. Management is relieved of the various risks involved in uncertainties becomes able to give due attention to other factors which effect the total efficiency of the organization such as labour force, material management, marketing etc. As such insured business firms can work better for profit maximization. (h) Enhancement of Credit. Insured business firms and individuals are in a position to raise loans and get credit facilities from various financial institutions and banks by pledging their insurance policies and in case the insured trader becomes unable to return the loan ore credit, then the financial institutions can recover their amount out of the policy’s surrender value. (i) Helpful to control inflation rate. It is an important tool to check inflation. It curbs the circulation of money and saves it from its ill effects. Compulsory savings in the form of premium reduces the spending volume of the individuals and this amount can be utilized in a better way by investing for the national development. (j) Confidence in work. Insurance, by providing a feeling of security among the insured, also creates self-confidence in them. Thus, insurance not only provides protection against risks but also provides capital to the insured which becomes a source of financial stability and strength. Credit is also advanced on insured property or assets because insurance works as a security of the loan. As such insurance increases selfconfidence, reputation, and goodwill of the insured.

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Insurance Business environment Insurance is one of the very important financial services from all over the world. It is one of the most grooming sections of the economic growth and development. This industry is the major source of the long term funds which is required for the development of the necessary infrastructure for the country. INDIAN INSURANCE INDUSTRY The Indian insurance industry is 150 years old. The industry has witnessed many phases of working from the days when there were many private sector companies initially and then moved to nationalization and again to the private sector. Being one of the important segments of the Indian economy. The insurance business in India is regulated by the IRDA Act. This act has also gone under some amendments and transformation. This shows that the insurance industry is dependent on many other economic policies, legislation, and regulations. Moreover, the tremendous enthusiasm by the prospective new players across the globe as well as domestic industry is well understood after privatization of insurance industry and passage of IRDA act. There exist a readymade market for about 20-25 cores population of the country in the immediate future and may grow at 15-17 per cent per annum. INSURANCE BUSINESS ENVIRONMENT The insurance business environment consists of set of factors and variable that provides various threat and opportunity to the operations of the insurance business. The Factors and variable may not always be poisonous; they may bring much good news to the existing business players. The insurance business environment can be broadly classified as follows:

Insurance Business Environment Internal Environement

External Environment

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Internal Insurance Business Environment The insurance industry in a country is affected by a large number of factors for its healthy development and growth. A congenial (comfortable) environment is a prerequisite, which is governed by many factors such as the economic state of the country, political stability, awareness amongst the public, awareness of investment for surplus generated and good steady and reasonable returns, and better corporate governance. There are certain other internal factors which have been direct or indirect effect on the insurance environment. These internal factors are explained as follow:

• Risk Management • Transparent rules and regulations • Role of technology • Scope of rural insurance • Business of retailing risk • Training and customised programmes • Pricing of policies • Growing consumerism • Consumer's perspective • Long term savings and investment • Organisation control and efforts • Family set up of indian society • Challenges and strategies of privatisation

Internal Environment

We will now explain them all one by one as follow:

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Risk Management Insurance is the business where insurance company transfers the risk of the company. This is the concept of pooling of risk. The risk is thus an integral part of every insurance organization. The company which promises the transfer of risk will have to manage the risk of its own. The risk management is an integral part of the insurance business. The sum received as premium for the insurance policy is invested in derivative market which is highly volatile. It is now well known in the financial world, as to how risk can destroy corporate value and how value additions can be achieved through Risk Management. At present, risk assessment and risk hedging models are being increasingly used in the corporate sectors. Financial engineers are now well equipped with the latest tools and techniques and products of the risk management. A number of insurance companies are selling risk management products, and insurance multiplies are being placed directly in the capital markets and the corporate sectors. Thus proper risk management strategies are required at each level of the insurance company. The firm’s capacity to absorb risk is determined by its current exposure to other risk. And thus all this risk is the important constituent of the internal environment of the insurance company. Transparent Rules and Regulations Now there are large number of insurers in the life and non life insurance business. These organizations deal in the variety of their own products / policies. These require proper control while formulating and implementing their respective rules and regulations. If there will not be any standards for the operations and rules and regulations, it will be very difficult for the insured to manage his policy. The IRDA have come a long way, since its inception in November, 1999. The following regulations have already been notified and the others are in the process: i. Appointed Actuary ii. Actuarial Report and Abstract iii. Asset liability and solvency margin of insurers iv. Licensing of insurance agents v. General insurance – reinsurance vi. Registration of Indian insurance companies vii. Insurance Advertisement and disclosures viii. Regulation on investment – life and non life ix. Regulations of accounts x. Surveyor’s Regulation Thus the transparent and better the regulations in place, better would be environment for generation and growth of insurance business in the country.

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Technology Technology plays a strategic role in providing a competitive edge, be it in aiding design and administering of products and building lifelong customer relationships. The use of better technology will help to enhance service and ensure effective and efficient service, delivery and lead to greater customization of products and greater efficiency. Most of the insurer has to set up national call centers, interactive voice response service system, and web site etc to grab the maximum business. It will help and create brand position. Before the emergence of information technology, no insurer could ever think of such advantage. The technology has helped in providing value added services and a great facilitators to the agents and the customer residing at faraway places. Moreover, it will also help the insurance sector to conduct proper training and development programmes. Use of internet for purchase of products, catering to one’s servicing needs, payment of premium etc. The various services offered are as follow: b. Providing for tele-services offering c. Advising on right kind of insurance covers d. Advising on extent of life cover required e. Advising on right investment decision Thus role of technology also brings various threats and opportunities of the insurance business environment. Scope of rural insurance Rural market in India is biggest as compared to any other nation in the world. It was untapped source of funds for the insurance company but due to lack of purchasing power of the people this sector of insurance remains untouched and not explored fully. Then IRDA came into scene .The IRDA has now defined it and has been made compulsory to do a certain percentage of rural business by the private sector players. It has a wide scope and remain untapped to the extent it provide opportunity. In rural areas the policies are of smaller denominations, but this is compensated by the large number of policy holder in urban areas. It is necessary to identify the right agent that can target and cultivate the rural sector. The rural insurance should be looked as an opportunity not as an obligation. A number of innovative products and an efficient delivery system are two aspects that have to be developed in order to penetrate the rural areas. Now the new entrants in the insurance sector will definitely form their efforts on rural sector. Although this sector presents number of challenges, it will provide great opportunities also. It is necessary to tap into the rural society. It is one of the very important internal factors of insurance business environment in the country.

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The Business of retailing risk The extent of risk that an insurance company can bear is determined by its net worth. The minimum capital requirement by IRDA for insurance companies is 100 crores. Now all private non life insurance companies are looking at the corporate sector as they do not have sufficient funds for the retail segment. Going by the solvency norms, the insurance company cannot maintain proper solvency if all sum received is invested. This creates high risk and thus reinsurance come into picture. To build up national reinsurance capacity, the Government of India designated the General Insurance Corporation of India as the national reinsurer. All no life insurer has to compulsorily part with 20 % of their premium to GIC. In return this company will be secured if in case the claim in any particular year due to extra ordinary event increases rapidly. Therefore, it is evident that better the business of retailing risk, the better will be considered the internal environment for the insurance business. Specified Training and customization programme The insurance business environment in any country is affected by the reflection of the training and its quality on implementation to the various intermediaries and agents. The IRDA has stipulated that all insurance sales agents have to undergo 100 hours of training and clear examination conducted by insurance institute of India. The reason is that all the players entering the insurance market need to have sales agent trained by the IRDA accredited institutions. The syllabus rest on 60 % technical and remaining based on the motivational task a sales agent has to perform. On line and distance learning are providing a boon in training of insurance agents in India. The more the trained personnel, the better it will be for the insurance business of a country. Pricing of the Products The pricing of the policy in insurance sector has a definite being ON INSURANCE BUSINESS. The price always has an impact of the demand and supply of the products and the services. So the pricing of the insurance products will have a bearing impact on the insurance business in the country. The pricing of the product undergo change and the regulator will have to monitor it in order to create a healthy competition and insurance market in the country in view, entry of private players. The provider and the receivers both will have to interact very closely to secure a fair deal on the pricing of the deal, as the good state insurance sector will no longer be in a monopolized position. There should be meaningful and viable price for any product to be marketed and sustained. However the responsible company can afford to cut prices to a certain point, if they are to preserve their own financial stability and ability to meet their obligations. This is an area which provides unlimited opportunities in the Indian context for consultancy, broking, and education in the post privatization phase with new employment opportunities.

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Growing Consumerism The Indian economy with its growth of around 6% is now moving towards the standard of living of the people. The very base of the middle class population is broadening to around 300 million. It is a knowing fact today that China and India are attracting the maximum attention of the world, as they are only most populated countries, but also the most closely viewed developing economies of the world. The openness of the economy from the closed one has led to an era of well defined consumerism. There is a new kind of pressure on the consumer profile aspiring for quality, effectiveness, and adaptability. Theses parameters would now determine the survival of the market operators. With the competitiveness, the emphasis would be in innovative of new products, and value added customer service. Thus, aggressive market approach would be significantly required to Ancash the opportunity. The newly opened insurance sector has been evincing the maximum interest only in one direction, i.e. the customer, by way of devising new methods to reach him with the kind of products and services which he expects today. The opinion of having a choice and that too varied has certainly raised customer expectations. Today, the reality is that the customer is more aware not only for his rights but also the alternatives available to him for better products and services as well as new avenue for redressel of grievances. To achieve this goal, it calls for continued focus on the customer which calls for total quality performance with continued growth. The new players shall have to be committed to the TQP in products and services so as to provide total customer satisfaction. Consumer’s perspective The emerging scenario will provide the customer with: f. Choice of insurance, wide range of new and innovative products g. Competitive pricing of the products and services h. Access to information about the companies and products. i. Continuous consumer education j. A well trained and highly professional sales force k. Prompt and courteous front office response l. Greater focus on customer service m. World class pre and post sales services n. Efficient and customer friendly claim administration system. Long term savings and investments The long term savings generated will be a big boon for the Indian economy catalyzing additional funds for the infrastructure investments. Insurance companies will also bring long term capital to the market, which will add to the depth and breadth of our

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financial sector. It is hoped that it will bring in long term investors in the primary and secondary markets and will also lead to market stability. Organizational Control and efforts There are generally three modes to which the business especially in insurance deals with. They are as follows: o. Business General Mode (This involves selling of insurance products) p. Maintenance Mode (This deals with retaining the current market share) q. Payout Mode ( When the claims are settled) All these three modes bring opportunities and threat to the insurance environment. The effort in all the three modes put in up by the management of the insurance company is an important factor for the insurance business environment. The management also includes controlling the insurance business in such a dynamic environment. Social family set up of the Indian society A social family set up plays as an important factor for the growth of the insurance sector in an economy. The social family system that used to exist in India is changing and so the offerings of the insurance companies. Traditionally, India was characterized by joint family system where the head of the family is the health and wealth protector of the family. But due to changing beliefs of the people the social set up of the people changes from traditional joint family to nuclear family system, where the family is sub divided into the working groups. Thus arose the need for better health services which provided an advantage to the health and medical insurance business in India. Moreover, traditionally the people were more secured at the time of retirement as the number of members to support were greater but now a day’s nuclear family system reduced the number of family and thus the member of the family search for the wealth security outside the family in the form of various pension scheme funds offered by the insurance companies. A deep understanding of all this system or social set up is very important for the insurance business company.

Challenges and strategies of privatization The insurance sector is not free from the challenges thrown open by its privatization and entry of more and more players to operate within the regulatory framework of IRDA. Some important challenges to be faced by this sector of the economy in the coming years may include: r. Providing more jobs: U.K. which is equivalent to MP in size and with the population of 55 million provides six lakh insurance jobs whereas India with one billion employs close to 5 lakhs. s. Fear of job loss Page 21 of 30


t. Private insurer coexist with LIC and GIC u. Managing and motivating risk of cross border operations v. Upcoming more products and more complex features

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External Insurance Business Environment The external environment of the insurance business has been classified in four parts, namely, legal, economic, financial, and commercial.

External Environment • Legal and economic Environment • Malhotra Committee • IRDA Act • SEBI • Companies Act • LIC Act • GIC • Financial Environment • Financial Functions • Integrated Risk Management • New Risk Insurance Issue • Action by insurers • Additional cost • Action by Indian Government • Capital Requirement • Investment of assets • Consortium Financing • FDI • Commercial Environment • Product Development • Customer Service • Customer Expectation • Pricing • Marketing

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Legal Environment The insurance sector cannot work in isolation. Its operations, growth, and development are always conditional by various factors of which external business environment is one of the significant factors. There are various laws and acts which have direct or indirect applications in the insurance sector, the knowledge of which is a pre-requisite for all those who are concerned with the business of insurance in any capacity. Some of the important acts which are applicable in insurance are as under: a. Insurance Act, 1938 b. Life Insurance Act, 1956 c. General Insurance Business Act, 1972 d. IRDA Act, 1999 e. General Insurance Business Amendment Act, 2001 f. Some provisions of Contract Act, 1872 g. Some provisions of Companies ,1956 h. Service Tax Act Extensive regulation of insurance business in India was brought into effect with the enactment of the insurance Act, 1938. It tried to create a strong and powerful supervisory and regulatory authority in the controller of insurance with powers to direct, advice, caution, investigate, inspect, search, seize, amalgamate, authorize, register, and liquidate insurance companies. However, consequent upon the nationalization of insurance business (Life in 1956 and general in 1972) applications of the insurance contract was greatly modified by the nationalizing enactments and Government notifications issued there under. Most of the regulatory functions were taken away from the controller of insurance and vested in the insurers themselves. Malhotra Committee The Government of India in 1993 had set up a high powered committee headed by Sh. R.N. Malhotra, former Governor, Reserve Bank of India, to examine the structure of the insurance industry and recommend changes to make it more efficient and competitive keeping in view the structural changes in other parts of the financial system of the economy. This committee submitted its report in January 1994 and recommended that an independent insurance regulatory apparatus should be activated and proposed the establishment of a strong and effective Insurance Regulatory Authority in the form of a Statutory Autonomous board quite akin to the Securities and Exchange Board of India. The recommendations of this committee were debated at various forums including managements of General Insurance Corporation, Life Insurance Corporation, trade unions, chambers of commerce, and consumer interest groups. These recommendations found wide support. In view of this, the Government decided to bring in an insurance legislation to establish an independent insurance regulatory authority. Since enacting legislation was to take time, the then Government constituted through a government resolution an interim insurance regulatory on 23rd January 1996. The Insurance Regulatory Authority Bill was introduced in the parliament in 1996. The Bill has since been referred twice to the Standing

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Committee on Finance. The Bill was retitled Insurance Regulatory and Development Authority and introduced again in 1999 along with three schedules containing amendments to the Insurance Act, 1938, Life Insurance Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972. IRDA Act, 1999 The preamble to the Insurance Regulatory and Development Authority Ac, 1999 reads: an Act, to provide for the establishment of an authority to protect the interests of holders of insurance policies, to regulate, promote, and ensure orderly growth of the Insurance Industry and for matters connected therewith thereto. Section 3 of the Act provides for the establishment and incorporation of Authority. The Authority established shall be a body corporate having perpetual succession, and common seal with a power to acquire, hold and dispose of property, both movable and immovable and shall sue and be sued by the said name. Section 4 lays composition of the Authority. It shall have a chairperson and other members not exceeding nine in number, of whom not more than five shall be whole-time members appointed by the Central Government from amongst persons having knowledge of general insurance, life insurance, actuarial science, finance economics, law, and administration. Section 14 of the Insurance Regulatory and Development Authority Act, 1999, lays the duties, powers, and functions of the Authority. The Authority shall have the duty to regulate, promote, and ensure orderly growth of the insurance business and reinsurance business.

Economic Environment The economic conditions of the economy lay heavy impact on the insurance sector of the economy. The following factors of the economic environment have an impact on the insurance sector: a. The state of insurance business b. Industrial Policy of the country c. System of economic planning d. LPG policies e. Comparative worldwide insurance environment.

FINANCIAL ENVIRONMENT The Indian Financial Sector is dominated by Public Sector whether it is in the segment of Insurance, Banking or development finance. But the scene is fast changing. With the passing of Insurance Development and Regulatory Act in January 2000, the Insurance Industry has opened the way for participation by private sector entities. It is hoped that the new entrants will bring with them experience of financial and commercial business environment that will enrich the Insurance Sector. Most of the Private Sector players who have entered the Insurance Sector so far have rich experience of working in the Financial Sector with vast commercial acumen and scope of handling the varied type of activities. The fact is that no business entity can grow unless it has proper systems and mechanism relating to its financial

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and commercial activities. The Insurance Sector, therefore, is no exception to the above corporate business principle. Financial institutions play a key role in the growth process. They help mobilize large savings. They also help to allocate resources more efficiently among competing demands. Financial institutions are called financial intermediaries because they act as a conduit for the transfer of financial resources from net savers to net borrowers. This basic function of intermediation is performed through transformation mechanism which are: 1. Liability – assets transformation, 2. Size transformation, 3. Maturity transformation, 4. Risk transformation, and 5. Commercial and Marketing Transformation. The gain to the real sector of the economy depends on how effectively or efficiently the financial sector performs this basic function of intermediation. However, institutions, like Insurance Companies perform additional function over and above being financial intermediaries. They provide risk coverage. The risk to be insured must result in a loss which is measurable in financial terms. New Risk Insurance Issues On September 11, 2001, four places went on a suicide mission and changed the world, when twin towers in New York (U.S.A) were destroyed by the terrorists along with the places and passengers abroad on them. On the business side nobody was more deeply and immediately affected than the world’s Insurance and Airline Companies. Never in their worst situations (Realistic Disaster Scenario’s, as Lloyd’s of London terms it) could insurers have calculated of such an even occurring. Immediately after the above happening in U.S.A., the President George Bush called the horrific deed of terrorism as an “Act of War”. There were reactions of the Insurance Industry that Insurance providers may try to involve“Act of War exclusion” and thereby escape liability. This speculation was short lived. It was felt that any attempt to evade coverage obligations by either Primary Insurers or Reinsurers would tear at the faith of the American population in the Insurance Industry. Finally, the world’s leading Insurers agreed not to apply war risk exclusions and to paying all the claims related to terrorists attacks – estimated at more than $5 billion only in property damage. However, in view of war clouds Insurers put the aviation world on that w.e.f. 24th September 2001, they would not provide liability coverage for war perils, and especially they cancelled the write back clause in their airlines policies that includes war risk perils upto the limit of policy. Capital Adequacy Requirement The Insurance Regulatory and Development Authority have prescribed the following scale of capital Adequacy requirement in the shape of paid up equity capital for the entities doing Insurance Business. (I) Companies engaged in the business of Life Insurance – Rs. 100 Crores.

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(ii) Companies engaged in the business of General Insurance – Rs. 100 Crores. (iii) Companies doing the business of Reinsurance – Rs. 200 Crores. No company or other entity can do/or will be allowed to do Insurance Business unless it comply with the minimum Capital Adequacy Requirement as mentioned above. Investment of Assets – New Norms Every Insurance Company includes investment of its funds from time to time. It is not open to a company to make investments as it may like. These are prescribed yardsticks for making investments in different forms. The following percentages have been prescribed by the IRDA for making investments by the Insurance Companies : (1) 50% of Funds in Government Securities. (2) 20% of Funds in Corporate Debts. (3) 15% of Funds in Market Investments. (4) 15% of Funds in Social Sector. The Social Sector includes Infrastructure, viz. roads, highways, bridges, airports, ports, railways, water irrigation projects, telecommunications, housing, generation, distribution, and transmission of power. Investment in Government Securities tends to be highly liquid, particularly in the following interest. Consortium Financing by Insurance Companies The four companies in the general insurance business used to participate in the consortium finance, with the consortium leaders, usually financial institutions, or banks. Due to increasing non-performing assets, the four major general Insurance Companies have now decided to withdraw from all consortium financial arrangements with Financial Institutions and banks. The reason for this decision is that consortium financing is no longer viable due to the reason as interest rates have dropped to record low. At present, the yield on assets of the four insurance companies, Oriental Insurance Company Ltd., New India Assurance Company Ltd., National Insurance Company Ltd., and United India Insurance Company Ltd. was now under nine per cent. All the Insurance Companies currently follow the mercantile system of accounting. In the event of their switching over to accounting on realized basis, the yield on assets could drop further. Moreover the mercantile system of accounting treatment of assets classified as NPAs by the consortium leaders as either sub-standard or loss assets. Method of Measuring Underwriting Losses NPA build ups also point to the un-sustainability of high underwriting losses. The normal method of measuring such underwriting losses is through assessment of claim ratios. Claim ratios of Insurance Companies have historically been above 100 per cent by high asset yields and consequently high income from investments which will cease to exist. Therefore, the insurance companies have to be more careful in underwriting losses. The only risk to be avoided is that the losses may not increase in any case the yield by way of underwriting.

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Foreign equity in Insurance Sector The Insurance Sector Act, 1938 allows only Indian Insurance Companies registered under the Companies Act, 1956to transact insurance business in India after registration with the Insurance Regulatory and Development Authority. Several representations were made to include and allow the Cooperative Sector into Insurance Sector. The Act is, therefore, being amended accordingly. The Government has decided to put foreign equity in the Insurance Sector on the list of items on automatic route, but will not be increasing in the invest cap beyond 26 per cent level. The companies entering the Insurance Sector will not be required to seek an approval from the Foreign Investment Promotion Board (FIPB) and have now only to comply with R.B.I. formalities. The Associating Joint Ventures can invest only up to 26% of the equity in the Insured Sector. There is now a demand this limit requires upward revision in view of the requirement of more capital for Insurance Business managing two important activities/functions, i.e. financial and commercial.

COMMERCIAL ENVIRONMENT The insurance industry and business have to be made itself fully aware of the breadth and depth of the: (a) Knowledge, (b) Experience, and (c) Expertise of its officers and other intermediaries. It should make constant efforts in assessing problems, and finding out their solutions in the most scientific professional and cost effective manner. It should have a clear vision and be ready to implement advanced management systems, procedures, and controls wherever required in its working. It should have a clear goal to achieve high levels of efficiency productivity and competitiveness. We should not forget about the competition which is likely to be faced in between the large number of operators in the public and private insurance sector. Therefore, to have effective commercial viability the players in the insurance sector should update themselves and acquire new levels of knowledge and expertise with clear dimensions. Product Development and Innovations There has been a lot of efforts for the development of various products and these innovations both in the life and non-life insurance in the country. With the entry of private sector players and the demand of the prospective customers in view of mounting competition, more and more products are likely to be developed to cater to the requirement of the customers at different levels. The insurance sector has to provide to its customers wide choice of products and price. The competition will ensure innovation and constant improvement of service. The non-life sector will face much competition. In the case of existing players, they are already in the process of connecting their distribution channels. Their managements have realized that if they do not come up with new products and better services they may stand to lose in the face of stiff competition.

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Thus, innovative products should be made available as per the developments of technology particularly in service industry, viz. telecommunication, satellite, computers, and entertainment, etc. product development, and research will attract greater attention of players and they have to update themselves as far as their products are concerned. The marketing concept of general insurance will undergo a major change by infusion of research and design of the products and the innovation of new products. Customer Service The insurance sector is operating in the service providers’ sector, where the customer service is very important. Customer service is an organizational approach to delight a customer and not merely satisfy him by simply fulfilling all his expectations. A very positive approach, tone of speech and appearance are attitudes that create a first and last impression on customers. Feedback is the best way of delivering quality services. Therefore, the moment license is issued to a new player in the market; there could be competition of a very high quality new products and services. New thinking and new perceptions will arise to make excellence sustainable in a liberalized insurance market in India. Customer Expectations In the present day competitive insurance environment, the role of insurer has expanded tremendously. Beyond issuing traditional insurance policies, they have to act as a consultant, advisor, and advocate to meet with the requirements of the prospective customers. At different stages, an insured may expect: 1. Value –added service from the insurance, 2. Development of new products, 3. Excellence in pricing and services, 4. Financial security, 5. Technological development, 6. Quality training to its staff, 7. After sales services, and 8. Customer satisfaction. Thus, the customer’s expectations have to be studied, reviewed from time to time so as to get better business in the prevailing competitive environment in the insurance sector. Marketing Insurance In the process of marketing of various insurance products we cannot ignore two vital constituents of it, i.e. demand, and supply. The supply side of insurance and the demand of the need will now undergo a major shake up with the advent of new players in the market. The general insurance market, which consisted of 107 companies in the 1970’s produced a market premium of Rs. 15 crores, whereas at the end of 2000, the premium figure of the state insurers stood at around Rs. 10,000 crores. The focus of the marketing by the state insurance during all the three years was on laying the foundation of infrastructure, creating need-based cover also caters to the social insurance requirements of the Indian population. Therefore, with the emergence of new players there will be emphasis on the marketing of general insurance products both by Government owned as well as the private sector players.

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It is expected that the penetration of players will enhance the growth of general insurance premium. Thus, marketing will be a focus item if change in the coming days due to competition in the insurance sector, there is going to be a drastic change in the distribution channel for marketing of general insurance products. Reinsurance concept will also play a major role in the marketing of general insurance products. Technology is changing very fast, and Information Technology is one which will revolutionize the marketing of insurance products. E-commerce and internet will enable the direct purchase without intermediaries and thus, this is a major change which the marketing field in insurance is going to face. Customer relationship management and culture of insurance players as a quality service provider will have its own role to play in marketing of various types of innovative insurance products. Pricing of the product, i.e. Tariff The pricing of the insurance product will also undergo changes and the regulator will have to monitor it in order to create a healthy insurance market. However, the tariff system for certain risk is bound to continue. This is due to the reason that there would be more presence on the market for flexibility and the players; both the providers and receivers will have to interact closely to secure a fair deal on the pricing of the product. It is a fact that insurance is after all a fund of many to take care of the calamities of few and there should be a meaningful and viable price for any product to be marketed and sustainable. There will thus be a definite pressure to move away from the tariff rating and the market will determine the price especially for personal insurance. In Indian insurance sector a lot is waiting to be done to have viable and fair external environment for its financial and commercial activities. It should have a lock and insight in the areas of reforms in the market environment, the legal /tax /accounting complexities. The process can continue towards new insurance legislations and it may be allowed in the areas where it is possible under the current scenario. The new baby of financial engineering like that of securitization for making investment in infrastructure projects and for health care receivables , air craft leases, air fare , insurance could be few potential products which should be made used off by the insurance sector for commercial viability and risk management.

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Insurance Business Environment an Introduction

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