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INTRODUCTION
“The Business of Insurance is related to the protection of the
economic values of the assets”. Every human being has the tendency to
save to protect him from risks or events of future.
Insurance is one form of savings where in people try to assure
themselves against risks or uncertainties of future. It is assurance
against risks or events or losses. People can save their earnings either
in the form gold, fixed assets like property or in banking and insurances.
All the savings of people of a country account for gross domestic
savings. In India, although savings rate is high but people prefer to
invest either in gold or fixed assets so that they can make money out of
it. Hence insurance sector is still untapped in India.
A. What is insurance?
Insurance is a tool by which fatalities of a small number are
compensated out of funds (premium payment) collected from plenteous.
Insurance is a safeguard against uncertain events that may occur in the
future. It is an arrangement where the losses experienced by a few are
extended over several who are exposed to similar risks. It is a protection
against financial loss arising on the happening of an unexpected event.
Insurance companies collect premium to provide security for the
purpose. Loss is paid out of the premium collected from people and the
insurance companies act as trustees to the amount so collected. These
companies have proposal forms which are filled to give details of
insurance required. Depending upon the answers in the proposal forms
insurance companies assess the risk and decide on the premium.
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Insurance companies are risk bearers. They underwrite the risk in
return for an insurance premium. The function of insurance is to provide
protection, prevent losses; capital formation etc. hence insurance can be
defined as a tool in which a sum of money as a premium is paid by the
insured in consideration of the insurer’s bearing the risk of paying a large
sum. It may also be defined as a contract wherein one party (insurer)
agrees to pay the other party (insured) or his beneficiary, a certain sum
upon a given contingency against which insurance is required.
Insurance industry commands massive funds through sales of
insurance products to large number of clients. Insurers also create
liabilities and commit themselves to compensate for losses occurring to
the policyholders on future date. It also plays an important role in
process of capital formation.
B. Nature of insurance
1. Risk sharing and risk transfer:
Insurance is used to share the financial losses that might occur to an
individual or his family on the happening of specified events. The loss
arising from such events are shared by all the insured in the form of
premium. Example: Suppose in a village, there are 250 houses, each
valued at Rs.200000. Every year one house gets burnt, resulting into a
total loss of Rs 200000. If all the 250 owners come together and
contribute Rs.800 each, the common fund would be Rs200000. This is
enough to pay to the owner whose house gets burnt. Thus the risk of
one owner is spread over 250 house owners of the village.
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2. Risk assessment in advance:
Insurance companies are risk bearers. They assess the risk before
insuring to charge the amount of premium.
3. It is not gambling or charity:
The uncertainty is changed to certainty by insuring property and life
because the insurer promises to pay a definite sum at damage or death.
Insurance is antithesis of gambling. Failure of insurance amounts to
gambling because the uncertainty of loss is always looming. Moreover
insurance is not possible without premium. So it is different from charity
because charity is given without consideration.
4. Huge number of insured people:
It is essential to insure larger number of people or property to make cost
of insurance less consequently premium would also be less.
5. Assists in capital formation:
Insurance provides capital to society. Accumulative funds are invested in
productive channels.
C. Types of insurance
Insurance is broadly classified into two parts covering different types of
risks:
1. Life Insurance: It can be classified as follows:
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Types Meaning
a. Whole Life
Insurance
In whole life assurance, insurance company collects premium
from the insured for whole life or till the time of his retirement
and pays claim to the family of the insured only after his death.
b. Endowment
Insurance
In case of endowment assurance, the term of policy is defined
for a specified period say 15, 20, 25 or 30 years. The insurance
company pays the claim to the family of assured in an event of
his death within the policy's term or in an event of the assured
surviving the policy's term.
cTerm
Assurance
The basic feature of term assurance plans is that they provide
death risk-cover. Term assurance policies are only for a limited
time, claim for which is paid to the family of the assured only
when he dies. In case the assured survives the term of policy,
no claim is paid to the assured.
d. Money Back
Policy
Money back policy is a policy opted by people who want
periodical payments. A money back policy is generally issued
for a particular period, and the sum assured is paid through
periodical payments to the insured, spread over this time period.
In case of death of the insured within the term of the policy, full
sum assured along with bonus accruing on it is payable by the
insurance company to the nominee of the deceased.
2. General Insurance: It can be classified as follows:
Types Meaning
Fire
Insurance
Fire insurance provides protection against damage to property
caused by accidents due to fire, lightening or explosion, whereby
the explosion is caused by boilers not being used for industrial
purposes. Fire insurance also includes damage caused due to other
perils like storm tempest or flood; burst pipes; earthquake; aircraft;
riot, civil commotion; malicious damage; explosion; impact.
Marine
Insurance
Marine insurance basically covers three risk areas, namely, hull,
cargo and freight. The risks which these areas are exposed to are
collectively known as "Perils of the Sea". These perils include theft,
fire, collision etc. Marine cargo policy provides protection to the
goods loaded on a ship against all perils between the departure and
arrival warehouse. Marine hull policy provides protection against
damage to ship caused due to the perils of the sea.
Miscellaneou
s
As per the Insurance Act, all types of general insurance other than
fire and marine insurance are covered under miscellaneous
insurance. Some of the examples of general insurance are motor
insurance, theft insurance, health insurance, personal accident
insurance, money insurance, engineering insurance etc.
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D. Functions of insurance
Primary functions:
1. Provide protection: Insurance cannot check the happening of the risk,
but can provide for the losses of risk.
2. Collective bearing of risk: Insurance is a device to share the financial
losses of few among many others.
3. Assessment of risk: Insurance determines the probable volume of risk
by evaluating various factors that give rise to risk.
4. Provide certainty: Insurance is a device, which helps to change from
uncertainty to certainty.
Secondary functions:
1. Prevention of losses : Insurance cautions businessman and individuals
to adoptsuitable device to prevent unfortunate consequences of risk by
observing safety instructions.
2. Small capital to cover large risks: Insurance relives the businessman
from security investment, by paying small amount of insurance against
larger risks and uncertainty.
3. Contributes towards development of larger industries.
Other Function:
Means of savings and investment: Insurance companies are business
houses. The product they sell is financial protection. To succeed and
survive, they must cover their costs, which include payments to cover
the losses of policyholders, as well as sales and administrative
expenses, taxes and dividends
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E. History of insurance industry in India
The insurance industry in India over the past century has gone
through big changes. In India this industry reveals the 360 degree turn.
360 degree turn means that it started in India from being an open
competitive market to nationalization and back to a liberalized market
again.
Insurance industry in India started as a fully private system with no
restriction on foreign participation in the nineteenth Century.
Before independence, a few British insurance companies dominated the
market. Life insurance was first set up in India through a British company
called the Oriental Life Insurance Company in 1818, followed by the
Bombay Assurance Company in 1823 and the Madras Equitable Life
Insurance Society in 1829. All of these companies operated in India but
did not insure the lives of Indians. They were there insuring the lives of
Europeans living in India. Some of the companies that started later did
provide insurance for Indians. But, they were treated as "substandard"
and therefore had to pay an extra premium of 20% or more. The first
company that had policies that could be bought by Indians with "fair
value" was the Bombay Mutual Life Assurance Society startingin1871.
The first general insurance company, Triton Insurance Company Lt
d. was established in 1850. It was owned and operated by the British.
The first general insurance company was the Indian Mercantile
Insurance Company Limited set up in Bombay in 1907. By 1938; the
insurance market in India had nearly 176 companies (both life and non-
life).
After the independence, the industry went to the other extreme. It
became a state-owned monopoly. The industry started to witness a
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problem like fraud. Hence many regulations were put in place to reduce
and control the problems in the industry. After which insurance was
nationalized. In 1956, the then finance minister S. D. Deshmukh
announced nationalization of the life insurance business and then the
general insurance business was nationalized in 1972. Only in 1999
private insurance companies have been allowed back into the business
of insurance with a maximum of 26% of foreign holding.
F. Indian scenario
1. Life insurance:
After the entry of new players and increase in the penetration
levels, could see the insurance sector cross the Rs 2,00,000 core mark
in business by 2010. The current size of the sector is estimated to be at
Rs 50,000 crore, which has seen a compound annual growth rate of
around 175 percent in the last few years.
The insurance sector, both life and non life, is likely to grow by
over 200 percent, and private insurers are expected to achieve a growth
rate of 140 percent as a result of aggressive marketing technique. It
added that state owned insurance companies are likely to be 35-40
percent.
On account of intense marketing strategies adopted by the private
insurance players, the market share of state-owned insurance
companies like GIC, LIC and others has come down to 70 percent in last
4-5 years from over 97 percent. Despite regulation, the private players
are offering 35 percent rate of return to the policy holders against
20 percent by public-sector insurers.
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2. General insurance:
General insurance in India has been expecting growth except in
some portfolios like motor insurance, fire and engineering. These
portfolios are still under tariff- this means that premium depends on a
fixed predetermined rate structure.
In India, GDS as a proportion of GDP at current prices increased
from 26.1% in 2002-03 to 28.1% in 2003-04. House hold sector
continued to be the major contributor to GDS at 24.3% in 2003-04. This
can be attributed to soft interest rates prevailing in housing
sector. General Insurance has low market penetration. It is 1.95% and
ranks 51st. However in collection of premium it is ranked 23rd. The ratio
of the premium collected to that of GDP is 0.58. The main reason for the
general insurance industry to perform very poorly was because of the
slow settlement of claims. Moreover the rates of claim in India were
highest in the world. It was 70 percent compared to 40 percent
internationally. This meant that out of 100 people who had insured their
commodities 70 claimed for a loss or damage. The main reason for the
lack of demand for general insurance is that people consider it as an
unnecessary expenditure. However it must be noted that the general
insurance has been earning consistent profits and has an efficient
dividend paying record accompanied by a steady growth in its financial
resources. The industry is recognized as one of the largest financial
Institutions in the country. Some of the private players in this sector are-
ICICI – Lombard, Reliance, Royal-Sundaram, Chholamandalam etc
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G. Contribution of the insurance sector to Indian economy
Some surveys have predicted that India and China will play a very
vital role in the years to come. Indian economy can be termed as an
emerging economy as it is doubling its GDP in 3 to 5 years and
moreover it is not dependent on any particular sector for its GDP.
If we look at the GDP of the Indian economy very closely over the
years, we can easily come to know the changing structure of the
economy. We can also come to know the changing contribution of
the various sectors like agriculture, manufacturing and the service
sector. In the financial year 1993-94, agricultural sector contributed to
31%, manufacturing accounted to 26.3% and the service sector
contributed to 42.7% of the total GDP of the country. Thus over
the years as India became an emerging economy in 2003-04
manufacturing sector contributed for 21.7 %, manufacturing contributed
for 26.8 whereas service sector contributed for 51.4% of the total GDP.
There has been 7.5% growth in the total GDP of the country and is
estimated to grow at 8.0% in 2006-07. The Indian economy has shown
signs of strong performance despite a rise in oil prices, high inflation rate
and abnormal rains in many parts of the country. The overall growth of
the Indian economy has been equally supported by all the three sectors
of the economy, i.e. the agriculture, manufacturing and the service
sector. Insurance, together with the banking sector, contributes to about
7.3 % of the total GDP of India, and the gross premium collected
contributes to about 2% of the total GDP of the country.
The insurance sector in India has completed a full circle from being
an open competitive market to nationalization and back to a liberalized
market again. Tracing the developments in the Indian insurance sector
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reveals the 360 degree turn witnessed over a period of almost 200
years.
H. Government policies regarding insurance
Insurance Regulatory and Development Authority (IRDA) 1999
Reforms in the insurance sector were initiated with the passage of the
IRDA bill in December 1999. It was set up as an independent body and it
has been able to frame globally compatible legislations.
The IRDA was set up to protect the interests of holders of insurance
policies, to regulate, promote and insure orderly growth of the insurance
industry and for matters connected there with or incidental thereto. This
act extends to whole of India. With the establishment of this act,
government amended Insurance act 1938, Life Insurance Act 1956 and
General Insurance Act 1972.IRDA was formed on the recommendations
of Malhotra Committee. In 1999 government of India has set up Malhotra
Committee to examine the structure of insurance industry and
recommend changes, under R.N Malhotra –former governor of RBI.
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THE INSURANCE INDUSTRY: FACTORS OF POSITIVE
PERCEPTION
The insurance industry brings multiple benefits to society. Through the
mechanism of risk analysis and loss compensation, it ensures the
smooth running of the economic system. Through its efforts to reduce
and prevent risk, it represents a decisive factor of individual and
collective welfare. Besides, a number of companies have now adopted a
corporate social responsibility policy, which leads them to
develop initiatives regarding community involvement, to strive to
integrate the environmental concern into their management, and to join
the socially responsible investment movement.
1. The insurance mechanism benefits society in many respects:
The basic function of the insurance sector in modern societies is to
cover a large number of risks through the mediation of contracts that
guarantee compensation to the insured, be they individuals or
organizations, when they experience losses due to a huge variety of
causes. For instance, private health insurance contracts complement
national health systems and enable policyholders to cover escalating
medical costs which is important in several countries that are facing an
ageing population; life and disability insurance contracts provide the
beneficiaries with financial amounts that allow them to live decently;
home insurance contracts protect individual property against theft,
fire and other natural hazards. Public liability insurance covers the
potential damage one could cause to others, e.g. by driving a car; other
contracts protect the subscribers against the accidents of life. Credit
insurance and travel insurance contracts provide the consumer with a
safety net in a number of situations.
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The insurance mechanism is thus essential for individuals: it
enables all of us as citizens to lead our lives free from the fear of being
left with nothing after a tragic event, and to feel a relative sense of
security in our everyday activities. But the insurance mechanism is also
vital for businesses. Accident, fire and theft insurance policies protect
companies against these three basic dangers, thereby enabling the
entrepreneurial spirit to express itself fully. Accident insurance contracts
cover the potential harm a company may cause to its employees. By
compensating injured employees in the case of an accident in the
workplace, employers’ liability insurance avoids the bankruptcy of the
responsible firm should the cost of the claims be too high. Similarly,
customers harmed by a defective product can be compensated by an
appropriate contract of manufacturer’s guarantee insurance.
Insurance for loss of trade can also prove useful, should the
company be unable to carry on its operations after a dreadful event.
Group insurance, transportation insurance, market exploration
insurance, or comprehensive site insurance, are other examples of
contracts which facilitate transactions among economic actors and the
running of firms of all kinds. The insurance mechanism releases
entrepreneurial energies and initiatives and allows economic agents to
create and develop their activities without feeling paralyzed by liabilities
and their potential consequences.
The insurance mechanism therefore ensures the smooth running
of the economic system, and decisively contributes to the freedom
of individuals and to the vitality of the entrepreneurial spirit. Through
its expertise in analyzing risks and compensating losses, the insurance
industry provides a sense of security to all economic and social factors.
Of course, it does not suppress the multiple dangers of life, but it
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significantly reduces the fears associated with them, and therefore
permits everyone to lead their lives with the ability to cope with the sense
of danger. Individuals and businesses alike do not need to hoard
excessive cash reserves to face risk, which releases them to spend and
invest.
Without the insurance mechanism, a number of professionals and
businesses would be at a loss to carry out their duties: surgeons, for
instance, wouldn’t be able to practice, due to the enormity of the
financial consequences of a lawsuit if a problem happened during an
operation. Similarly, transport companies dealing with dangerous
materials, or the most toxic chemical industries, would find themselves
in great difficulty if an accident happened, since the compensations
granted to victims of such accidents by the courts now usually reach
millions of dollars. Besides, even if it cannot assume all the costs of a
natural disaster, the insurance sector plays a role of solidarity in case of
catastrophes and helps the economy to recover. In sum, this industry
has taken such an important place in our modern lives that we can
hardly imagine a developed society without insurance companies.
To conclude, it may be asserted that the insurance sector has
largely contributed to the edification of our complex and sophisticated
economy: without insurance contracts, transactions would be more
difficult and costly, and a great part of them would probably never take
place. And as far as ordinary life is concerned, individuals would be
much more cautious in all that they do, less willing to engage in some of
their risky activities – such as driving a car for instance. Therefore, it can
be said that the insurance sector is almost as indispensable to the
functioning of a modern society as is the legal system that protects
companies and individuals against wrongdoings and crimes.
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2. Insurance companies’ efforts to foster risk reduction and prevention
Beyond risk analysis and loss compensation, the insurance sector
contributes to the reduction of risk in a number of domains. Insurance
companies are interested in reducing risk and avoiding loss for
profitability reasons in the first place: prevention is not only better but
also cheaper than cure. Since insurers – often – bear most of the cost if
a risk happens to become an actual event, they devote considerable
efforts to minimize risks – and potential costs associated with them.
Insurers have applied this sound principle to many areas of their activity.
For individual subscribers, they offer incentives (in the form of
discounts on premiums) to householders who install efficient door locks
and alarms, and to motorists who possess car alarms, immobilizers or
central locking systems; they encourage in the same way those car
owners who take additional safe driving instruction.
As regards insurance for businesses, insurers educate employers
to view risk management as a useful concern that improves safety;
they inspect hundreds of business and public buildings everyday to
check fire safety; they fund research to improve building security
standards (both against fire and crime); they audit company fleets
to monitor the way commercial vehicles are maintained and to
improve driving practices. They also exert continuous pressure on car
manufacturers to influence vehicle design in a sense that improves
security, and have elaborated a rating system which classifies vehicles
according to a number of criteria; manufacturers have a clear interest to
follow insurers’ recommendations, since a good ranking for their vehicles
means lower insurance premiums, and consequently a lower cost of car
ownership for the buyers, who in turn will have a financial incentive to
buy these cars.
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Moreover, insurance companies are strongly involved in promoting
public health: they have started years ago to offer lower premiums for
non-smokers and moderate drinkers. They are now placing the
emphasis on the rehabilitation of individuals who have experienced an
accident, including getting them back to work within a reasonable time,
which is essential for their personal psychological health as well as for
their quality of life. In their efforts to foster risk reduction and prevention,
insurance companies are helped by policyholders themselves, due to a
key principle of the insurance mechanism: the greater the risk, the higher
the premium. In other words, the insured, simple individuals and
large multinationals alike, and whatever the kind of contract they have
signed, have an incentive to reduce the possibility of loss and to take
precautions, in order to minimize the level of the premium they will pay.
On the contrary, should an accident happen, this would result in a higher
price of the premium, especially when the policyholder is responsible for
it.
To sum up, it seems that in many respects, the insurance industry
contributes to improve our lives: it helps businesses to protect
themselves from risk, provides a wide range of services to citizens, and
favors the well-being of society as a whole through a variety of initiatives.
Insurance companies protect the persons against the accidents of life
and provide them with a safety net; they enable entrepreneurs to engage
in risk-taking free from the fear of liabilities, thereby possibly allowing
new technologies to develop; and their interventions have led to the
adoption of higher security standards in several important areas such as
car safety for instance. They also promote public health through
incentives for customers and investments in medical care and
rehabilitation schemes; they conduct inspections in industrial
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establishments on a regular basis to reduce risks and prevent accidents;
they are also involved in research efforts for the prevention of fire and
crime.
3. Insurance companies’ growing interest for socially responsible
investment
Besides, insurance companies are financial institutions, and as
such, they are involved in the management of financial investments.
How do they manage their financial assets? Do they simply adhere to
the dominant conception of the maximization of shareholder value as the
unique objective of the firm, and expect quarterly results of companies
they invest in to be always higher? Insurance companies are big
investors focused on the long-term, and therefore have a preference for
companies that will deliver long-term value. Being themselves experts in
risk analysis, they also take a growing interest in the way the companies
they invest in manage their own risks; increasingly, they play their
role as institutional investors, investigating how the boards of these
companies handle risk issues, looking at the reporting methods that are
implemented, and occasionally advising changes in corporate
governance schemes.
Additionally, some leading insurance companies have also started
to incorporate sustainability-related issues into their investment
decisions. In this regard, it seems that minds are changing at a relatively
fast pace. For the past two decades, the movement of socially
responsible investing (SRI) has kept continuously increasing, in relation
with the alarming visibility of global warming and other environmental
threats, but also with some pressing societal issues such as the rise of
social inequalities and exclusion, child labor in overseas factories, or
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human rights violations. These pioneering, sustainability-oriented
insurance companies, have understood that businesses which
deliberately ignore the societal and environmental dimensions do so
at their own peril: they may experience lawsuits, tarnished reputations,
and see their possibility to operate in important markets significantly
reduced.
A group of leading insurance companies have now adopted clear
policies of socially responsible investment, and have undertaken to
implement them in their asset management practices. By choosing to
integrate environmental and social criteria into their decision- making
process, these companies have joined the movement of socially
responsible investing, which is gaining momentum worldwide.
Socially responsible investing (SRI) consists in the inclusion of
non-financial criteria, such as environmental, social and governance
considerations, into the process of investment decision-making. It thus
aims at achieving non-financial results as well as a financial return. In
today’s society, a number of observers – and scientists alike – suggest
that there is no fundamental contradiction between the promotion of
social or environmental values on the one hand, and the search for
financial gains on the other; on the contrary, the good performance
of socially responsible indices and mutual funds, as well as
several recent studies, support the idea that values-led investing does
not compromise financial gains.
Three main SRI strategies are available for responsible investors:
screening, shareholder activism and community investing. The practice
of screening, the first SRI strategy, consists in choosing securities based
on social or environmental criteria; the choice process may be negative,
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positive, or a combination of both. For instance, negative screening
implies the exclusion of companies that manufacture harmful
products such as tobacco, alcohol or weapons, or that have
developed management practices considered negatively. Alternatively,
positive screening implies buying shares of companies that bring a
positive contribution to society, such as developing renewable energies,
sustainable buildings and organic agriculture, fostering diversity in the
workplace and social inclusion, or other beneficial practices. And of
course, any combination of both strategies is possible. Screening is thus
a selection process, whereby the investor filters the shares that he
prefers to buy or to avoid. However, since the process requires
extensive research into company policies and practices, most
socially responsible investors rely on mutual funds to manage their
investments.
The second option open to socially responsible investors is
shareholder activism. The ownership of company shares provides
investors with rights and responsibilities, and a growing number of
them are using their rights as corporate owners to advocate whatever
Lastly, the third identified SRI strategy resides in community investing.
For instance, financial institutions choosing this path can propose low
interest rate loans to people who earn a low or moderate income, and
who would otherwise be at a loss to finance affordable housing; they can
develop such programs either in poor areas of the cities of rich countries,
or in villages in developing countries. The logic of community investing
can also be applied through micro-insurance for the economically
deprived: for instance in India, Aviva has insured 450,000 people
belonging to this category, almost exclusively poor women, thereby
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enabling them to commence productive activities, for if they are ensured,
they can get a loan, etc.
To a certain extent, the choice of insurance companies to adopt
SRI policies is a matter of consistency between risk management and
financial management: is it appropriate for an insurance company to
invest in tobacco firms with a view to reaping high short-term benefits,
knowing that at the same time these firms manufacture products that
increase public health risks and will generate heavy compensations for
the victims? Belth and Dorfman are right when they claim that insurance
companies should divest their tobacco investments, not only on moral
grounds, but also for good economic reasons. Besides, the choices
made by the insurance industry exert an influence on corporate behavior
in many other sectors, and thus this industry can act as a lever to
encourage positive change in society as a whole. For all these reasons,
the investment policies of the insurance sector have a great effect in
designing the future of our economic system, and they condition our
quality of life and that of our children; therefore the integration of
extra-financial concerns and values in the investment choices of
insurance companies is of great importance.
To conclude this section, it is undeniable that the insurance
industry brings numerous positive contributions to society, and that some
pioneering companies are striving to operate in a more socially
responsible way. However, it is also undeniable that the industry suffers
from a negative image in the public opinion, which may be ascribed to a
variety of causes; the next section will precisely investigate the
underlying causes of this negative perception problem.
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THE INSURANCE INDUSTRY: FACTORS OF NEGATIVE
PERCEPTION
The insurance business is faced with several kinds of ethical issues.
Some of these issues are common to all economic sectors, such as for
instance operations localization, social inclusion, diversity in the
workplace, governance mechanisms, and so on. We will concentrate
here on those issues that are the most pressing for the insurance
industry and that account most for its being negatively perceived by the
public opinion: the uncovering of corporate scandals, misrepresentation
and mis-selling practices, the agents’ remuneration system, the respect
of customers privacy, and the consequences of outsourcing.
1. The uncovering of recent scandals has tarnished the industry’s image
Amid the spate of highly publicized accounting and corruption scandals
that have been uncovered in several high-profile corporations around the
world in recent years, the insurance business has not been spared.
Some of the world’s largest insurers and insurance brokers have been
named in corporate scandals, ranging from bid rigging, price
fixing, improper accounting methods, to overstating earnings. The
adverse publicity generated by these scandals has obviously hurt
the industry’s reputation. Customers, both corporations and
individuals, have criticized the market conduct in the industry. The two
main sectors of the insurance industry – the life insurance business, and
general insurance business – have received their fair share of criticism.
This is from an article in India Today. Indian insurance companies have
collectively lost a whopping Rs.30,401 crore due to various frauds which
have taken place in the life and general insurance segments during the
year, according to a study. The losses work out to about nine per cent of
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the total estimated size of the insurance industry in 2011, the study
carried out by Pune-based company India forensic states said.
The total premium income of the insurance industry, comprising life, non-
life and health, is around Rs.3.5 lakh crore, according to the figures by
Insurance Regulatory and Development Authority (IRDA).
The company has identified collusion between employees of insurance
companies and beneficiaries furnishing false documents, and
manipulation in citing the cause of death as part of the modus operandi
adopted by fraudsters to claim undue insurance benefits. India forensic
carries out regular studies in examining frauds, security, risk
management and forensic accounting and claims to have assisted the
Central Bureau of Investigation (CBI) in the multi-crore Satyam scam.
The life insurance segment accounted for as much as 86 per cent of the
frauds while remaining 14 per cent took place in the general insurance
sector, which includes false claims for cars, houses and accidents, the
report showed. The study also highlighted that the frauds in the life
insurance segment had more than doubled in the last five years while
those related to general insurance sector increased by 70 per cent.
In 2007, insurance firms had lost as much as Rs.15,288 crore, of which
life insurance accounted for 13,148 crore while the general insurance
segment lostRs.2,140 crore. The insurance sector is susceptible to
various frauds in the country. There is an urgent need to have strict
measures, including setting up of a dedicated unit to detect and check
frauds in the companies, said anti-fraud and money laundering expert
Mayur Joshi, who is a founder member of India forensic. However,
insurance experts assert that while it is true that insurance companies
are cheated, the quantum of losses is not as high as the study claims.
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IRDA chairman J. Harinarayan brushed aside the study. He said the
insurance firms are capable enough to protect their interests. However,
he admitted that insurance companies were not reporting scams or other
malpractices in the insurance industry. "It is just a sensational claim. I do
not think so. Insurance companies have not reported to me about such
frauds. Let me see the report first and what it says and how it claims that
a `30,000-crore frauds was committed in 2012 in the insurance sector.
Insurance companies are capable enough to protect their interest,"
Harinarayan told Mail Today on Sunday. LIFE Insurance Council
secretary general S.B. Mathur said, "I think the figures of fraud as
claimed are unrealistic. The fraud committed could be higher in non-life
insurance compared to life insurance companies. However, the total
figure for fraud cannot be as high asRs.30,000 crore. "I went through
reports submitted by the respective insurance companies to their audit
committees which are not open documents. But I have not come across
such mind-boggling figures. It is next to impossible.
The internal laws are not so lax." The study said that clients were
defrauding the insurance companies by not disclosing existing diseases.
This was being done by manipulating the impaneled doctors while
applying for the policy. False age certificates are also being submitted to
become eligible for insurance. The forging of medical bills are the most
common fraud that affect the health insurance sector. In as many as 31
per cent of the total falsified documentation, medical bills were the
common target of the frauds by external parties.
Travel abroad for surgery without disclosing it, or getting a damaged
vehicle insured without disclosing the accident are some of the common
methods of cheating insurance companies, the report states as
examples of frauds in the general insurance sector.
23
To sum up, the fact that these episodes simply reinforces the message
that the negative image faced by the insurance industry is a global issue,
not limited to a given country. These high-profile cases have given
stakeholders the impression that the unethical behavior uncovered does
not only apply to a few black sheep in the insurance business, but
indicates a bigger problem that concerns the entire industry. The
unfavorable media coverage has shaken people’s confidence, and led to
customer suspicion toward insurance companies.
2. The opacity of the insurance business: misrepresentation and mis-
selling practices
One of the sources of the negative image conveyed by the
insurance sector resides in the perceived opacity of the language and
procedures it has developed. For ordinary citizens, insurance
professionals are viewed as specialists in financial techniques, who often
use – and hide themselves behind – an unintelligible jargon. Contracts
are usually fraught with a myriad of obscure clauses, often written in
small print, which prove difficult to understand for the layman.
More generally, the complexity of the market makes comparisons
difficult for customers. Due to the large number of existing companies
and to the variability of available contracts, the insurance arena is very
sophisticated and looks like a jungle; individual customers often lack
reliable elements to assess the offers of different companies. Besides, it
is an obligation for customers – individuals or businesses – to subscribe
various policies (e.g. against fire, accidents, etc.) and they often sense
that the level of the premiums is too high compared to the risks at stake;
they don’t have the necessary knowledge to check that they pay the
right level of price for the service they receive. In sum, subscribers may
24
have the impression of being trapped in a system that is organized to
take their money without caring very much about their real insurance
needs. It is no surprise then that the insurance industry has been the
target of widespread criticism for its commercial practices, often
characterized by misleading advertising, misrepresentation, and mis-
selling – especially in the long-term savings and life insurance
businesses.
A number of financial institutions – not only insurance
companies – have been confronted to consumer protest for not giving
enough information about the products they sold, in particular relating to
the risky aspect of variable income, stock-based investments.
Sometimes, misrepresentations are not deliberately done to deceive
buyers, but are instead due to agents’ lack of product knowledge and
training. Besides, numerous complaints against the insurance industry
concern agents who sell customers products that are unsuitable to them,
in order to meet sales quotas and/or boost their earnings as these
products give the agent higher commission: this is mis-selling. Mis-
selling could also be due to agents giving wrong advice to customers.
The policies are considered mis-sold because they do not meet
customers’ needs. Moreover, it happens frequently in insurance
contracts that charges are hidden, or disclosed only in small print in
advertisements, brochures or policy documents. There are also
instances where insurance agents do not highlight exclusions of the
coverage to customers.
3. Issues linked to the insurance agents’ reward system
The remuneration system of intermediaries for distributing
investment products poses several problems that account for the bad
25
reputation of the savings and life businesses, since it rests on heavily
front-end loaded commission structures. Salespeople in the industry are
often paid commission upfront for the sale of products. Some critics
believe that such a way of rewarding insurance agents is the underlying
cause of unethical behavior as it gives rise to a conflict between the
agent’s and the client’s interests. The commission-based selling system
would generate a bias to over-sell, since this mode of remuneration of
advisers can lead them to push a customer to purchase an investment
product on the basis of the resulting payment it generates for them,
irrespective of the best choice for the customer, who could alternatively
prefer to reduce his/her debt or to hold savings in cash. Moreover, this
system can also bring about a product bias, which occurs when the
adviser has an incentive to recommend a particular investment
product that does not necessarily meet the customer’s needs (supposing
that this time he/she is willing to purchase an investment product), but
that grants them a higher remuneration. For instance, agents are
usually paid more commission for the sale of full life insurance products
than term life ones; it has been alleged that in order to earn more
commission, agents would have a higher tendency to recommend full life
insurance to their clients, whereas term life insurance is much cheaper
for the customer to buy.
The structure of remunerations across products and providers is
really confusing for customers, who often do not understand the
rationale behind it. Whereas an initial cost is associated with the start of
the advice process, ongoing commission (renewal and trail) is a current
practice, the justification of which is not quite clear; the customer is not
always aware of its purpose. As a matter of fact, it is hard to understand
if trail commissions correspond to a deferred initial commission, or if they
26
imply the provision of ongoing advice. The practice of “churning”
customers’ portfolios is also highly questionable. Churning refers to a
sales method in which insurance agents persuade policyholders to
terminate their existing policies after a short period of time and switch to
new, similar ones for no valid reason. In the process, the insurance
agent earns commissions on the new policies sold. Other problems
happen to occur in the customer-advisor relationship, for instance when
the latter refuses to provide feature documents and personal illustrations
if the former does not go through with the transaction.
4. Dilemmas related to the consequences of outsourcing decisions
Another determinant of the bad image conveyed by the
insurance industry may be ascribed to the off shoring trend that has
been rapidly developing during the past few years: insurance companies
have massively delocalized jobs to India, especially to operate their call
centers in this country where wages are largely lower than in the
Western developed world, and also to transfer thousands of back office
staff to separate companies. For instance Aviva has delocalized 6,000
jobs in India – in the cities of Pune, Bangalore and New Delhi and plans
to create 3,000 more jobs while implementing a BOT model, entering
into new types of relationship and governance with Indian partners. Jobs
concerned are not anymore those of phone operators, but are now
extending to back office functions. Similarly, Scottish Widows, an
insurance business belonging to Lloyds TSB, transferred 125 jobs to
New Delhi in September 2005, following a first wave of 40 delocalized
jobs in 2004; Standard Life Investments has transferred administration
jobs to Citigroup and Bank of New York recently, and several other
examples could be quoted here. However, this offshoring and
outsourcing trend raises many complex questions. Certainly, while
27
reducing operating costs in home countries, it contributes to the
development of host-country economies (creating jobs, transferring
know- how, developing skills, paying some taxes, etc), and in some
specific cases it may enhance the quality of service, while bringing
innovations at home. But what are the consequences in terms of
employment in the home country? Does this imply that part of the
workforce should be made redundant, or can the consequences of such
massive staff transfers be amortized, smoothed through the non-
replacement of retirement leaves? In the case of Aviva, in the aftermath
of its move to India, the 3,500 staff in Edinburgh and Perth remained
almost intact, but other sites including Norwich lost 2,500 jobs, according
to ABI, though in reality the number of employees may have increased,
with different jobs created.
And after call centers, back office operations, some administration
jobs, what might be the next step? Due to global competitive pressure,
thanks to IT progress, almost everything – except perhaps the Board
and the top management – could be delocalized to India or other lower
cost countries in Asia or elsewhere, to the appreciation of shareholders
happy to see how such effective cost-cutting offshoring strategy can
improve the bottom line. Overtime, a massive offshoring trend (e.g. in
manufacturing and financial services) can’t but bring increased
unemployment problems in the insurance companies’ home countries,
and it seems that there would be some lack of realism to deny that
simple reality. Besides, isn’t it contradictory for a company to engage
in community investment programs in order to gain a good corporate
citizen image, and at the same time to make decisions that impact
so negatively on the social fabric?
RESEARCH METHODOLOGY
28
Objectives of the study:
1. The main objective of this study was to understand the growth of the
insurance sector in India and to find out the important criteria that people
think about before investing in an insurance policy.
2. To study the reasons of customer’s perception towards insurance,
since India is a very fast developing country.
3. To find out the awareness level of insurance and to recommend
improvement in the different sectors of insurance.
4. To know about the current and future prospects of insurance to the
customers.
Limits of the study:
1. The study of this project is limited to 40 people of Mumbai who have
been questioned to understand the project well.
2. Nearly 90% of the respondent belonged to the age group of 20-50
years and only 10% were above 50 years. So, the responses and the
opinions of the experienced and aged were not available. So,
the findings may not be correct when we think about the opinion of the
elderly people about insurance.
3. The selection of people for the questionnaire was done on the basis
of convenient random sampling, so there were certain cases in which
the people selected did not have any insurance policy, so they could not
give any positive feedback regarding the important criteria to be
considered before taking an insurance policy. So, this further reduced
the actual number of respondents to 30 from 40.
Methodology used:
29
1. Primary data:
a. Survey: Questionnaire distributed among 40 people out of which 30
were insurance policy holders
2. Secondary data:
a. Internet
b. Reference books by various authors and newspapers
c. Case-studies
SURVEY AND DATA ANALYSIS
30
Below 30 30-40 40-50 Above 500
2
4
6
8
10
12
14
AGE
30%
35%
25%
10%
ANNUAL INCOME
Below 1 lakh1-3 lakh3-5 lakhAbove 5 lakh
31
Interpretation: It was founded that 83% customers who have taken the
policy are job oriented or having some kind of business.
Very costly Not needed Lack of awareness
Lack of trust Complex products
0%
5%
10%
15%
20%
25%
30%
35%
REASONS FOR NOT BUYING AN INSURANCE POLICY
Interpretation: the main reason for not buying insurance is either people
feel it is not required or they lack trust dues to various insurance frauds.
32
Interpretation: The main cause of taking the insurance policy by majority
of consumer is future security followed by tax saving.
60%
40%
APPROACH
Company approachOthers
Interpretation: It was founded that 60% people have taken policy
because of company approach and rest bought either by their approach
or other reasons
33
44%
66%
SECTOR
PrivatePublic
Interpretation:
After the survey it was found that still major portion of customers go for
public insurance companies because of the trust factor, but with the
entry of more and more private companies the scenario is changing
rapidly, people who need more and better returns are opting for private
companies, and this can be justified by the increasing market share of
private companies in the Indian insurance sector. There are various
ways in which private companies are found much more lucrative than
public companies and the fact which support this statement are as
follows:
1. Versatility of products
2. Efficient fund managers
3. Better customer services
4. More returns
5. Regular follow up
6. Quicker settlement
34
Premuim Services Accessibility Company image and reputation
0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
FACTORS CONSIDERED WHILE TAKING A POL-ICY
Interpretation: Now if we consider one of the criteria we can see that
45% of the respondent has rated premium as the most important factor
that they consider before taking any insurance policy from any company.
So, it can be clearly interpreted that premium that the policy holder has
to pay to continue his/her policy plays a very important role before
selecting the terms and conditions of the policy and also the
company from which the policy is to be taken.
There were many respondents who think that many of the companies
provide them satisfactory services only till the policy is being taken by
the respondent, but after that if there is any requirement from the point of
view of the customer, the company does not pay the same attention to
them as they had paid earlier. So, nearly 20% of the respondents feel
that services (both pre and post sales) provided by the company is
highly important to consider before undertaking any kind of life
insurance policy.
The term accessibility refers to the easy availability of the facilities that
the company provides to its customers. The facilities may be regarding
35
information about the company and the various products offered by
them, it can be made available through internet and other media.
According to the study 10% of the respondents think it is an important
factor while that one may consider before taking any insurance policy.
Company image also plays a very important role in influencing the
decision of a prospective customer while taking the final decision. From
the study it has been found out that nearly 30% of the people feel that it
plays a significant role in their decision making.
To further analyze the perception of the respondents about what they
think as the important criteria before taking an insurance policy, two
independent parameters can be considered:
a) Age of the People
b) Annual Income of the People.
After taking these two independent parameters, the analysis is being
made to see which age group people think what criterion is important or
what is the difference in perception among the people who have annual
income which are significantly different from each other.
36
Below 30 31-40 41-50 Above 500%
5%
10%
15%
20%
25%
30%
35%
40%
45%
AGE-PERCEPTION
PremuimServicesAccessibilityCompany image
People who belong to the age group of less than 30 consider premium
as the highly important criterion in comparison to the people who belong
to an age group of 30-40. So, people who have started their professional
life consider more about the money that has to be spent on the
insurance policy in comparison to the people who are working for a
relatively longer period of time. Again, if we consider those people 41-50
years who have come to the important stage of their working life, we can
say that these people also think that the expense regarding the premium
to be paid is the highly important criteria for them because they likely to
spend or save their money on medical, education etc.
In this case, we can conclude that the people who belong to the age
group of less than 30 years who may be taking an insurance policy for
the first time, give much importance on services in comparison to the
people belonging to the age group of 30–40, who put more emphasis on
the other benefits than services provided by the company.
We can say that not much importance is given to the accessibility criteria
by the respondents belonging to below 30 and 31-40 years. But only
37
respondent belonging to 41-50 years consider that it is highly important,
because of their long period of working age they like to get easy
availability of the products offered.
In the case of company image also, we see most of the respondents of
the age group 41-50 consider it an important criterion. This is mainly
because people feel secure and comfortable of their money which they
spend on the company which has a brand name or image.
Below 1 lakh 1-3 lakh 3-5 lakh Above 5 lakh0%
5%
10%
15%
20%
25%
30%
35%
40%
45%
50%
ANNUAL INCOME- PERCEPTION
PremiumServicesAccessibilityCompany image
In this scenario mostly the respondents of all the annual income groups
think that premium to be paid in a policy is the most important criterion,
even though the income increases it is considered to be the highly
important.
If we consider the services provided by the company we can see that the
people who are having less income put more emphasis on this criterion
because people are more conscious about their money than the people
who belong to 1-3 lakh. So, they expect better services for their money
38
even though it is less and among all respondents above 5 lakh who have
more job responsibility also think of service as a highly important
criterion for decision making.
If we consider the accessibility as one of the criterion for taking
insurance policy, we can see that as the income of the person increases,
they put less importance on the accessibility criterion.
When we compare company image among different age groups and
annual income groups we find similar opinion, considering that it is highly
important for decision making. This mainly because people feel safe and
secure with the company they invest.
30%
20%
50%
USE OF INTERNET
PurchaseSeeking informationTraditional methods
RECOMMENDATION AND CONCLUSION
One of the most striking and positive findings from the survey is that the
reputation of the insurance industry has not been tarnished by various
frauds. The majority of customers still have reasonably high satisfaction
levels and are confident that their products meet their needs. But there is
no room for complacency: for a significant minority of customers,
39
insufficient information about product suitability is creating a lack of
confidence that their product is right for their needs. Customers are
looking for value to be clearly demonstrated, reflecting a balance of
price, product features and service tailored to their needs. They also
expect the buying process to be convenient and transparent, allowing
them to buy with confidence. In non-life insurance, price is often the
main measure of value since products are more comparable and
frequency of purchase drives greater customer familiarity. Brand and
reputation are more important criteria.
In every case it was found that customers intend to do more research
using the internet, even if they ultimately rely on conventional channels
for purchase. Majority of the customers continue to have a high
preference for personal interaction including agents/brokers and direct
channels to actually complete the purchase, with the main reason being
the need for expert assistance because the products are too complex.
The degree of use of online by customers also varies by type of
transaction; some customers are happy to use the internet to make a
purchase but not to deal with a claim but most respondents still wanted a
mix of online and personal contact.
Customers want to build relationships with providers they trust and who
make it convenient for them. Insurers must except this challenge and
adjust to live up to this expectation. The reason for switching providers is
that the provider is unable to respond to their changing needs. Another
key area where insurers can encourage longer-term relationships is
through rewarding loyalty. Consumers are used to many other industries
rewarding their loyalty, such as supermarkets, airlines or hotels, and
they expect the same from insurers. The following are a few
recommendations and suggestions to help the insurance companies to
40
bring about a positive perception in the minds of the customers towards
insurance:
Integrating online and offline channels seamlessly to meet
changing customers’ needs over the product life cycle.
Making sales and renewal simple and convenient for customers
across whichever channel or medium they chose.
Understanding how to personalize service and show customers
they are valued, particularly in an ever more digital environment.
Putting the customer, rather than the intermediary, at the center of
the business model, and using customer data to develop deep
insight into their needs and to offer the right product, at the right
time, to the right customer, and to follow through with service that
responds to their changing needs
Providing a suite of simple and transparent products, tailored to life
stage needs that customers can understand and buy with
confidence.
Making it easy to access relevant products and information
throughout the product life cycle, particularly online, but supported
by trusted personal interaction where necessary.
Building trust by delivering a great customer experience and
anticipating and responding to customers’ changing needs.
Rewarding customers’ loyalty with incentives that recognize
multiple purchasing and value of the overall relationship.
Improving customer retention by addressing the underlying causes
of lapses and being better at meeting their changing needs and
expectations over the life cycle
Consumer should be aware of company’s profile and returns
associated with insurance.
41
The Financial advisor should be right enough to serve the
consumers. The consumer should also be aware of the advisor or
others who is looking after their investments.
Company should publish their performance by comparing it with
their competitors.
BIBLIOGRAPHY
Websites:
1.http://www.indianexpress.com/news/huge-potential-in-untapped-
market/732418/3
2.http://topics.nytimes.com/topics/reference/timestopics/subjects/i/
insurance/index.html
3. http://articles.cnn.com/keyword/health-insurance
4. http://www.eurojournals.com/EJSS_25_2_09.pdf
42
5. http://businesstoday.intoday.in/story/insurance-cover-health-
insurance-profit-fraud-fake-data/1/22898.html
Books:
1. Principles of insurance By William Franklin Gephart
2. Consumer perception of credit insurance on retail purchases By Joel
Huber
3. Perception of Service Quality and Loyalty: Among Customers of
Insurance Companies: A Comparative Analysis by Djalalie Itana Ayana
4. Delivering Quality Service: Balancing Customer Perceptions and
Expectations by Valarie A Zeithaml
APPENDIX
Survey about insurance:
1. Name: _______________________________________
2. Age:
Below 30 31-40 41-50 Above 50
3. Annual income:
Below 1 lakh 1-3 lakhs 3-5 lakhs 5 lakhs does not
work
4. Do you have an Insurance Policy with any Insurance Company?
43
Yes No
a) If yes, name the company
__________________________________
b) Name the policy which you own
______________________________
c) If no, reason for not buying an insurance
________________________
5. What is the main reason for buying an insurance policy?
Future security Future investment Tax benefits
6. What factors do you consider while selecting a life insurance
company?
Premium Company Reputation and image Services
Accessibility
7. What made you decide to purchase an Insurance policy?
Company approach Friends Family Advertisements
Others
8. For what purpose do you use internet taking insurance into
consideration?
Purchase of insurance Seeking information Traditional
channels only
9. Any suggestions for improving the service offered by insurance
companies:
44
_________________________________________________________
_________________________________________________________
______
45