Basics Of Insurance

Who can make laws on Insurance?

• Insurance is a subject listed in the Union list in the Seventh Schedule to the Constitution of India.
• That means only Union Government  can make laws on insurance (a state Government cannot make law on this subject)

IRDA

• Insurance Regulatory and Development Authority (IRDA)
• Created on the recommendations of the Malhotra Committee report
• Started in 2000, it is a statutory body (i.e. made through an Act of parliament).

What are the functions of IRDA?

• To run insurance businesss, a company has to register itself with IRDA.
• IRDA regulates the insurance industry and protects the customers.
• IRDA has the power to frame regulations regarding Insurance market (just like SEBI for Capital market)
• promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums. (for example IRDA allowed Health Insurance Portability)

Organizational setup of IRDA

• IRDA has a ten member team consisting of
• 1 Chairman
• 5 whole-time members
• 4 part-time members

All of them, appointed by the Government of India.

Insurance Ombudsman

• was created by a Government of India in 1998

Functions of Insurance Ombudsman

• Receive and consider complaints in respect of insurance from any person who has any problem against an insurer.
• pass an award within 3 months after receiving complaint.
• Insurance companies are required to honour the awards passed by an Insurance Ombudsman within three months.
• If the policy holder [customer] is not satisfied with the award of the Ombudsman he can approach other venues like Consumer Forums and Courts of law for redressal of his grievances.

Selection of Ombudsman

• Ombudsman are drawn from Insurance Industry, Civil Services and Judicial Services.
• A committee comprising of Chairman, IRDA, Chairman, LIC, Chairman, GIC and a representative of the Central Government select the Insurance Ombudsman.
• There are twelve Ombudsman across the country allotting them different geographical areas as their areas of jurisdiction.
• An insurance Ombudsman is appointed for a term of three years or till the incumbent attains the age of sixty five years, whichever is earlier.
• Re-appointment is not permitted.

What is premium?

• To enjoy SAB TV, Zee TV,  Star Movies, AXN, HBO etc. you’ve to make regular payment to Dish TV/Tata Sky etc., we call it “subscription”.
• Similarly to get insurance protection, you’ve to make regular payment to the insurance company, we call it “premium”.

Insurance Policies: Types

Two main types: General and Life

General Insurance

• General Insurance = Every Insurance plan EXCEPT life insurance plan

Name	Sub categories
Personal Insurance policies	medical insurance, accident, property and vehicle insurance
Rural Insurance policies	protection against natural and climatic disasters for agriculture and rural businesses
Industrial Insurance policies	coverage for project, construction, contracts, fire, equipment loss, theft, etc.
Commercial Insurance policies	protection against loss and damage of property during transportation, transactions, marine insurance etc.

Life Insurance Types

list is not exhastive.

Whole life plan	You pay the premium till you retire or till the term of the policy. Your family will get money ONLY after you die. You MUST DIE to get back the money.
Endowment	Insurance company collect premium form the insured for the certain period of time like 15, 20, 25, 30 years. If you die within that term, the company will pay huge money to your family. If you don’t die within that term, company will return the premium you paid + some interest or bonus on it. So, you DONOT NEED TO DIE to get back the money.
Term Plan	You keep paying premium for given period (5,10,20 etc. years) If you die within that period, your family gets huge money. But if you don’t die within that period, you will not get a single penny from the company. So, you MUST DIE to get back the money. Good part- Term Plans have cheaper premium than other plans.
ULIP(Unit Linked Insurance Policy)	You pay regular premium to the company. Company invests it in Debt and Equity markets. The profit generated by this investment, will be given to you no matter you die or not. Thus you get the benefit of risk cover as well as the investment gains. You DONOT NEED TO DIE to get back the money. They pay higher return than Endowment.

Nationalization of Insurance business

• In 1972, Government  of India passed of the General Insurance Business (Nationalisation) Act,
• With this Act, Government  took control of all the private insurance companies of India and created 4 companies

National Insurance Company Ltd	General Insurance.HQ: Kolkata
New India Assurance Company Ltd	General InsuranceHQ: Mumbai
Oriental Insurance Company Ltd	General InsuranceHQ: New Delhi
United India Insurance Company Ltd.	General InsuranceHQ: Chennai

Foreign Direct Investment in Insurance

• up to 26% is allowed.Update: 49% allowed after Mamta Left the UPA alliance.
• For example “Bajaj Allianz Life Insurance Company Limited” is a joint venture between
• The Indian Company Bajaj (that scooter maker, has 74% stakes in this company.)
• The Foreign Company Allianz AG (German Company, has 26% stakes in this company)
• Similar arrangement was present in “Max New York Life Insurance Company” But the New York Life sold its stakes and left the game hence the new name of the company is Max Life Insurance Company. [You might have seen the ads on TV about its name change.]

Reform in Insurance sector

Already Done by IRDA

• If an Insurance company has been in business for 10 years, it can launch IPO.
• Mobility / Portability in Health Insurance= if you’re unhappy with your Health (Medical) insurance company, you can change it.

Pending Reform

Mohan: I want to increase the FDI limit from 26% to 49%. Then more foreign companies would come up = more products = lower premiums.

Mamatha: But I’m opposed to FDI in Retail, Insurance and Aviation.

Mohan: Ok I drop the idea sir-ji.

LIC

• Life Insurance Corporation of India
• 100% owned by Government.
• Started in 1956
• HQ: Mumbai
• Motto: “Yogakshemam Vahamyaham” (taken from Gita, meaning “I carry what you require”.)
• Provides Life Insurance, Health Insurance

GIC- Reinsurer

• Suppose LIC sells 1000 life insurance policies, each with a 1 crore policy limit (e.g. I, the customer pay Rs.10,000 premium every year and If I die my family should get 1 crore- that type of Policy).
• Theoretically, the LIC could lose 1000 crores in a day, if every customer dies on the same day!
• So to prevent itself from such a loss, LIC itself should take some insurance from a third insurance company (GIC).
• for example “I, the LIC Manager shall continue to pay the GIC 1 lakh every month, and in return GIC insures that if my company LIC has to pay more than 100 crores in policy claims within 1 week, then GIC will cover the cost.
• So, This third party, General Insurance Corporation of India (GIC) = Reinsurer.
• GIC is the ONLY Reinsurer in India.