CHAPTER – 1

INTRODUCTION

1.1. Overview of Industry as a whole

Insurance, in law and economics, is a form of risk management

primarily used to hedge against the risk of a contingent loss. Insurance is defined as the
equitable transfer of the risk of a loss, from one entity to another, in exchange for a
premium. An insurer is a company selling the insurance. The insurance rate is a factor
used to determine the amount, called the premium, to be charged for a certain amount of
insurance coverage. Risk management, the practice of appraising and controlling risk, has
evolved as a discrete field of study and practice.

The business of insurance is related to the protection of the economic values of assets.
Every asset has a value; the assets would have been created through the effort of the
owner. The asset is valuable to the owner, because he expects to get some benefits from
it. The benefit may be an income or something else. It is a factory or a cow, the product
generated by is sold and income generated. In the case of a motor car, it provides comfort
and convenience in transportation. There is no direct income.

Every asset is expected to last for a certain period of the during which it will perform.
After that, the benefit may not be available. There is a life-time for a machine in a factory
or a cow or a motor car. None of them will lose for ever , The owner is aware of this and
he can so manage his affairs that by the end of that period of life-time, a substitute is
made available. Thus, he makes sure that the value of income is not lost. However, the
asset may get lost earlier. An accident or some other unfortunate event may destroy it or
make it non financial. In that case, the owner and those deriving benefits there from,
would be deprived of the benefit and the planned substitute would not have ready. There
is an adverse or unpleasant situation. Insurance is a mechanism that helps to reduce the
effect of such adverse situation.

Life insurance provides a monetary benefit to a decedent's family or other designated

beneficiary, and may specifically provide for income to an insured person's family,
burial, funeral and other final expenses. Life insurance policies often allow the option of
having the proceeds paid to the beneficiary either in a lump sum cash payment or an
annuity.

Annuities provide a stream of payments and are generally classified as insurance because
they are issued by insurance companies and regulated as insurance and require the same
kinds of actuarial and investment management expertise that life insurance requires.
Annuities and pensions that pay a benefit for life are sometimes regarded as insurance
against the possibility that a retiree will outlive his or her financial resources. In that
sense, they are the complement of life insurance and, from an underwriting perspective,
are the mirror image of life insurance.

Certain life insurance contracts accumulate cash values, which may be taken by the
insured if the policy is surrendered or which may be borrowed against. Some policies,
such as annuities and endowment policies, are financial instruments to accumulate or
liquidate wealth when it is needed.

In many countries, such as the U.S. and the UK, the tax law provides that the interest on
this cash value is not taxable under certain circumstances. This leads to widespread use of
life insurance as a tax-efficient method of saving as well as protection in the event of
early death.

In U.S., the tax on interest income on life insurance policies and annuities is generally
deferred. However, in some cases the benefit derived from tax deferral may be offset by a
low return. This depends upon the insuring company, the type of policy and other
variables (mortality, market return, etc.). Moreover, other income tax saving vehicles
(e.g., IRAs, 401(k) plans, Roth IRAs) may be better alternatives for value accumulation.
A combination of low-cost term life insurance and a higher-return tax-efficient retirement
account may achieve better investment return.

Life insurance in India made its debut well over 100 years ago.
In our country, which is one of the most populated in the world, the prominence of
insurance is not as widely understood, as it ought to be. What follows is an attempt to
acquaint readers with some of the concepts of life insurance, with special reference to
LIC.

It should, however, be clearly understood that the following content is by no means an

exhaustive description of the terms and conditions of an LIC policy or its benefits or
privileges.

For more details, please contact our branch or divisional office. Any LIC Agent will be
glad to help you choose the life insurance plan to meet your needs and render policy
servicing.
Life insurance is a contract that pledges payment of an amount to the person assured (or
his nominee) on the happening of the event insured against.

The contract is valid for payment of the insured amount during:

• The date of maturity, or

• Specified dates at periodic intervals, or
• Unfortunate death, if it occurs earlier.

Among other things, the contract also provides for the payment of premium periodically
to the Corporation by the policyholder. Life insurance is universally acknowledged to be
an institution, which eliminates 'risk', substituting certainty for uncertainty and comes to
the timely aid of the family in the unfortunate event of death of the breadwinner.
By and large, life insurance is civilization's partial solution to the problems caused by
death.
Life insurance, in short, is concerned with two hazards that stand across the life-path of
every person:

1. That of dying prematurely leaving a dependent family to fend for itself.

2. That of living till old age without visible means of support.

A contract of insurance is a contract of utmost good faith technically known as uberrima

fides. The doctrine of disclosing all material facts is embodied in this important principle,
which applies to all forms of insurance.
At the time of taking a policy, policyholder should ensure that all questions in the
proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in
any document leading to the acceptance of the risk would render the insurance contract
null and void.

Savings through life insurance guarantee full protection against risk of death of the saver.
Also, in case of demise, life insurance assures payment of the entire amount assured (with
bonuses wherever applicable) whereas in other savings schemes, only the amount saved
(with interest) is payable.

Life insurance encourages 'thrift'. It allows long-term savings since payments can be
made effortlessly because of the 'easy installment' facility built into the scheme.
(Premium payment for insurance is either monthly, quarterly, half yearly or yearly).
For example: The Salary Saving Scheme popularly known as SSS, provides a convenient
method of paying premium each month by deduction from one's salary.
In this case the employer directly pays the deducted premium to LIC. The Salary Saving
Scheme is ideal for any institution or establishment subject to specified terms and
conditions.

In case of insurance, it is easy to acquire loans on the sole security of any policy that has
acquired loan value. Besides, a life insurance policy is also generally accepted as
security, even for a commercial loan.

Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This
is available for amounts paid by way of premium for life insurance subject to income tax
rates in force.

A policy that has a suitable insurance plan or a combination of different plans can be
effectively used to meet certain monetary needs that may arise from time-to-time.
Children's education, start-in-life or marriage provision or even periodical needs for cash
over a stretch of time can be less stressful with the help of these policies.
Alternatively, policy money can be made available at the time of one's retirement from
service and used for any specific purpose, such as, purchase of a house or for other
investments. Also, loans are granted to policyholders for house building or for purchase
of flats.

Policies can also be taken, subject to certain conditions, on the life of one's spouse or
children. While underwriting proposals, certain factors such as the policyholder’s state of
health, the proponent's income and other relevant factors are considered by the
Corporation.
Prior to nationalization (1956), many private insurance companies would offer insurance
to female lives with some extra premium or on restrictive conditions. However, after
nationalization of life insurance, the terms under which life insurance is granted to female
lives.
Life insurance is normally offered after a medical examination of the life to be assured.
However, to facilitate greater spread of insurance and also to avoid inconvenience, LIC
has been extending insurance cover without any medical examination, subject to certain
conditions.

An insurance policy can be 'with' or 'without' profit. In the former, bonuses disclosed, if
any, after periodical valuations are allotted to the policy and are payable along with the
contracted amount.

In 'without' profit plan the contracted amount is paid without any addition. The premium
rate charged for a 'with' profit policy is therefore higher than for a 'without' profit policy.

Key man insurance is taken by a business firm on the life of key employee(s) to protect
the firm against financial losses, which may occur due to the premature demise of the
Key man.

The business of insurance started with marine business. Traders, who used to gather in
the Lloyd’s coffee house in London, agreed to share the losses to their goods while being
carried by ships. The losses used to occur because of pirates who robbed on the high seas
or because of bad weather spoiling the goods or sinking the ship. The first insurance
policy was issued in 1583 in England. In India, insurance began in 1876 with life
insurance being transacted by an English company, the European and the Albert. The first
Indian insurance company was the Bombay Mutual Assurance Society Ltd. Formed in
1870. This was followed by the Oriental Life Assurance Co. in 1874, the Bharat in 1896
and the Empire of India in 1897.

Later, the Hindustan Cooperative was formed in Calcutta, the United India in Madras, the
Bombay Life in Mumbai and the Lakshmi in New Delhi. These were all Indian
companies, started as a result of the swadeshi movement in the early 1900s. when the life
insurance was nationalized and the Life Insurance Corporation of India (LIC) was formed
on 1st September 1956, there were 170 companies and 75 provident fund societies
transacting life insurance business in India. After the amendment to the relevant laws in
1999, the L.I.C. did not have the exclusive privilege of doing life insurance business in
India. By 31.3.2002, eleven new insurers had been registered and had begun to transact
life insurance business in India.
1.2. Profile of the Organization

On 19 January, 1956, the President of India promulgated “Life Insurance

(Emergency Provisions) Ordinance” as a result of which the management and control of
Life Insurance Business in India including Foreign Insurance Business of Indian Insurers
and Indian Business of Foreign Insurers were vested in Central Govt. Thus Life Insurance
Business in India passed over from Private Sector to Public Sector — a step never
attempted anywhere in the world on such a large scale.

The Life Insurance Corporation Act (Act XXXI of 1956) was passed by the
Parliament in June 1956 came in force on 1st July, 1956. The LIC of India came into
existence on 1st September 1956.

Organization of the Corporation follows the pattern laid down in the LIC of India
Act, 1956. The Corporation consists of a Board of Directors appointed by the Central
Government. The Chairman and the Managing Director/s are Members of the Board. The
number of Members shall not exceed 16. The LIC of India Act was provided for the
constitution of an Executive Committee and an Investment Committee; the former is
entrusted with the general superintendence and the latter gives advice on the investment
matters.

The Corporation can also constitute Advisory Committees. In addition, there are
Zonal Advisory Boards for each Zone and Policyholder’s Councils for each Divisional
Office as provided for in the LIC of India Act. These Boards and Councils offer guidance
in certain specific areas to the Zonal and Divisional Managers.

With a steady growth in the annual business of the LIC over the years, the number
of policies serviced have been steadily increasing and the number of offices have also
considerably increased. With the significant increase in the volume of work spread over a
large number of officers, it was time to have a second look at our organization and work
system, so as to continue to render and if possible to improve service to the
policyholders. The size of an organization does not impair its efficiency so long as timely
and effective measures are taken to bring about (a) suitable changes in its structure,
systems and procedures and (b) the involvement of the people at all levels in the growth
and proper development of the organization.

The working of the LIC has been the subject of review from time to time by a
number of parliamentary and other committees. The last committee to go into the
working of LIC was appointed by the Government on 18.5.1975 under the Chairmanship
of Sri Era Sezhiyan, Member, Rajya Sabha. The Committee submitted its Report in
September, 1980 wherein they had made certain suggestions about reorganizing the work
at Branch Level. These recommendations suggested decentralization of servicing
functions to mofussil and city branch offices with a time-bound programmed installation
of micro processors in large branch offices and making every branch an accounting unit.
As per advice of the Central Government, LIC decided to implement such of the
suggestions of the Era Sezhiyan Committee which were found feasible to LIC and these
recommendations were found acceptable.

LIC had undertaken a comprehensive programme of reorganization in 1980-81.

The management had to deal fairly early in the programme with several issues; what was
the organization set out to achieve? What practices had prevented the organization from
achieving its defined purposes? What changes would have to be undertaken to recognize
their own strength and weaknesses? The decisions were difficult and the top and senior
managers had to devote many hours of discussions and search to seek out practical
answers. The exercise had to include a desire to understand their role in changing the
system and the determination to deal with problem, the organized set-ups of the branch
and the division are finalized as under: After a series of studies and discussions on
working paper, LIC’s management identified the areas of concentration in the short run
and those in the future programmes of work.

(I) The role of the branch needed redefinition and its measure of effectiveness had to
be the same as that of the Corporation. The achievements of the Corporation are, in
effect, the sum total of the achievements of its base line units. The structure of work and
the management practices must enable the branch to achieve stated results.
(2) Single Window Service for policyholder which required redefinition of the
concept of customer service. This concept had to be operational zed. The concept
of service included various aspects of counter services such as premium notices,
time taken for paying premium, reduction of deposits so that statue of policy was
upto date, issue of policy, loan, claims settlement and routine service functions. In
deeper sense it included availability of appropriate product, understanding of the
customer needs, reduction in administrative costs to maintain and improve bonus
rate and many related issues. The management had to create structures and
management practices that could effectively respond to these.

(3) LIC had the mandate by Government to provide cover to possible people in India
who are traditionality ignored in several affluent countries by assurance
companies LIC had to extend cover to low income groups and in rural areas. This
purpose could not be operationalised without developing a planning system based
on market segmentation and a balanced product mix so as to maintain LIC’s
financial viability. .Qperationalising the concept required many steps. A planning
and budgeting system to provide cover to various segments of the populations
(marketed segmentation), geographical dispersal of business, etc. The branch had
to be reorganized to enable it achieve corporate results and administrative
practices that promote co-operation among departments. The Divisional Office
too had to take up a supervisory role from the operating branches.

(4) Strengthening control systems to provide relevant data to the higher levels of
management to know how well the subordinate offices were working. Two
conditions had to be met; (i) management information system that could data on
key areas of operations and the quality of decision making creating conditions for
controls to operate effectively, eg: the superior subordinate offices should be clear
on what is expected of the subordinate

(5) Changes in the role of controlling offices at the Divisional, the Zonal Central
Offices. Each of these offices had, besides supervisory functions, a distinct
contribution to make. Better data control by improving the support. Accuracy and
 efficiency of data storage, processing and retrieval is essential for improved
policyholder servicing by service units. Ex satisfaction by providing direct contact
with customer, greater de responsibility, job redesign and consultative practices in
the offices. Apart change in structural and supervisory practices, personnel policy
would review.

Some elements of the programme are mentioned here to indicate comprehensive

nature of the programme. More detailed description of the total programme of change
cannot be attempted in this chapter.

The programmes required decentralization of work, the powers, the change work
flow relationships and physical transfer of almost two crore policies from Divisional to
Branch Offices, installation of machine support and physical movement of large numbers
of employees from Divisional to Branch Offices. In one Division alone the pre and post
reorganization staff position was as follows:

Staff Branch Office Divisional Office

Before 500 1400

After 1500 400

The role of each of the offices and each position had to be defined and understood
by the incumbents. The programme required training of Branch Managers and heads of
departments in Divisional Office whose job content changed in significant ways Branch
Managers became responsible for total results and not sales alone. The con the Divisional
Office jobs became supervisory, analytical, providing support to Br to improve the
quality of their decision making.

The insurance sector in India governed by Insurance Act, 1938, the life Insurance
corporation Act, 1956 and General Insurance business (Nationalisation) Act, 1972,
Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other
related Acts.

More than 100 non-life insurance companies including branches of foreign companies
including branches of foreign companies operating within the country were amalgamated
and grouped into four companies, viz., the National Insurance Company Ltd., the New
India Assurance Company Ltd., the Oriental Insurance Company Ltd., and the United
India Insurance Company Ltd. With head offices at Calcutta, Bombay, New Delhi and
Madras, respectively. General Insurance Corporation (GIC) which was the holding
company of the four public sector general insurance companies has since been
delinked from the later and has been approved as the “India Reinsurer” since 3rd
November 2000. The share capital of GIC and that of the four companies are held by the
Government of India. All the five entities are Government companies registered under
the Companies Act.

The general insurance business has grown in spread and volume after nationalisation. The
four companies have 2699 branch offices, 1360 divisional offices and 92 regional offices
spread all over the country . GIC and its subsidiaries have representation either directly
through branches or agencies in 16 countries and through associate/locally incorporated
subsidiary companies in 14 other countries . A wholly owned subsidiary company of
GIC, i.e. India International Pte. Ltd. Is operating in Singapore and there is a joint venture
company, viz. Kenindia Assurance Ltd. In Kenya. A new wholly owned subsidiary called
New India International Ltd., UK has also been registered.
 Members On The Board Of The Corporation

Shri. T.S. Vijayan (Chairman)

Shri. D.K. Mehrotra (Managing Director - LIC)
Shri. Thomas Mathew T (Managing Director - LIC)
Shri. Vinod Rai, Secretary (Financial Sector), Department of Economic Affairs,
Ministry Of Finance
Shri. V.P.Shetty (Chairman, IDBI)
Shri. R.K.Joshi (Chairman cum Managing Director, GIC)
Shri. Amitav Kothari (Chartered Accountant )
Shri. Sunil Kant Munjal (MD & CEO, Hero Corporate Services Ltd.)
Dr. Arvind Virmani (Principal Advisor, Planning Commission, Yojana Bhavan)
Dr. A.Jayagovind (Director, National Law School of India )
Smt. Pushpa Girimaji (Social Activist)
Dr. (Ms.) Swati Piramal ( Director, Nicholas Piramal Ltd.)
Dr.Gautam Barua ( Director, IIT, Guwahati
1.3. Problems of the Organization

LIC of India also faced several problems in recruiting their policies and making the
people aware about the importance of life insurance. Today also there is a large sum
of people who don’t know about life insurance. In today’s deadly world we need to
think about our lives and our family’s life too. But people are not doing so and still in
the country there are maximum of people who have not taken a life cover. Perhaps
people do not think that god forbids if they die early in life where will their family eat
from. The world and the people in it are not so kind. They will not let them live
peacefully.

So LIC of India needed to think about these issues. The certain problems which the
organization faced are listed below. They are :

 Firstly , making people aware about life insurance was a breath taking task.

 Application and awareness of policies.

 Making people interested in buying policies.

 Premium amount which was higher in maximum cases.

 Recruitment of sales executives and personnels.

 Trusting LIC for their money back guarantee.

So, like all the other organizations LIC of India also faced many problems.
1.4. Competition Information

Like every organization LIC of India also has many competitors.

IRDA has so far granted registration to 12 private life insurance companies and 9 general
insurance companies are included, there are currently 13 insurance companies in the life
side and 13 companies operating in general insurance business. General Insurance
Corporation has been approved as the “India reinsurer” for underwriting only reinsurance
business. Particulars of the life insurance companies and general insurance companies
including their web address is given below.

LIFE Websites
INSURERS
Public Sector
Life Insurance
Corporation of www.licindia.com
India

India

Private Sector
ICICI Prudential
Life Insurance www.iciciprulife.com
Co. Limited
Allianz Bajaj
Life Insurance
Company www. Allianzbajaj.co.in
Limited
Birla Sun Life Insurance
Company Limited
www.birlasunlife.com
HDFC Standard www.hdfcinsurance.com
Life Insurance
Co. Limited
ING Vysya Life www.ingvysayalife.com
Insurance
Company
Limited

Max New York www.maxnewyorklife.com

Life Insurance
Co. Limited

Om Kotak www.omkotmahindra.com
Mahindra Life
Insurance Co.
Ltd.

SBI Life www.sbilife.co.in

Insurance
Company
Limited

TATA AIG LIFE www.tata-aig.com

Insurance
Company
Limited

AMP Sanmar www.ampsanmar.com

Assurance
Company
Limited

Dabur CGU Life www.avivaindia.com

Insurance Co.
Pvt.Limited
 GENERAL INSURANCE
Public Sector

National
Insurance www.nationalinsuranceindia.com
Company
Limited

New India
Assurance www.orientalinsurance.nic.in
Company
Limited

United India
Insurance www.uiic.co.in
Company
Limited

Private Sector

Bajaj Allianz
General www.bajajallianz.com.
Insurance Co.
Limited
ICICI Lombard www.icicilombard.com

IFFCO-Tokio
General www.itgi.co.in
Insurance Co.
Ltd.
Reliance
General www.ril.com
Insurance Co.
Limited
Royal
Sundaram
Alliance www.royalsun.com
Insurance Co.
Ltd.
TATA AIG
General www.tata-aig.com
Insurance Co.
Limited
Cholamandalam
General www.cholainsurance.com
Insurance Co.
Ltd.
Export Credit
Guarantee www.ecgcindia.com
Corporation
HDFC Chubb
General
Insurance Co.
Ltd.

REINSURER
General
Insurance
Corporation of www.gicindia.com
India
Table 1.1. Life Insurers
PROTECTION OF THE INTEREST OF POLICY HOLDERS:

IRDA has the responsibility of protecting the interest of insurance policyholders.

Towards achieving this objective, the Authority has taken the following steps:

• IRDA has notified Protection of Policyholders Interest Regulations 2001 to

provide for. Policy proposal documents in easily understandable language; claims
procedure in both life and non-life, setting up of grievance redressal machinery;
speedy settlement of claims; and policyholders’ servicing. The Regulation also
provides for payment of interest by insurers for the delay in settlement of claim.
• The insurers are required to maintain solvency margins so that they are in a
position to meet their obligations towards policyholders with regard to payment of
claims.
 • It is obligatory on the part of the insurance companies to desclose clearly the
benefits, terms and conditions under the policy. The advertisement issued by the
insurers should not mislead the insuring public.
• All insurers are required to set up proper grievance redress machinery in their
head office and at their other offices.

The Authority takes up with the insurers any complaint received from the policyholders
in connection with services provided by them under the insurance contract.

Insurance Company
Marlet Share (Fig.in
%)
LIC 71.44
ICICI Prudential 11.35
Bajaj Allianz 7.06
HDFC Standard Life 2.37
SBI Life 1.81
Birla Sun Life 1.49
Max New York Life 0.98
TATA AIG 0.78
Aviva 0.89
OM Kotak Mahindra 0.86
ING Vyasa 0.57
Reliance 0.37
MetLife 0.24
Table 1.2. Insurance companies and their market sector