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8/8/2019 MBC - 307 - Session 1
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MBC ± 307 :
BANKING & INSURANCE MANAGEMENT
Session 1
Introduction to Insurance:
± Definition and Basic Concepts
± Evolution of Insurance Business
± An Overview of the Insurance sector
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2
The Concept of Risk
Integral to the concept of Insurance
Defined as the possibility of adverse resultsflowing from any occurrence.
Uncertainty gives rise to risk.
There should be at least two possibleoutcomes of which, one is Undesirable.
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3
Insurance
Insurance is a cooperative device to spread the loss
caused by a particular risk over a number of persons
who are exposed to it.
Insurance is a legal contract that transfers risk froman insured to an insurer in exchange for a premium.
People exposed to the similar risks come together and pool
funds to protect each individual against that risk.
Thus risk is spread out.
Insurance can not reduce the probability of risk.
It only spreads the financial loss.
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4
Insurance: functional definitions
Insurance is the collective bearing of risk.(William Beveridge)
Insurance is a plan by which a large number of
people associate themselves and transfer, to
the shoulders of all, risks attached to
individuals. (D H Magee)
Insurance is a source of distribution of loss of
few persons into many persons. (Rock Fell)
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5
Insurance: legal definitions
Insurance is a contract in which a sum of money is paid by the
assured in consideration of the insurer¶s incurring the risk of
paying a large sum assured upon a given contingency.
(Chief Justice Tindal)
An insurance transaction involves the following -
Insurer: Party agreeing to pay for the losses of the insured.
Insured: The party who insures his risk with the insurer.
Premium: The consideration payable to the insurer by the
insured.
Policy: The contract between the insurer and the insured
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6
How Insurance Works
Example :
In a particular city there are 1000 houses each
costing, say, Rs.1,00,000. Every year, there is a
probability that 4 houses are destroyed by fire,
resulting in a total loss of Rs. 4,00,000.
If all of the 1000 house owners join a common pool
of fire insurance, amount payable by each houseowner is Rs.400. (ignoring expenses / profit of the
insurer)
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Evolution of
Life Insurance Business
ENGLAND
± Evolved in England in the 16th century
± First Life Policy: William Gybbons (18.06.1653), as
per recorded evidence
± 1st Registered Life office in England: Hand in Hand
Society (1696)
INDIA
± Oriental Life Assurance (Calcutta: 1818)
± Bombay Mutual Life assurance (Bombay: 1871)
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Evolution of
Marine Business
Oldest form of insurance
Existed in the early days of marine trading to protect
against risks due to natural hazards, sea piracy,
capture by the enemy country and so on
Marine policies in the modern form started in Europe
during 14th century
In the 19th century, Lloyd's and the Institute of London
Underwriters developed between them standardized
clauses for the use of marine insurance, and these
have been maintained since.
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Evolution of
Fire Business
Originated in Germany during 16th century
Got momentum in England after the Great Fire-1666
± Continued for 5 days
± 13200(85%) houses and 87 churches destroyed
± 1.5 miles x 0.5 mile area reduced to ashes
± Property worth 1 billion Sterling were destroyed
With colonial expansion of England, it spread allover the world
In India, it took off with Triton Insurance, Calcutta
(1850)
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The History of
Insurance Business in India
Pre-Independence Scenario
± 1912: The Indian Life Assurance Companies Act -
the first statutory measure to regulate life insurance
business
± 1928: Indian Insurance Companies Act - enacted to
enable the Government to collect statistical
information about both life and non-life business
± 1938: Insurance Act, 1938 - enacted by
consolidating the earlier legislations with a view to
protect the interest of insuring public
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The History of
Insurance Business in India
Nationalisation Era
± In spite of mushrooming insurance companies, the
per capita insurance in India was only Rs.8 (as
against Rs.2000 in US and Rs.600 in UK)
± Lack of public faith due to malpractices and
liquidation of many insurance companies
± 1956: Nationalisation of life insurance business with
the enactment of LIC Act. LIC of India formed to take
over the business of about 250 companies
± 1972: The General Insurance Business
(Nationalisation) Act, 1972 nationalised the general
insurance business with effect from 1st Jan 1973
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The History of
Insurance Business in India
Ready to Open Up (1999)
± Govt. and the public were not satisfied with the
growth of the insurance sector (only 20% of the
insurable population were covered)
± Monopoly resulted in lack of sensitivity to the
policyholders
± GOI commits at GATT (the earlier avataar of WTO)
to open up insurance sector to local and global
operators
± Malhotra Committee appointed to look into the
reforms in insurance sector
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Introduction to Insurance:
Insurance Business in India
Post-IRDA era
± Insurance Regulatory and Development Authority (IRDA)
formed by IRDA Act 1999
± Based in Hyderabad, this regulatory body is presently
headed by Mr. Hari Narayana ± No. of insures (still increasing):
Life ± 22, Non-life ± 21, Reinsurer ± 1
± Life Insurers have approx. 11,700 branches of which about
8,400 branches are set-up by private companies
± The capital deployed - Rs. 232bn by life insurancecompanies (66% jump from Rs139bn in 2007)
± Total assets of life insurance companies have grown to
Rs.8,568 bn as on December 31, 2008.