HISTORY OF INSURANCE

HISTORY OF INSURANCE


Globally, the history of
general insurance can be traced back to the early civilization. As the
incidence of losses increased with the advancement of civilization, slowly the
idea and concept of loss pooling and loss sharing started taking roots.
Historical facts show that the Aryans through their cooperatives practiced the
loss of profits insurances. The Mediterranean merchants also practised
insurances from as early as the 4th century BC through the issue of bottomry
bonds, which is an advance of money in a ship during the period of voyage,
repayable on the arrival of the ship. The Code of Manu also indicates the
practice of marine insurance by Indian with their counter parts in SriLanka,
Egypt and Greece. Marine insurance is the oldest type of insurance originating
in England, as early as in the 12th century. The earliest transaction of
insurance as practised today can be traced back to the 14th century AD in
Italy. General insurance as a whole, developed with the industrial revolution
in the West and with the consequent growth of seafaring trade and commerce in
the seventh century. In India too, evidence of insurance in some form can be
traced as early as from the Aryan period. The British and some of the other
foreign insurance companies through their agencies transacted insurance
business in India. The first general insurance company in India was the Triton
Insurance company Ltd., established in Calcutta in 1850 AD, with the British
holding major share. The first general insurance company by Indian promoters
was the Indian Mercantile Insurance company Ltd. started in Bombay in 1906-07.
Following the First World War, several foreign insurance companies started
insurance business in India, capturing about 40 percent of the insurance market
in India at the time of Independence.
Insurance business in India
is governed by the Insurance Act of 1938, which was amended later in 1969.
However, in 1971, the government by an ordinance nationalized the general
insurance business, under the General insurance Nationalization Act, 1972 to
ensure orderly and healthy growth of the business. The then existing 107
companies were brought under the aegis of General Insurance Corporation (GIC)
of India. The GIC was thus entrusted with the responsibility of superintending,
controlling, and ensuring smooth and healthy conduct of the general insurance
business in India along with its four subsidiaries in all the zones in India.
THE
INSURANCE MARKET IN INDIA
 A contract of insurance can be defined as a
contract whereby one person, called the ‘insurer’ undertakes in return for a
consideration, called the ‘premium’, to pay to another person called ‘assured’,
a sum of money or its equivalent on the happening of a specified event. The
happening of the specified event must involve some loss to the assured or at
least should expose him to adversity, which in insurance parlance is called
‘risk’. The underlying concept of insurance is to transfer the loss suffered by
an individual to a willing and capable professional.
Providers The Insurance
market comprises the insurers, the buyers, and the intermediaries who mediate
between the two parties and are rewarded for their efforts by the insurer. The
insurance market in India hitherto consisted of the General Insurance
Corporation of India (GIC) and its four subsidiaries namely: National Insurance
Co. Ltd. with Head Office in Kolkata. United India Insurance Co. Ltd. with Head
Office in Chennai. The New India Assurance Co. Ltd. with Head Office in Mumbai.
The Oriental Insurance Co. Ltd. with Head Office in New Delhi The GIC was
formed on 1st January, 1973, under the Insurance Act, 1938 in accordance with
the provisions of the General Insurance Business (Nationalization) Act, 1972.
All the existing companies carrying on general insurance business in India were
merged under Section 16 of the Nationalization Act, and notified by the
government on 31.12.1972. Thus, from 1.1.1973, the four subsidiaries of GIC as
mentioned above started insurance operations.
A brief review of the four
public sector companies as subsidiaries of GIC under the nationalization
program in chronological order is examined in the following paragraphs.
National Insurance Company is one of the four public sector companies. Since
its incorporation in the year 1906 headquartered in Kolkata, the company had
been carrying out general insurance business under private management until
1972, the year of its nationalisation. In the same year, 21 foreign and 11
Indian Insurance Companies were amalgamated with National Insurance Company
Limited, as a subsidiary company of General Insurance Corporation of India. The
New India Assurance Company was incorporated on 23rd July, 1919 and commenced
business from 14th October, 1919 with head office in Mumbai. In 1972, the year
of its nationalisation, Government of India took over the management of the
company along with all other non-life insurers in the country. New India
Assurance (NIA) was subsequently reconstituted taking over 23 companies under
the Scheme of Merger, following the nationalization of General Insurance
Business in 1973. United India Insurance Company Limited was incorporated as a
Company on 18th February 1938 with its head office in Chennai, with 12 Indian
Insurance Companies, 4 Cooperative Insurance Societies and Indian operations of
5 Foreign Insurers, besides General Insurance operations of southern region of
Life Insurance Corporation of India were merged with United India Insurance
Company Limited. The Oriental Fire & General Insurance Co. Ltd., with its
head office in New Delhi was incorporated in the year 1947 as a subsidiary of
Oriental Government Security Life Assurance Co. Ltd. In 1956, Oriental became a
subsidiary of the Life Insurance.





Corporation of India until
13th May 1971, when the Government of India (GOI) took over the management of
all general insurance companies in India. This was followed by the
nationalisaton of general insurance business with effect from 1st January 1973
and the Oriental Fire and General insurance company came under the General
Insurance Corporation of India as one of the four subsidiaries. It commenced
its operations from 1st January 1975. Later on in 2002, with the passage of
Insurance amendment Bill (2002), all the four Public sector companies were
delinked from GIC and are functioning as independent companies since then.
Following convergence of the financial services and financial institutions, the
Indian government also initiated reforms based on the recommendations made in
the Report of the Malhotra Committee, set up in 1993. As a result, the
insurance sector was opened up to private participation to make the sector
efficient, vibrant, and competitive. At present, the Insurance Regulatory and
Development Authority (IRDA), is the statutory body entrusted with the
responsibility of regulation of operations of the insurance companies as well ensuring
orderly development and growth of the insurance business in India. The primary
concern of the IRDA is the protection of the policyholder’s interest. Following
are the Life and General insurance companies operating their business.
(Position as of 18th October 2008).
INSURANCE COMPANIES
OPERATING IN INDIA
 LIFE INSURERS
PUBLIC
SECTOR PRIVATE SECTOR
1. Life Insurance Corporation of India
(LIC)
1. Bajaj Allianz Life
Insurance Co. Ltd.
2. Birla Sun Life Insurance
Co. Ltd. (BSLI)
 3. HDFC Standard Life Insurance Co. Ltd. (HDFC
STD LIFE)
 4. ICICI Prudential Life Insurance Co.Ltd.
(ICICI PRU)
5. ING Vysa Life Insurance
Co.Ltd. (ING VYSYA)
 6. Max New York Life Insurance Co. Ltd. (MNYL)
 7. MetLife India Insurance Co.Ltd. (METLIFE)
8. Kotak Mahindra Old
Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co.
Ltd. (SBI LIFE)
10. TATA AIG Life Insurance
Co. Ltd. (TATA AIG)
11. Reliance Life Insurance
Co. Ltd.
12. Aviva Life Insurance
Co. Ltd. (AVIVA)
13. Sahara India Life
Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance
Co. Ltd.
 15. Bharti AXA Life Insurance Company Ltd.
16. Future Generali India
Life Insurance Company Limited
17. IDBI Fortis Life
Insurance Company Ltd.
18. Canara HSBC Oriental
Bank of Commerce Life Insurance Company Ltd.
19. AEGON Religare Life
Insurance Company
20. DLF Pramerica Life
Insurance Co. Ltd.
NON–LIFE
INSURERS
PUBLIC
SECTOR PRIVATE SECTOR
1. The New India Assurance
Co. Ltd
2. National Insurance Co.
Ltd.
 3. The Oriental Insurance Co. Ltd.
 4. United India Insurance Co. Ltd.
 5. Export Credit Guarantee Corporation Ltd.
 6. Agriculture Insurance Company of India
(AIC)
1. Bajaj Allianz General
Insurance Co. Ltd. (BAJAJ ALLIANZ)
 2. ICICI Lombard General Insurance Co. Ltd.
(ICICI LOMBARD)
3. IFFCO Tokio General
Insurance Co. Ltd. (IFFCO TOKIO)
4. Reliance General
Insurance Co. LTD. (RELIANCE)
5. Royal Sundaram Alliance
Insurance Co. Ltd. (ROYAL SANDARAM)
6. TATA AIG General
Insurance Co. Ltd. (TATA AIG)
7. Cholamandalam MS General
Insurance Co. Ltd. (CHOLAMANDALAM)
 8. HDFC ERGO General Insurance Co. Ltd. (HDFC
CHUBB)
9. Star Health and Allied
Insurance Company Limited
10. Apollo DKV Insurance
Company Limited
11. Future Generali India
Insurance Company Limited
12. Universal Sompo General
Insurance Company Ltd.
13. Shriram General
Insurance Company Ltd.
14. Bharti AXA General
Insurance Company Ltd
RE-INSURER:
General Insurance
Corporation of India (GIC)
 The buyers in the insurance
market are the general public, traders, exporters, importers, industrial and
commercial organizations, clubs, associations, hospitals, schools, etc. The
intermediaries are the agents, and now-a-days new channels include brokers,
corporate agents and financial institutions like banks (Bancassurance),
micro-finance institutions etc. All the intermediaries are to be duly licensed
by the Insurance Regulatory and Development Authority (IRDA).
INSURANCE
INTERMEDIARIES INSURANCE COMPANIES
Sell their products mainly
through the following:
i.            
Agents (who are the representatives of the
Insurer)
ii.          
 ii.
Independent Intermediaries (who are the representatives of the Buyer)
iii.        
 iii.
Direct Sales including through ‘online’ and ‘Referrals’.
iv.         
 
 In
Insurance industry the term “Agent” is ordinarily applied to a person engaged
by the insurer to procure new business. An Agent can work for one life insurer
and/or one non-life insurer and in addition to this, to one ‘exclusive health
insurer’. Insurance agents are intermediaries whose activities include
soliciting, procuring, and servicing the general insurance market. An agent
must fulfill the statutory requirements of his competence prescribed by the
regulator and for which he has to pass the stipulated examination to satisfy
the regulator after undergoing specified number of hours of training at accredited
institutions (online / off-line). Upon the successful completion of the
examination, all the agents in the insurance business are given license granted
as provided under Insurance Regulatory and Development Authority (Licensing of
Insurance Agents) Regulations, 2000, as amended upto date. Application for the
same are to be made in prescribed form. The contact of agency between the
company and agent defines the authority and responsibility and sets forth the
agreement of the parties with respect to commissions and other details of the
relationship. Agency license can also be granted to cooperative societies,
panchayats, corporate entities, and banks. Renewal of license should be done in
time by paying the prescribed fees. However, no license can be granted, if the
individual suffers from any of the following disqualification: if the person is
a minor. if found to be of unsound mind by a competent court. if found guilty
of or connived at any fraud, dishonesty or misrepresentation against any insured
or insurer.
The appointment of agents is governed by
Insurance Regulatory and Development Authority (Licensing of Insurance Agents)
Regulations, 2000. The IRDA has prescribed both qualifications and
disqualification for a person to be given a licence under section 42 of the
Insurance Act. A person must a) Be at least of 18 years of age. b) Have passed
at least 12th standard or equivalent examination appointed if he/she resides in
a place having a population of five thousand or more as per the last census, or
10th standard otherwise. c) Have undergone a training program of 50 hours in
Life or General insurance business or any other pre-recruitment examination
recognized by IRDA. (However there are reduction in the required hours based on
insurance qualifications, etc. of the applicant for Agency.) d) For a composite
agency, a person should have completed 75 hours of training in Life and General
insurance business spread over 6 to 8 weeks. An agency licence is usually given
for 3 years, which may be either renewed or cancelled later. But before renewal
of the licence, it is a prerequisite that the agent should have undergone 25
hours of practical training in Life and General Insurance business or at least
50 hours practical training in subject for a composite agency renewal. The
agent is expected to procure a minimum premium amount depending upon the
company rules and targets.
The agent is paid commission as remuneration
for discharge of all his functions, the commission rates are subject to the
guide lines issued from time to time by the IRDA. Corporate Agents The IRDA has
also allowed Corporate Agents to act as insurance intermediaries to sell
insurance products. As per the Act, a Corporate Agent means any person
specified in clause (k) of the Act, and licensed to act as such, while a
Composite Corporate Agent means a Corporate Agent who holds a licence to act as
an insurance agent for a life insurer and a general insurer.
Qualifications – The corporate agent should
ensure that depending upon the nature of the entity, the Partnership Deed,
Memorandum of Association or any other document evidencing the constitution of
the entity shall contain as one of its main objects soliciting or procuring
insurance business as a Corporate Agent. – The corporate insurance executive
shall possess the minimum qualification of a pass in 12th Standard or
equivalent examination conducted by any recognised Board/Institution, where the
applicant resides in a place with a population of five thousand or more as per
the last census, and a pass in 10th Standard or equivalent examination from a
recognised Board/Institution if the applicant resides in any other place. –
Should have completed from an approved institution, at least, fifty hours’
practical training which may be spread over one to two weeks, in either life or
general insurance business, as the case may be. – Or shall have completed from
an approved institution, at least, seventy five hours’ practical training both
in life and general insurance business, where such an applicant is seeking
licence for the first time to act as a composite corporate agent.
The applicant seeking the Corporate Agency
from the authority or any other corporate insurance executive of the applicant
should be a professional as mentioned below: (a) an Associate/Fellow of the
Insurance Institute of India, Mumbai; (b) an Associate/Fellow of the Institute
of Chartered Accountants of India, New Delhi; (c) an Associate/Fellow of the
Institute of Costs and Works Accountants of India, Calcutta; (d) an Associate/Fellow
of the Institute of Company Secretaries of India, New Delhi; (e) an
Associate/Fellow of the Actuarial Society of India, Mumbai; (f) a Master of
Business Administration of any Institution/ University recognised by any State
Government or the Central Government; or (g) possessing Certified Associateship
of Indian Institute of Bankers (CAIIB); or (h) possessing any professional
qualification in marketing from any Institution/ University recognised by any
State Government or the Central Government; (i) (from 1.4.2009, it is
compulsory that a Broker should have the Designated Person with qualification
of AIII / FIII).
Besides individuals, some of the companies
are making use of banks, building societies and others as agents to increase
the new business volumes. Further, tied agency has also become a popular
channel of distribution where in the tied agents are representatives of the
company drawing commissions as remuneration. Banks, under the contract of
“bancasurrance” which is the strategic alliance between an insurance company
and the bank, where in the banks use their resources and client base to augment
sales of insurance policies. This arrangement provides mutual benefit to the
bank as well as the insurance company and more importantly value addition to
the customer, who can derive insurance services also from his bank counter.
Independent Intermediaries (Brokers) Brokerage has also become a very popular
distribution channel for marketing Life and General insurance business. Also
known as Independent financial advisors (IFAs), these advisors have become the
popular source of procurement of business in the advanced markets. Brokers
canvas the business and place the same with insurers either on standard or
negotiated terms. They are also authorized to negotiate with insurers for
tailor-made policies to cater to the customer’s specific needs. A broker
usually does business with more than one company and in return gets commission.
However, he does not charge anything from the client. He is bound by the IRDA Regulations
to give best advice to his client and acts on behalf of the advice seekers.
Basically, a Broker is the representative of the insurance buyer.
A broker is a through professional who is
registered and licensed to offer his professional advice to the clients. IRDA
has prescribed guidelines for Brokerage registrations under INSURANCE
REGULATORY AND DEVELOPMENT AUTHORITY (INSURANCE BROKERS) REGULATIONS, 2002. An
insurance broker is an individual / firm / Company / Co-op. Society who advises
policyholders on insurance matters and places business with the insurers. A
high standard of professional skill and conduct is expected of a broker.
Moreover, if he fails to maintain the required standard he may be liable for
damages to his principal. Although brokers are agents of the proposer, they are
usually paid by the insurers with whom they place business. In India, there are
many licensed brokers who are engaged in procuring business in the domestic
markets and also in international exchange of reinsurance business. Besides,
these brokers also provide risk management consultancy services. Agency and
brokerage systems are most common and contribute maximum share of insurance
business in the developing and developed countries.
IRDA
REGULATIONS LIMITS ON PAYMENT OF COMMISSION OR BROKERAGE ON GENERAL INSURANCE
BUSINESS
The IRDA under Section 14 of the Insurance
Regulatory and Development Authority Act, 1999 and in terms of the provisions
of Sections 40(1), 40A(3) and Section 42E of the Insurance Act, 1938, has laid
down the percentage of premium that can be paid by way of commission or
brokerage on a general insurance policy not exceeding the percentages of
premiums set out below. The IRDA also specifies that no brokerage can be paid
in respect of an insurance where agency commission is payable and likewise, no
agency commission can be paid in respect of an insurance where brokerage is
payable. The following are the current rates of commission as recommended by
IRDA:
AGENCY COMMISSION STRUCTURE
Class of business Agency commission (% of
premium) Brokerage commission (% of Premium)
1. Fire, engineering insurances
i.
Individuals                                         
 ii.
Corporate clients (including PSUs) whose paid up capital is: a) Upto Rs.15
crores         b) Between Rs.15 crs
& 25 crs c) Over Rs.25 crores    
 iii.
Risks qualifying as large risks under para 19(v) of File & Use Guidelines
10% 10% 6.25% 5% 5% 12.5% 12.5% 7.25% 6.25% 6.25%
2.  Motor
insurance business (other than third party)*,
3.  WC/
EL and statutory PL Business 10% 10% 3. Marine Hull insurance
        10% 12.5% 4. Marine Cargo
business                              
15% 17.5% 5. All other
business                                       
15% 17.5%
Please Note No commission
shall be paid on motor third party insurance. Evidence of paid up capital can
be taken from the latest Balance Sheet which is in public domain as per the
requirements of the Companies Act, 1956. In case of a balance sheet which is 2
years prior to the relevant year of placing insurance, an auditor’s certificate
must be produced. In case of sole proprietorship and partnership firms a
certificate from a Chartered Accountant to the client should be acceptable. In
respect of branches in India of a foreign company reference should be made to the
paid up capital of the company in the country in which it is incorporated
converting it into Indian Rupees at the current exchange rate on the date of
insurance. No payment of any kind, including “administration or servicing
charges” is permitted to be made to the agent or the broker in respect of the
business in respect of which he is paid agency commission or brokerage. These
rates supersede all existing directions on the subject and shall take effect in
respect of insurances or renewals commencing on or after 1st January, 2007.
Development Officers (DO)
This arrangement is in vogue in Public Sector Insurers, both in Life and
Non-Life. This is purely an internal arrangement in organizing the marketing
force of an Insurer. They are not covered under any Regulation of IRDA or other
Statutes. They are governed by the service conditions of his/her employer only.
Functionally, Development officer is a link between the branch manager in an
insurance company and the agent. In particular, the Development Officer is a
field worker and plays an important role in the promotion of insurance business
and in increasing the sales of insurance policies. The development staff
procures the General insurance business in India either directly or through
agents. The development staff is usually full-time employees of the insurance
companies. They are also required to procure the targeted business in the
classes of business deemed as non-traditional classes. Some of the main
functions or duties of the Development officer as envisaged in the act include:
Soliciting, negotiating, procuring, or effectuating an insurance contract or a
renewal of an insurance contract Disseminating information relating to coverage
or rates Forwarding an insurance application Servicing or delivering an
insurance policy or contract.
Inspecting a risk Setting a
rate Investigating or assessing a claim Transacting a matter after the
effectuation of the contract Representing or assisting an insurer or other
person in any other manner in the transaction of insurance with respect to a
subject matter of insurance. Some of the other general functions include:
assist their agents in matters connected with procurement of new business make
various plans for the development of insurance conduct research for the development
of insurance business recruit, train, guide, and motivate agents for procuring
business develop general insurance business in the area under their
jurisdiction make rules for appointment, transfers, and promotions of various
cadres of agents arrange training programs for agents review system of accounts
from time to time to prepare and issue cover notes and kutcha ( temporary)
receipts for the business written.
Thus, the development
officer acts as a vital link for the company. The insurance company monitors
the activities of these officers through the integrated and monthly reports
prepared by them. The reports show the work done by the officer, number of new
policies issued, business procured, premium collected and the difficulties
faced by them. Inefficient and non-performing officers are given training and
motivation to perform better. Direct Sales The direct Sales force (DSA) refers
to sales activity procured by the staff of the company itself has become a
popular channel of distribution of insurance products now-days. The main
advantage in this channel is that commissions need not be paid to the salaried
staff. Generally this advantage of the commission savings is passed on to the
consumers by way of premium discount by the life insurance companies. Nowadays,
sales through internet or online sales is picking up particularly in case of
retail insurance of Motor and Health. Payments are made through credit cards /
internet banking. Receipts are generated online but the policies are dispatched
by the Insurer subsequently. Referrals also contribute to direct sales and this
mode is also picking up faster. Referrals provide the database already
available with them, such as banks, associations, etc. Referrals are not paid
any commission but are compensated by way of fees, whether the individuals
referred by the referrals ultimately buy insurance or not.
INSURANCE
INTERMEDIARIES IN OVERSEAS MARKETS
 The insurance
intermediaries in the U.K. comprise part-time agents such as solicitors,
accountants, bank managers, building societies, and estate agents who introduce
their own clients to an insurance company. It is the brokers, who are full-time
specialists, who are regarded as professionals with expert knowledge of
insurance. Besides arranging for insurance, these brokers also offer risk
management services, such as risk analysis, loss prevention advice, adequate
insurance programming and placement of insurance with companies or at Lloyds of
London (a corporate of individual underwriters who accept marine insurance
business on their own behalf) at best possible rates. These brokers are
required to be registered with the Brokers Registration Council (Registration)
Act, 1977. The U.S. insurance intermediaries are composed of three categories,
such as Independent agents, who represent a number of companies, Exclusive
agents, who work for a single company, and the General Agent, who in turn hire
and train full-time agents to procure business under his direction and
supervision. These General agents are empowered to accept and underwrite risks
on behalf of the insurance companies and also issue policies. In Japan, the
agents are individuals, partnerships or corporate bodies who procure majority of
the insurance business except marine. Marine insurance is sold directly through
the staff of the insurance companies (direct distribution). Besides, the usual
agents, there are also canvassers who sell monthly payment insurance schemes
such as the householders and storekeepers policy, dwelling/ apartment fire
insurance policy.

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