29

CHAPTER –VII

SUMMARY OF FINDINGS

CONCLUSION AND SUGGESTIONS

CHAPTER I

INTRODUCTION

The advancement of science and technology changes the life style of the
individuals and the society as a whole. At the same time the degree of risk is also
widening. Unexpected accidents and sudden health hazards also cause irreparable and
unbearable loss to the members concerned.

Uncertainties can happen to individuals or to his properties which have economic

value. This may happen because of natural calamities like thunder and lightning, flood,
storm, tsunami, earthquake and the like. At this time the sufferings and the loss of the
life of a person or the destruction of properties become a huge loss not only to the
individuals but also to the nation.
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Risks are inevitable and uncontrollable. The losses caused by the happenings of
unforeseen events cannot be avoided and the losses cannot be substituted by any means.
There is a possibility for shifting to minimise the effect of risk to some extent. Under
these circumstances, the losses are being compensated by monetary measures by the
Insurance Business. In this process, the risk of loss is transferred to the group of the
likeminded persons under the insurance schemes.

1.1. CONCEPT OF INSURANCE

‘According to Disnadle, ‘Insurance is an instrument of distributing the loss of

few among many.’1Insurance acts as an important social security tool providing a sense
of security to the society as a whole. Every person has the right to have basic amenities
like food, clothing, housing, medical care, standard of living necessary for one’s own
and his family’s well being and right to secure in case of unemployment, disability
sickness or any other circumstances out of his control. Insurance is an arrangement to
overcome from the worst economic situation and rescue the person from losses caused
due to uncertain contingencies.

1.1.1 LEGAL CONCEPT

In legal point of view, insurance is a contract arises out of an agreement between

two parties whereby one party agrees to undertake the risk of another in exchange for
consideration known as premium and promise to pay a fixed sum of money to the other
party on happening of an uncertain event or after expiry of a stipulated period in the
case of life insurance or to indemnify the other party on happening of an certain event
in the case of general insurance. The party promises to pay or bear the risk is called
‘insurer’ or assurer or underwriter or Insurance Company. The party whose risk is
covered is known as the insured or assured.

1.2. BASIC PRINCIPLES OF INSURANCE

Insurance involves pooling of funds from many insured entities to pay for the
losses that someone incurs. The insured entity are therefore protected from risk for a
fee, with the fee being dependent upon the frequency and severity of the event
 31

occurring. In order to be insurable risk, the following seven common characteristics

must be met for the insured risk against unforeseen and unexpected events.

1.2.1. A large Number of Homogeneous Exposure Units2

Insurance operates through pooling of resources. A vast majority of insurance

policies are provided for individual members of large classes allowing insurers to
benefit from the law of a large number, in which the predicted losses are similar to the
actual losses. In automobile insurance policies are issued to a great large number of
individuals. There are exceptions to this criterion, Lloyd’s of London, which is famous
for insuring the life or health of actors, sports personalities, and other famous persons.
However, all exposures will have particular differences which may lead to different
premium rates.

1.2.2. Definite Loss

The event that gives rise to the loss that is subject to the insured, at least in
principle takes place at a known time, in a known place and from a known cause. The
classic example is death of an insured person on a life insurance policy. Fire, automobile
accident, and worker injuries may all easily meet this criterion; other types of losses
may only be definite in theory. Occupational disease, for instance, may involve
prolonged exposure to injurious conditions, where no specific time, place or cause is
identifiable. Ideally, the time, place and cause of loss should be clear enough that a
reasonable reason, with sufficient infraction, could objectively verify all the three
elements.

1.2.3. Accidental Loss

The event that constitutes the trigger of claim should be fortuitous, or at least
outside the control of the beneficiary of the Insurance. The loss should be pure, in the
sense that it results from an event for which there is only the opportunity for cost. Events
that contain speculative elements such as ordinary business risks, or even purchasing a
lottery ticket are generally not considered insurable.
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1.2.4. Large Loss

The size of the loss must be meaningful from the perspective of the insured.
Insurance premium needs to cover both the expected cost of losses, plus the cost of
issuing and administering the policy, adjusting losses; and supplying the capital needed
to reasonably assure that the insurer will be able to pay claims. For small losses these
latter costs may be several times the size of the expected cost of losses. There is hardly
any point in paying such costs unless the protection offered has real value to a buyer.

1.2.5. Affordable Premium

If the likelihood of an insured event is so high, or the cost of the event is so large,
that the resulting premium is large relatively to the amount of protection offered. It is
not likely that any one will buy the insurance even if an offer. Further, as the accounting
profession formally recognises in financial accounting standards, the premium cannot
be so large that there is not a reasonable chance of a significant loss to the insurer. If
there is not such chance of loss, the transaction may have the form of insurance but not
the substance.

1.2.6. Calculable Loss

There are two elements that must be at least estimable, if not formally calculable,
that is the probability of loss and the attendant cost probability of loss is generally an
empirical exercise. While cost has more to do with the ability of a reasonable person in
possession of a copy of the insurance policy and a proof of loss associated with a claim
presented under that policy, it is to make a reasonably definite and objective evaluation
of the amount of the loss recoverable as a result of the claim.

1.2.7. Limited Risk of Catastrophically Large Losses

Insurable losses are ideally independent and non-catastrophic, meaning that the
losses do not happen all at once and individual losses are not severe to bankrupt the
insurer. Insurer may prefer to limit their exposure to a loss from a single event to some
small portion of their capital base. Capital constraints insurer’s ability to issue or sell
earthquake insurance as well as wind insurance in hurricane zones. In some countries
 33

catastrophic risks are insured by the government. In commercial fire insurance, it is

possible to find single properties, whose total exposed value is well in excess of any
individual insurer’s capital constraint.

Such properties are generally shared among several insurers or insured by a

single insurer who syndicates the risk into the re-insurance market.

1.3. LEGAL PRINCIPLES OF INSURANCE

Insurance companies insure an individual entity, only after fulfilling the basic
legal requirements. The following are some of the commonly cited legal principles.

1.3.1. Indemnity

The insurance company indemnifies, or compensates, the insured in the case of

certain losses only up to the insured's interest. The principle of indemnity is applicable
to all types of insurance policies except life insurance policies. Indemnity means a
promise to compensate in case of a loss. The insurer promises to help the insured in
restoring the position before loss. Whenever there is a loss of property, the loss is
compensated. The compensation payable and the loss suffered should be measurable in
terms of money. The insured will be compensated only up to the amount of loss suffered
by him. The Insured will not earn profit from the Insurer. The maximum amount of
compensation will be up to the value of the policy. The value of the policy undertaken
is fixed at the time of contract. The actual amount of loss suffered is compensated and
the value of policy is only the maximum limit.

The principle of indemnity is not applicable in case of life insurance contracts,

because it is not based on the principle of compensation. The loss of life cannot be
compensated by any amount of money.

1.3.2. Insurable Interest

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The insured must directly suffer from the loss. Insurable interest must exist
whether property insurance or insurance on a person is involved. The concept requires
that the insured have a "stake" in the loss or damage to the life or property insured. What
that "stake" is will be determined by the kind of insurance involved and the nature of
the property ownership or relationship between the persons.

1.3.3. Utmost Good Faith

The insurance contract is founded on the basis of utmost good faith on the part
of both the parties. It is obligatory on the part of the proposer (one who wants to get an
insurance policy) to disclose all material facts about the subject to be insured. If some
material facts come to light later on, then the contract can be avoided at the discretion
of the insurer. The amount of premium is fixed on the basis of all the facts supplied to
the insurance company. If some facts are withheld, then the amount of premium will
not be properly settled. The insurer should also disclose the facts of the policy to the
proposer. So utmost good faith on the part of both the parties is a must. The insured and
the insurer are bound by a good faith bond of honesty and fairness. Material facts must
be disclosed.

1.3.4. Contribution

The insurer compensates the insured up to the actual loss. Sometimes a property
is insured with more than one company. The insured cannot claim more than total loss
from all the companies put together. He cannot claim the same loss from different
companies. In this case he will be benefitted by the insurance, which runs counter to the
principle of indemnity. A person cannot be restored to a better position than before the
loss occurred. The total loss suffered by the insured will be contributed by different
companies in the ratio of the value of policies issued by them. So companies make a
contribution to restore the previous position of the insured.

1.3.5. Subrogation
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The principle of subrogation is applicable to all insurances other than the life
insurance. If the insured party gets a compensation for the loss suffered by him, he
cannot claim the same amount of loss from any other party. The rights of claiming the
loss are shifted to the insurer. The insurance company acquires legal rights to pursue
recoveries on behalf of the insured.

1.3.6. Causa Proxima or Proximate Cause

The cause of loss (the peril) must be covered under the insuring agreement of the
policy, and the dominant cause must not be excluded.

1.3.7. Mitigation

In case of any loss or casualty, the asset owner must attempt to keep the loss to
a minimum, as if the asset was not insured. It means the owner of the property must
take all possible measures to reduce the loss at the minimum, when happening of an
unforeseen event.

1.4. CLASSIFICATION OF INSURANCE

Insurance is broadly classified into two categories as stated below.

1.4.1. Life Insurance

Life Insurance which covers the risk of human beings and compensate
monetarily the losses of victim’s kith and kin is known as Life Insurance. Human life
is subject to various risks, such as, risk of death or disability caused by nature or by
manmade fatalities. Humans are also prone to some diseases, the treatment of which
may involve huge expenditure. When human life is lost or a person is disabled either
permanently or temporarily there is a reduction in the earning capacity leads a loss of
income to the household. The family is put to hardship. Sometimes survival itself is at
stake for the dependents. Basically Life Insurer issues, two types of policies such as
Whole Life Policy and Endowment Policy. ‘A whole life policy is one where the policy
amount is payable only after the death of the policy holder to his nominees. The policy
holder may continue to pay the premium.’3 In the Endowment policy premium will be
 36

paid for a specific period. The policy amount will be paid either on the death of the
insured or on completion of the stipulated period, whichever happens first.

1.4.2. Non-Life Insurance or General Insurance

Insurance, which is not covered under life insurance, is known as General

Insurance. The property owned by man is exposed to various hazards, natural and
manmade. In the case of property, loss or damage to property results in loss of income
to the persons. Risk has the element of unpredictability. Loss or damage could occur at
any time. The losses can be mitigated through insurance. Insurance is a commodity
which offers protection against various contingencies. Insurance provides financial
protection against a loss arising out of happening of an uncertain event, such as fire,
inundation, earthquake, flood, storm damage, burglary, allied perils and the like.
Insurance works on the basic principle of risk sharing. The great advantage of insurance
is that it spreads the risk of few people over a large group of people exposed to the risk
of similar. The concept behind insurance is that a groups of people exposed to similar
risk come together and make contribution towards formation of a pool of funds. In case
a person actually suffers a loss on account of such risk he is compensated out of the
same pool of funds. The insurance companies are collecting the contribution of
premium to the pool from the group of people sharing the common risk. They also act
as a trustee to the pool of funds.

General Insurer issues policies to cover risks like fire, marine, accident, aviation
and other miscellaneous to fulfill the requirements of individual, trader, industrial,
commercial entities and others. Normally, they issue policies for a period of one year.
In some cases, the policies may also be issued for longer or shorter period.

In this study, an attempt has been made to analyse the ‘General Insurance
Business in India’ particularly with reference to its features and prospects.
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1.5. IMPORTANCE OF INSURANCE

Nowadays, insurance plays an important role in every walk of life. Every human
being for his survival needs food, clothing and shelter. These human needs give birth to
various wants which when satisfied give a sense of satisfaction. If these wants are not
attained, one feels unhappy. If the basic needs are satisfied, some more wants come to
surface, to be satisfied. In the present day life, man, his family and their belongings or
properties are always exposed to variety of risks. Every human being needs money not
only for present but also for future for himself and for his dependents. But life is not
certain. Any untoward incident will happen for human beings and his belongings. In
order to overcome or reduce the burden of risk, people rely on insurance. Insurance is
in fact a social device. It accumulates funds to meet individual loses. It is a mechanism
of spreading loss of one over many facing the same risk. Insurance as a business and an
institution has very wide scope and covers a variety of transactions.

Insurance is defined as a co-operative device, to spread the loss caused by a

particular risk over a number of persons who are exposed to it and also agree to ensure
themselves against the risk. Insurance protects the economic values of assets. ‘Every
asset has a value. Assets are created through the hard efforts of the owner. It is valuable
to the owner since it generates some benefits or income’.4 The income is needed to
fulfill our needs.

Every asset has its own life, no asset will lose forever. The owner is well aware
of this. So he manages his affairs that the end of the period or life time, a suitable
substitute is made available. Thus, he makes sure that the benefits or income is not lost.
However, an asset lost earlier due to an accident or some unfortunate event may cause
destruction of the asset, which in turn makes the asset incapable of generating benefits
or income. In such circumstances the owner and those enjoying the income there would
be deprived of the benefits. The planned substitute would not have been ready. This
results an adverse and unpleasant situation. Insurance is a mechanism that helps reduce
the effect of such adverse situation, make whole again or make good of the loss. It is an
essential service to make life most meaningful, dignified and worth living.
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The importance of insurance is as follows.

1.5.1. Importance to Individual.

Insurance provides safety, security and profitability. When an individual takes a

policy it provides not only financial safety and security but also provides earning for
their investment. In the case of life insurance, when death occurs or the term of
insurance policy expires the full assured payment will be given to the legal heir or the
policy holder. In the case of general insurance relevant policies provide necessary
financial protection against the loss of a given contingency.

1.5.1.1. Insurance Provides Peace of Mind.

Every person faces the risk in the form of death or disability due to accident or
fall in sickness. Anything untoward happening to a human being leads to loss of income
to the individual concerned. Insurance coverage provides a sense of security against all
such odds and provides the necessary financial protection and promises to compensate
loses for better work performance of an individual.

1.5.1.2. Insurance Eliminates Dependency.

The family of an insured is safe in the event of a death of a bread winner due to
accident, sickness and the like. Insurance company gives a helping hand by providing
financial assistance to the insured family.

1.5.1.3. Insurance Serves as a Source of Savings.

Every individual must plan to save regularly for his future commitments like
education, marriage and the like. Insurance provides various plans or schemes to
promote systematic savings in the form of regular premium.

1.5.1.4. Insurance as a Sound Investment with the savings

The regular premium payment periodically will be a good investment to the

insured. High returns in the form of periodical bonus and maturity bonus provide with
high return on one’s investment in the case the funds are invested in insurance policies.
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1.5.1.5. Insurance Protected Mortgaged Property.

Many policy holders construct their houses or purchase assets by borrowing

money from the insurance companies. The best way to provide for repayment of
mortgage loan is life insurance. It helps the individual keep the assets of the family
intact.

1.5.1.6. Other Uses to an Individual.

Apart from the above uses, the insurance fulfills the needs of family, old age
requirements, education, marriage, settlement for children, income to widower, ritual
ceremony, tax saving benefits and the like.

1.5.2. Importance to Business

1.5.2.1.Financial help

The modern industry needs heavy capital investment. Insurance companies

provide financial assistance to the enterprises in the form of equity participation and by
granting loans and advances.

1.5.2.2. Reduces uncertainty of business losses

Business investments are exposed to loss in the form of fire, theft, accidents and
other perils. When the company is insured, it reduces the uncertainty of business losses
and be sure of its future earnings and smooth running of business.

1.5.2.3. Improves Efficiency

By taking an insurance policy, the insured will get relieved of unnecessary

worries and dexterity of the enterprises will improve.

1.5.2.4. Indemnification
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Insurance ensures the compensation to the dependents and indemnification of

loss of damaged properties.

1.5.2.5. Grant of Credit Facilities

A businessman can obtain credit by pledging the insurance policies as collateral

securities for the loan.

1.5.2.6. Continuous Business

If an enterprise is insured, the entrepreneur can run the business uninterrupted

against any odds. The employer can give compensation against any loss in the factory.

1.5.2.7. Employee’s Security

Insurance provides social security measures like Employee’s state insurance

(ESI) life policies, old age pensions, medical benefits and the like. This will provide
security coverage to the workers.

1.5.2.8. Importance to Commerce and Industry

Insurance is very helpful to increase the national productivity. Agriculture

experiences loss of cattle, crops, machines, tools and equipment. In trade, there is risk
of loss of goods in transit, in godown and the like. In industry also, the machinery,
building and the like on operation are also under risk. Insurance protects from these
types of risks. Insurance companies invest their surplus funds in bonds and securities of
the companies which results into the development of commerce and industry.

1.5.2.9. Encourage Trade

Further, insurance is a good source of earning of foreign exchange as it covers

export, import, shipping, and family services. Risks in foreign trade can be minimized
through insurance. It facilitates the growth and development of international trade.

1.5.3. Importance to Society

1.5.3.1. Protection to Wealth of Society

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Insurance coverage protects against financial losses. Loss or damage to property

can also be indemnified by the insurance company.

1.5.3.2. Economic growth of the country

Protection against loss of property and capital provides strong and sound mind
for the entrepreneur. This will enhance the production of more wealth. Welfare of
employees creates a conducive atmosphere to work.

1.5.3.3. Standard of living

Destitution and misery are reduced by insurance. This will promote and maintain
the standard of living of the people.

1.5.3.4. Social Security Benefits

In case of natural calamities and other risks, families would have been relieved
of financial shock. This could be done only through insurance.

1.5.3.5. Equitable Distribution of Loss

Insurance tends to distribute equitably the cost of accidental events. In the

absence of insurance the cost would have been paid in a haphazard manner.

1.5.3.6. Removal of Social Evils.

All forms of insurance tend to reduce the extent of evils they are meant to
alleviate.

1.5.3.7. Accelerate the Production Cycle.

Adequate capital from insurance companies accelerates the production cycle in

the country.

1.5.3.8. Taming Inflation

Insurance reduces the inflationary pressure by extracting money supply to the

amount of premium collected.

1.5.3.9. Huge Funds

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Insurance accumulates from the small deposits of many persons, a large fund
that may be invested and used in the development of industry and society.

1.6. HISTORY OF INSURANCE

1.6.1. History of Insurance in the World 5

Although the concept of insurance is a development of the recent past, the story
of insurance is perhaps as old as mankind itself. We know two types of economy in
human society.

i) Natural or non-monetary economy

Natural economy is barter and is more primitive and the insurance in such
economy entails agreement of mutual help.

ii) Modern monetary economy

Modern monetary economy interacts with markets, financial instruments,

currency and the like.

If one family’s house is destroyed, the neighbours are committed to help and
rebuild the same. Granaries are another primitive form of insurance to indemnify against
famines, often informal or formally intrinsic to local religious customs. This type of
insurance has survived to the present day in some countries where modern economy is
not widespread.

Insurance business has been known to exist in some form or other since 3000
B.C.E (Before Common Era). The Chinese traders travelling treacherous river rapids
would distribute their goods among several vessels so that the loss from any vessel
being lost would be partial and shared and not total.

The Babylonian developed a system which was recorded in the famous code of
Hammurabi, 1750 BCE and practised by early Mediterranean sailing merchants. If a
merchant received a loan to fund his shipment, he would pay the lender an additional
sum in exchange for the lender’s guarantee to cancel the loan should the shipment be
stolen or lost at sea.
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Achacmenian Monarchs of Ancient Persia were the first to insure their people
and made it official by registering the insuring process in governmental notary offices.
The insurance tradition was reformed each year in honour (Beginning of the Iranian
New year). The heads of different ethnic groups as well as others willing to take part,
presented gift to the Monarch. The most important gift was presented during a special
ceremony. When a gift was worth more than 1000 Derrick (Achaemenian gold coin)
the issue was then registered in a special office. This was advantageous to those who
presented such special gifts. For others, the presents were fairly assessed by the
confidents of the court and the assessment was registered in special offices.

The purpose of registering was that whenever the persons who presented the
special gift registered by the court were in trouble, the monarch and the court would
help him. Jahaz, a historian and writer, writes in one of his books on Ancient Iran,
whenever the owner of the present is in trouble wants to construct a building, setup a
feast, have his children married and the like are to be helped. The one in charge of this
in the court would check the registration, if the registered amount exceeds 10000
Derrick. He or she would receive an amount of twice as much he presented.

The inhabitants of Chodes adopted the principles of general coverage, whereby

if goods are shipped together, the owners would bear the losses in proportion. If loss
occurs, due to jettisoning during distress when Capitans of ships caught in storms would
throw some cargo to reduce the weight and restore balance. Such throwing away is
called jettisoning.

The Greeks and Romans have started benevolent societies in the late 7th Century.
These guilds earned for the families and paid funeral expenses of members upon death.
Guilds in the middle ages served a similar purpose.

The Ialmud deals with several aspects of insuring goods. Before insurance was
established in the late 17th Century, friendly societies existed in England, in which
people donated amounts of money to a general sum that could be used for emergencies.

Towards the end of the seventeenth century, London’s growing importance as a

centre for trade increased the demand for marine insurance. In the late 1680s Mr.
 44

Edward Lloyd opened a Coffee house that became a popular haunt of ship owners,
merchants and ship’s captains and there by realise source of the latest shipping news. It
became the meeting place for parties wishing to insure cargos, ships and those willing
to undertake such ventures. Today, Lloyds of London remains the leading market for
marine and other special types of insurance, but it works rather differently than the more
familiar kinds of insurance.

Fire insurance as we know it today can be traced to the Great Fire of London,
which in 1666 devoured 13200 houses. In the aftermath of disaster, Nicholas Barbon
opened an office to insure buildings. In 1680, he established England’s first fire
insurance company. The fire office to insure brick and frame homes.

The first insurance company in the United States under fire insurance was
formed in Charles Town, South Carolina in 1732. Benjamin Franklin helped to
popularize and made standard the practice of insurance, particularly against fire in the
form of perpetual insurance. In 1752, he founded Philadelphia contribution ship for the
insurance of houses from loss by fire. Franklin’s company was the first to make
contributions towards fire prevention. Not only did his company warn against certain
fire hazards, it also refused to insure certain buildings where the risk of fire was too
great as all wooden houses.

1.6.2. History of Insurance in India

‘In India insurance has a deep-rooted history. It finds mention in the writings of
Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The
writings talk in terms of polling of resources that could be re-distributed in times of
calamities such as fire, flood, epidemics and famine. This was probably a pre-cursor to
modern day insurance.’6 Ancient Indian History has preserved the earliest traces of
insurance in the form of marine trade loans and carriers contracts. In Rig-Veda, the most
sacred book of India references were made to the concept “yogakshema” more or less
liken to the well being and security of the people. These works also show that the system
of credit and the law of interest were well developed in India. They were based on a
clear appreciation of the hazard involved and the means of safeguarding against it.
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In India, life insurance in its modern form was brought for the first time by the
Britishers. The Oriental Insurance Company started in the year 1818 in Calcutta was
the first to be founded in India by the Europeans to help the widows of their community,
which was liquidated in the year 1834 A.D.

Bombay Assurance Company was started in 1823. Followed this, the Madras
Equitable Life Insurance Society was started in the year CE (Chirst Era) 1829. All of
these companies operated their business in India but did not insure the lives of Indians.
They were insuring the lives of Europeans living in India. Some of the companies
started later, did provide insurance for Indians. But they were treated as “substandard”
and therefore had to pay an extra premium of 20 per cent more than a European paid.
This practice prevailed until the growth and development of Swadeshi Movement
whereby many Indian companies were started to insure our people.

1.6.3. History of General Insurance

The history of General Insurance dates back to the Industrial Revolution in the
west and the consequent growth of seafaring trade and commerce in the 17th century. It
came to India as a legacy of British occupation. British and other foreign insurance
companies transacted their business in India through their agents.

‘The first General Insurance Company in India is “The Triton Insurance

Company Ltd.” was established by British owner in Calcutta in the year 1850’.7

Bombay Mutual Life Assurance Society heralded the birth of first Indian Life
Insurance Company in the year 1870 covered Indian lives at normal rates. The Swadeshi
Movement of 1905-1907 gave rise to more insurance companies. The United India in
Madras, National Insurance in Calcutta, and the Co-operative Assurance at Lahore were
established in 1906 in India.

In 1907, Hindustan Co-operative Insurance Company took its birth in one of the
rooms of the Jorasanko house of the great poet Ravindranath Tagore in Calcutta. In the
same year the Indian Mercantile Insurance Ltd was set up; this was the first company
to transact all classes of General Insurance business.
 46

Prior to 1912, India had no legislation to regulate insurance business. In the year
1912, the Life Insurance Companies Act and the Provident Fund Act were passed. This
Act made it necessary that the premium rate tables and periodical valuation of
companies should be certified by an actuary. But the Act discriminated between foreign
and Indian companies on many accounts, putting the Indian companies at a
disadvantage.

The first two decades of the twentieth century witnessed the mushroom growth
of the insurance business; many financially unsound and failed miserably.

In 1928, The Indian Insurance Companies Act enacted in the parliament, which
enables the government to collect statistical information from both life and non-life
insurance business companies. In order to protect the interest of the insuring public at a
larger interest, the earlier legislations were consolidated and amended by the Insurance
Act 1938, with comprehensive provisions and effective control over the activities of
insurers. This was the first effective initiative step to bring the insurance business under
state’s control to some extent.

Indian insurers are concentrated only in big cities and in trade centers. They were
rendering their services only to the rich and strong business concerns. With the object
of providing protection of insurance to all people living in every nook and corner of the
century, moreover to mobilize the savings for the nation’s development, the Life
Insurance India was nationalised in the year 1956.

Life Insurance Corporation of India came into existence on the 1st day of
September 1956. In order to remember this historical moment, insurance week is
celebrated from 1st to 7th September every year.

Another milestone in the history of General Insurance is the establishment of

General Insurance Council as a wing of the Insurance Association of India in 1957. This
council framed code of conduct rules for ensuring fair conduct and sound business
practices among the general insurers operating in India.
 47

With the object of regulating the investments the council set minimum solvency
margins that should be followed by all insurance companies. The Insurance Act was
amended in the year 1968. The Tariff Advisory Committee was setup. This committee
became a statutory body in fixing, amending or modifying rates, advantages or benefits
terms and conditions relating to any risk.

1.7. NATIONALISATION OF GENERAL INSURANCE BUSINESS

General Insurance Business was nationalised in 1972. There were 107 General
Insurance companies including 45 foreign companies at that time, mainly in large cities
catering to the needs of trade and industries in the organised sector. They were of
different sizes, operating at different levels of sophistication.

They were amalgamated, grouped into four subsidiaries and assigned to the
General Insurance Corporation. The General Insurance Corporation was incorporated
as a holding company in November 1972 and it commenced its business on 1st January
1973 onwards. The four subsidiaries are namely, ‘The National Insurance Company
Limited, The New India Assurance Company Limited, The Oriental Fire and General
Insurance Company Limited and The United India Insurance Company Limited’8
having the head offices in Calcutta, Bombay, New Delhi and Madras respectively.

There were several goals for setting up of this structure. First the subsidiary
companies were expected to setup standards of conduct and sound practices in the
general insurance business and render efficient customer service. Secondly, the general
insurance corporation was to help in controlling their expenses. Thirdly, it was to help
in the investments of funds. Fourthly, it was to bring general insurance business in the
rural areas of the country. Fifthly, the General Insurance Corporation was also
designated as the National Re-insurer. All the domestic insurers were to cede 20% of
their gross direct premium to the general insurance corporation, under the section 101A
of the Insurance Act 1938. The idea was to retain as much risk as possible domestically.
This was in turn motivated by the desire to minimize the expenditure on foreign
exchange.
 48

Lastly, all the four subsidiaries were supposed to compete with each other to
create a healthy insurance business in India.

1.8. NEW ECONOMIC POLICY ERA

Liberalization, privatization and globalization have become a much talked

subject among economists, businessmen, politicians and professionals in modern days.
Privatisation is expressed as the supporting pillar on which is the edifice of new
economic policy of the government has been enacted and implemented since 1991.

Although the Indian markets were privatised and opened up the gate for foreign
companies in a number of sectors, insurance remained out of bounds on both life and
non-life. The government wanted to proceed with caution. With great pressure from the
opposition the congress led government at that time decided to set up a committee
headed by Mr. R.N. Malhotra, the then Governor of the Reserve Bank of India in the
year 1993, to propose recommendations for reforms in the insurance sector. The
committee submitted its report in 1996. Wherein among other things, it recommended
that the private players be permitted to enter the insurance industry. They stated that
foreign companies are allowed to enter by floating Indian companies preferably a Joint
venture with Indian Partner.

While praising the work done in achieving many of its objectives, the committee
was critical about the low insurance coverage, unresponsiveness to customers’ needs,
poor service, and costly insurance cover with low returns, hierarchical management and
excessive lapse ratio policies. It also stated that there was a large untapped potential for
insurance in the country and this led to the first step being taken towards opening up of
this sector to private players.

Following the recommendations of the Malhotora Committee Report, the

Insurance Regulatory and Development Authority Act (IRDA) was passed in 1999. It
was a milestone in the history of insurance sector. It was constituted as an autonomous
body to regulate and develop the insurance industry. Insurance Regulatory and
Development Authority was incorporated as a statutory body in April 2000. The main
 49

objective of setting up the Insurance Regulatory and Development Authority was to

protect the interest of policy holders and to regulate promote and ensure the
development of the insurance sector. It is also aimed at the ending of the monopoly of
the Life Insurance Corporation and General Insurance Corporation in the insurance
sector of the country.

The IRDA opened up the market to private players in August 2000, with the
issue of application for Registration. Foreign companies were allowed hold equity cap
up to 26 per cent at that time of introduction. ‘The Insurance Bill, Amendment Bill
proposes to allow the foreign equity ceiling to 49 per cent from the current level of 26
per cent’.9 The Authority has the power to frame regulation under section 114A of the
Insurance Act and has started enacting rules since 2000 onwards.

The Authority framed various regulations from registration of companies for

carrying on insurance business to protection of policy holder’s interest. In December
2000, the four subsidiaries of the General Insurance Corporation of India were
restructured as independent companies. These subsidiaries have been delinked from the
parent company, permitted to function as an independent entity. General Insurance
Corporation of India was converted into a National Re-insurer. A Bill delinking the four
subsidiaries from GIC was passed in the parliament in July 2002.

Insurance business in India was divided into four classes such as Life Insurance,
Fire Insurance, Marine Insurance and miscellaneous Insurance. Life insurers transact
Life Insurance Business. General insurers transact the rest. Composite of both are not
permissible as per law.

The first private insurance company was registered on 23rd October 2000 by the
IRDA and started doing insurance business shortly thereafter there by, the long years
of public sector monopoly has come to an end in Indian Insurance Sector.

In 2001, Royal Sundaram Alliance Company issued the first non-life insurance
policy in private sector. In the year 2000-2001, along with four public sector insurers
six private players started their business in the general insurance industry. In 2001-2002,
three more life insurer and one more non-life insurance company get registered.
 50

To protect the interest of farmers, a new corporate body called Agricultural

Insurance Company of India (AIC) was floated in the fiscal year 2002-03 in pursuance
of the announcement made in the annual budget. The main objective of the formation
of this corporation was to provide financial security to persons engaged in agriculture
and allied activities through insurance products and other support services. AIC offers
four major categories of Insurance services namely, Horticulture and Plantation
Insurance, Coffee Insurance, Varshabima and National Crop Insurance. In the same
period another specialized insurer in field of export trade also started was the Export
Credit and Guarantee Corporation. (ECGC)

In 2003-2004, 2004-2005, 2005-2006and 2006-2007 new players registered in

the life insurance sector.

‘One of the major milestones in the history of general insurance industry has
been the withdrawal of premium pricing restrictions from January 2007.’10 In fact, the
de-tariffing of marine cargo, personal accident, health and aviation sector was done in
1994. In 2004, de-tariffing was announced for marine hull segment. The major de-
tarrifing of fire, engineering and motor own damage segments was done in 2007. Motor
third party policies are still under tarrifing.

In 2007-2008, further five more private entrants got registered among which two
are life insurer and the remaining three are in general insurance.

In the year 2008-2009, four more companies came into the insurance sector,
three of them are in life and one in non-life insurance. In the year 2010, three more
general insurers got registered in the insurance sector. As on 31st march, 2010, there
were eighteen private players and six public players and one Re-insurer constitute the
General Insurance Market.

As on 30th January2013, there are twenty-one private sector companies and six
public sector companies and one re-insurer have been operating in the general insurance
industry. On the private sector, four insurance companies are in the Health Insurance
Business. In the public sector insurance companies, two of them specially engaged in
 51

the field of the export trade and agricultural sector respectively which is given in
Appendix I.

1.9. DISTINCTION BETWEEN LIFE INSURANCE AND GENERAL

INSURANCE
There are many distinctions between life insurance and general insurance .Some of
the important differences are listed below.

1.9.1. Contract

A life insurance contract is a long term contract, while general insurance contract
is normally a one-year renewable contract.

1.9.2. Risk
In life insurance the risk death is certain. The only uncertainty is as to when it
takes place whereas, in general insurance the insured event may or may not take place.

1.9.3. Value

In life insurance, it is difficult to assess the economic value of life. But in general
insurance the financial value of any asset can be assessed.

1.10 .STRUCTURE OF INDIAN INSURANCE SECTOR

The following diagram vividly explains the structure of Indian insurance sector.
 52

Figure -1.1
STRUCTURE OF INDIAN INSURANCE SECTOR

Insurance Sector

Life Insurance General Insurance

Re-insurer
(GIC)

Public Private Public Private

Sector Sector Sector Sector

LIC
Public Specialised Private Stand
Players insurer Players alone
Business

ECGC,
Health
AIC Insurance
25
53

1.11. STATEMENT OF THE PROBLEM

The Insurance business has been changing across the globe and the ripple effects
of the same can be observed in the domestic markets as well. An evolving insurance
sector is of vital importance for economic growth. While encouraging saving habit, it
also provides a safety net to both enterprises and individuals. The insurance industry
has acted as an intermediary service by transferring funds from the insured to capital
investment which is crucially required for sustained economic expansion and growth.
It also acts as a necessary support system for the structural changes in the economy.

Insurance sector in India has faced a 360 degree turn, from an open competitive
market to nationalisation and back to a liberalised market again, during the post
independence period. The IRDA Act was passed in 1999, regulates and encourages the
private participation in a liberalised environment.

At present both private, and public sector are playing an important role in
providing various services and products to fulfill the requirements of general public and
business firms. More private players are allowed both in life and non-life business in
India. The total investments made by the general insurance companies on Central
government, State government securities and on other approved investments stood at
Rs. 45,289.19 crores as on March 31st 2010. It is a remarkable trend in the development
of the economy of the country.

Moreover, Indian Insurance Industry covers largest number of insurance policies

in the world. Yet it has great scope for further expansion with a large untapped potential.

The major problem regarding the general insurance is that many of the products
and services provided by the General Insurance Companies are not known to a large
section of general public. The lack of awareness about these products and services leads
a large section of the general public away from benefiting out of this.

The companies offering the general insurance business are having very high
potential for growth, if the public awareness is created to a larger extent, through various
means.
54

1.12. OBJECTIVES
Following are the objectives of the present study.

1. To study the concept and the historical perspective of insurance business in India.
2. To study about the different products and its features offered by the general
insurance companies in India.
3. To evaluate the performance of public sector and private sector general insurance
companies in India.
4. To analyse the contribution of insurance companies to the economic
development of India.
5. To study the perception level of customers on different attributes of General
Insurance Companies in India.
6. To offer suitable suggestions on the basis of the findings of the study for the
further growth of General Insurance business in India.

1.13. SCOPE OF THE STUDY

The following are some of the scope of the study.

· To inculcate an understanding of the basics of insurance and its importance.

· To know about the suitability of various types of general insurance policies to
different persons with variety of needs, offered by the insurance companies.
· To highlight the level of performance and investment patterns of the general
insurance companies.
· To understand the underwriting experience and profitability of general insurance
companies.
· To assess the perception level of customers towards insurance business.

1.14. LIMITATIONS OF THE STUDY

The following are the limitations of the present study.

55

The study is related to only general insurance with a limited period of 10 years
only. Generalization of result based on the results may or may not suit the whole of
insurance sector.

The study is based on primary and secondary data. The chance of bias among the
respondents may be greater which will not give a true picture about the insurance
company.

The study is a micro level study confined to Madurai City only for collecting
primary data. What is true to individual may not be true for aggregates. So the policy
generalisation based on micro level study may not be suitable.

The business of insurance sector mainly depends upon the psychological feelings
of the respondents. The feelings may vary greatly from respondent to respondent.

1.15. HYPOTHESES

Hypothesis is a tentative statement about the validity of which remains to be

tested. In this study, in order to find out the customers’ perception rating between public
and private sector insurance companies ,18 attributes are grouped under five headings
namely, service, human relations, economic, product and comfort factors. Appropriate
hypothesis has been framed and tested with the help of independent samples‘t’ test. The
details are given in chapter six.

1.16. LAY OUT OF THE THESIS

The present study “General Insurance Business in India- Features and Prospects”
has been presented in seven chapters.

The first chapter, ‘Introduction’ explains the concept, principles, classifications

and importance of insurance. Further history of insurance and its structure, particularly
general insurance business and its nationlisation, importance of the study, statement of
the problem, objectives, scope and limitations, and hypotheses, along with
chapterisation have been studied.
56

The second chapter ‘ Review of Literature and Methodology’ presents the

theoretical frame work with theories relevant to the study, the method which explains
the research design that has been used, research approach, data collection, tools and
concepts used in the research.

The third chapter ‘Products and their features in General Insurance Companies ’
deals with the products of general insurance Companies with its classifications. Further,
general insurance and economic development have been discussed.

The fourth chapter ‘Performance Analysis of General Insurance Buiness in

India’ discusses the advantages of General Insurance and its growth indicators for the
public and private sector.

The fifth chapter ‘Pattern of Investment by Public and Private sector Insurance
Companies’ analyses the share of investment channelized in different sectors, sector
wise distribution of investment by different companies, underwriting experiences and
profitability of insurance companies.

The sixth chapter, ‘Customers’ perception on General Insurance Companies’

deals with the perception level of customers on different attributes along with the
influence related to demographic factors.

The seventh chapter, ‘Summary of Findings, Conclusions and Suggestions’

interprets the findings, conclusions and suggestions of the study and area for further
research is suggested.
57

REFERENCES

1. Indrajit Singh, Rakesh kalyal and Sanjay Arora ‘Insurance Principles and
Practice’ Published by Kalyani Publishers, New Delhi, 2005 p-10
2. Dr.Usha Virwel, ‘Significance of Insurance’ Published by Bhasker Publications,
Kanpur, 2010,pp-39-41
3. B.Santhanam, ‘Financial Services’ Published by Margham Publications,
Chennai, 2012, p-39.
4. Balachandran.S, ‘IC-33LifeInsurance’, Insurance Institute of India, Mumbai,
2007, p-1.
5. Wikipedia, ‘The Free Encyclopedia’( Insurance.com)
6. www.irda.gov.in ‘History of insurance in India.’
7. Tapen Sinha, ‘An Analysis of the Evolution of Insurance in India’ Centre for
Risk and Insurance Studies (CRIS) Discussion on paper series, 2005, p-2.
8. Clifford Gomez, ‘Financial Markets Institutions and Financial Services’
Published by PHI Learning Private Limited, New Delhi, 2010, p-374.
9. C.Sivakumar, ‘Business Daily from The Hindu group of Publications, May 23,
2009.

10. The Report on, ‘Indian non-life insurance Industry Performance update’ (2009)
Credit Analysis RE search Ltd. (CARE) Ratings.com, Mumbai.

CHAPTER II

REVIEW OF LITERATURE AND METHODOLOGY

A research study on any aspect can be made good only when the existing studies
relating to that aspects, features and suggestions are known. In this chapter, an attempt
has been made to briefly review the relevant literature in the field of insurance sector.
The review of literature can lead to draw some significant conclusions and serve as a
guide mark for this study. It also gives a chance to identify the research gap. The studies