Principles of General Insurance

M.Rajaram

J.B.Boda Insurance Brokers Pvt.Ltd

Delhi

General Insurance• Definition• History of growth of General Insurance in India• Growth of general insurance premium• Classes of General Insurance• Prospects of further growth in India• Important terms used in General Insurance• Underwriting and claim procedures• Insurance and Reinsurance• Impact of detariffing rates and products• Role of Regulator• Conclusion

General Insurance

• Insurance is classified into Life and General• Any insurance other than human lives comes

under the scope of General Insurance• It is preferable to call this as General Insurance

instead of non-life insurance• There is vast scope and the market is trying to

cope up with the demands of the market• Insurance penetration is improving in India and

being the second largest developing economy in the world the scope is huge

Insurance in India

• Marine insurance was being practiced in India from the beginning of 19th century

• Offices were established in Kolkatta which was the centre for East India Company

• Fire insurance followed in 1825 at Madras• Swadeshi movement also had its impact on Insurance

and first Indian Company was formed in 1907 – Indian Mercantile Insurance Company

• Need to control insurance business was felt by the British government which introduced the Insurance Act in 1938 and Insurance Rules in 1939

Development in 1970• Life Insurance business was nationalised in India in the year

1956• General Insurance business was being done by 106 companies

including LIC (GI)• On May 13th 1971 an ordinance was promulgated taking state

control of general insurance business with custodians in charge• In 1972 GI Nationalisation act was passed allowing the

formation of GIC as the holding company and with 4 subsidiaries each having its Head Office at one metro

• 1st Jan 1973 GIC and 4 companies were formed taking in them 106 companies and the 4 PSUs were taking care of the general insurance business in the country till 2000 totally. GIC on its own was also writing aviation and crop business besides becoming the National & Asian Reinsurer

• The objective of nationalisation was to spread insurance to nook and corner of the country and to utilise people’s money for the people’s good thus uplifting the socio economic condition of the country

Liberalisation• Following globalisation moves Malhotra

committee had been formed to look into the methods of liberalisation of insurance

• Based on the report IRA bill was introduced but later on withdrawn without discussions from the floor of parliament

• Later on the bill in the modified form as IRDA bill was introduced in 1999 and the IRDA act was passed.

• An independent statutory authority as Regulator for insurance business came into existence in 1999

Developments since 2000• Surveyors and loss assessors regulations 2000

• Third party administrators regulations 2001

• Investment regulations 2001

• Policy holder’s interests regulations 2002

• Brokers’ regulations 2002

• Corporate Agents regulations 2002

• Manner of receipt of premium 2002

• Rural sector 2002

• Distribution of surplus 2002

Insurance councils & Institutes• Two councils which had been reconstituted – life

insurance council• Insurance ombudsman had been appointed• General insurance council• IIISLA has been formed • IIBA- Brokers association• IIRM- Institute of risk management• Intermediaries now allowed-Agents/ corporate agents/

Brokers• Institutes for educating the agents/Brokers have been

formed and passing the examination has been made mandatory for carrying out insurance business

• Surveyor licensing is being controlled by Regulator

General Insurance business done

• Year In Crores NA;OIC:UI;NA;GIC• 1974 219.99 25.3:25.5:25.5:21.5:2.6• 1975 253.75 26.6:26.7:26.7:21.1:2.6• 1976 286.51 27.1:26.5:23.4:21.0:2.1• 1990 2174.43 29.8:22.4:26.7:20.1:1.0• 2000 10272 crores• 2006 > 20000 crores• 2007 > 24000 crores

International comparison

• Penetration( premium as % of GDP)

• United states 4.32• Canada 3.31• UK 3.05• Germany 3.55• Japan 2.30• South Korea 2.89• China 0.61• India 0.54

• Density ( Premium per capita) USD

• USA 1474.4• Canada 700.6• UK 741.5• Germany 913.5• Japan 805.5• South Korea 262.3• China 5.0• India 2.4

General Insurance

• Insurance of property

• Insurance of persons

• Insurance of liability

• Insurance of Interest

Classes of GI Business

• Fire –Property damage and business interruption insurance

• Marine- Cargo and Hull

• Misc - Motor/ Engineering/Liability/ Aviation/ Space/Energy/ Guarantee/ Bonds/ Rural/ Livestock/ weather/ Crop/

All risks/ accident/ Travel/ Baggage/

Insurers now licensed by IRDA• LIFE INSURERS• 1. Bajaj Allianz• 2. Birla sun life• 3. HDFC Std life• 4. ICICI Prduential• 5. ING Vysya• 6. LIC• 7. Max New York Life• 8. Metlife• 9. Kotak Mahindra OM• 10.SBI Life• 11.TATA-AIG Life• 12.Reliance Life• 13.AVIVA life• 14.Sahara India life• 15.Shri Ram Life• 16.Bharti AXA Life

• GENERAL INSURERS• 1. Bajaj Allianz• 2. ICICI Lombard• 3. Iffco-Tokio General Insurance• 4. National Insurance• 5. New India Assurance Company• 6. Oriental Insurance• 7. Reliance General Insurance • 8. Royal Sundaram Alliance• 9. TATA-AIG General• 10.United India Insurance • 11. Cholamandalam MS General• 12. HDFC Chubb General• 13. Export Credit Guarantee• 14. Agriculture Insurance Company• 15. Star Health & Allied• Sompho/ Shri Ram General/AXA/

Apollo DKV

New Companies licensed

• Life

• 2000 3• 2001 7• 2002 2• 2003 1• 2004• 2005• 2006• 2007

• General

• 2000 3• 2001 3• 2002 3• 2003 • 2004• 2005• 2006• 2007

Terminology used in General Insurance

• Proposer-Insured-Insurer• Risk- Peril• Proposal form• Sum Insured• Premium ( Consideration)• Excess ( Deductible)• Indemnity• Cover note• Policy document• Endorsement-for effecting changes in the policy• Warranties/ Clauses• Conditions• Underwriting• Renewal• Hazard

Basic Principles of General Insce• Insurance is a legal agreement entered

between Insured and Insurer due to which due to the consideration, the Insurer agrees to indemnify the Insured, for the loss or damage or liability created due an accident which is covered under the policy subject to the terms and conditions of the contract

• All insurance policies are subject to the warranties, conditions and clauses of the policy contract and claims will be settled accordingly

Basic principles• UTMOST GOOD FAITH- which is embodied in all

insurance contracts and appears in the conditions of the policy documents.

• Since only the Insured who is the owner/possessing the property he/she needs to declare the details which are to be considered by the Underwriter. To obtain the requisite details the Insurer arranges all questions in order in the proposal form so that he/she knows where to look for the required details. Material fact is the detail of the risk which will influence the mind of the Underwriter to accept/reject; and if to accept the rate /terms at which the risk is to be accepted.

• Duty of disclosure is on the proposer/Insured and if wilful concealment/ non-disclosure of facts could be established the claim if any could be denied

Insurable interest• Only the person who has insurable interest can

arrange insurance and seek indemnity due to loss or damage

• Insurable interest is defined as legal interest in another person’s life or in the protection of property from injury,loss,destruction or pecuniary damage

• By virtue of ownership

• Tenant who had leased property

• Employer’s interest on employees lives

Proximate cause• Insurer is liable for any loss proximately caused

by a peril insured against, but he is not liable for any loss which is not proximately caused by a peril insured against-Judge Lumb

• Proximate cause means the active, efficient cause that sets in motion a train of events which brings about a result, without the intervention of any force started and working actively from a new and independent source

Indemnity• Insurance contracts are mostly contracts of indemnity• Insured is entitled to obtain the loss amount suffered

from the insurances he had effected on the property• He is not to be benefited due the loss/damage• If sum insured is on agreed value basis the loss will be

settled on that basis• Extent of indemnity will be based on the market value

of the property at the time of occurrence of the event which caused the loss/damage or destruction

• Subrogation and contribution are the corollaries of indemnity to ensure that the claim settlement follows the normal indemnity

Underwriting and claims

• Offer and acceptance- Proposal is studied by the Underwriter who then quotes the premium terms, warranties and conditions

• Once accepted by the proposer and premium is paid, the cover note is issued. Later on policy document is issued.

• Alterations/ changes are effected by endorsements• Claim is being processed to take into account the salvage,

under-insurance and excess under the policy and many times to deduct the additional premium for restoring the sum insured to the original level by charging the additional premium on the claim amount paid from the date of loss till the date of expiry.

• Claim will be subject to getting the subrogation rights preserved against the third parties responsible for making good the loss and transferring the same to Insurers

Changes

• Fire insurance; Reinstatement value (other than stocks) Market value• Marine insurance : Agreed value• Marine hull insurance: Agreed value• Motor insurance: Insured declared value• Engineering insurance: Present day

replacement value• Misc insurance: Market value

Insurances which need to become popular

• Business Interruption insurance• Engineering insurance• Liability insurance- CGL Public /Product• E & O ( PI) liability insurance• D & O liability insurance• PI for Lawyers/CAs/Doctors/ Brokers/Architects/

structural engineers• Overseas travel insurance • Employees benefit policies ( GPA/GMC)

Detariffing• TAC was earlier providing the rates, terms policy

wordings and regulations as to how to conduct the business

• Nearly 70% of the business was in the purview of the tariff

• After liberalising the market by allowing new players Tariff rates had been withdrawn wef 1-1-2007 but with some limitations

• From 1-1-2008 it is expected that the policy wordings will be withdrawn by IRDA which will allow freedom to the insurers to come out with their policy design wordings clauses and warranties.

• The beneficiary will be the customers/ insureds