CHAPTER 1

INTRODUCTION OF
INSURANCE

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1.1.

HISTORY OF INSURANCE

Ref: IRDA
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 pooling of resources that could be re-distributed in times of calamities such as
fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance.
Ancient Indian history has preserved the earliest traces of insurance in the form of marine
trade loans and carriers contracts. Insurance in India has evolved over time heavily drawing
from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of the
Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In
1829, the Madras Equitable had begun transacting life insurance business in the Madras
Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades
of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India
(1897) were started in the Bombay Residency. This era, however, was dominated by foreign
insurance offices which did good business in India, namely Albert Life Assurance, Royal
Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard
competition from the foreign companies.
An Ordinance was issued on 19 th January, 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and
foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was
reopened to the private sector.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous
body to regulate and develop the insurance industry. The IRDA was incorporated as a
statutory body in April, 2000. The key objectives of the IRDA include promotion of
competition so as to enhance customer satisfaction through increased consumer choice and
lower premiums, while ensuring the financial security of the insurance market.
The IRDA opened up the market in August 2000 with the invitation for application
for registrations. Foreign companies were allowed ownership of up to 26%. The Authority
has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has
from 2000 onwards framed various regulations ranging from registration of companies for
carrying on insurance business to protection of policyholders interests.

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1.2.

OVERVIEW OF INSURANCE

Insurance is the equitable transfer of the risk of a loss, from one entity to another in
exchange for payment. It is a form of risk management primarily used to hedge against the
risk of a contingent, uncertain loss. An insurer, or insurance carrier, is a company selling the
insurance; the insured, or policyholder, is the person or entity buying the insurance policy.
The amount of money to be charged for a certain amount of insurance coverage is called the
premium. Risk management, the practice of appraising and controlling risk, has evolved as a
discrete field of study and practice.

Definition of 'Insurance'

A contract (policy) in which an individual or entity receives financial protection or

reimbursement against losses from an insurance company. The company pools clients' risks
to make payments more affordable for the insured.

Definition of 'Life Insurance'

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.
A protection against the loss of income that would result if the insured passed away.
The named beneficiary receives the proceeds and is thereby safeguarded from the financial
impact of the death of the insured.

Purposes of Life Insurance

Most often, the purpose of life insurance is to maintain the financial security and wellbeing of ones family or dependents in case of a wage-earners death. If you have others who
are financially dependent, you should have a life policy. However, life insurance can also be
used for the following reasons:

Mortgage Protection to cover your mortgage loan or payments

Retirement the savings, cash value build-up or investment opportunity help build a
familys net worth or nest egg

Childcare to replace a home-makers contribution

Estate Protection to help cover estate taxes

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Protect Your Business to protect a business against the loss of a key employee,
known as key man life insurance

Employee Benefits typically offered as group life insurance through your employer

Insurance that guarantees a specific sum of money to a designated beneficiary upon

the death of the insured or to the insured if he or she lives beyond a certain age. Insurance
providing for payment of a sum of money to a named beneficiary upon the death of the
policyholder or to the policyholder if still living after reaching a specified age.

1.3.

TYPES OF LIFE INSURANCE

Life insurance may be divided into two basic classes: temporary and permanent; or
the following subclasses: term, universal, whole life, and endowment life insurance.
(A) Term insurance
Term assurance provides life insurance coverage for a specified term. The policy does
not accumulate cash value. Term is generally considered "pure" insurance, where the
premium buys protection in the event of death and nothing else.
There are three key factors to be considered in term insurance:
1. Face amount (protection or death benefit),
2. Premium to be paid (cost to the insured), and
3. Length of coverage (term).
Annual renewable term is a one-year policy, but the insurance company guarantees it
will issue a policy of an equal or lesser amount regardless of the insurability of the applicant,
and with a premium set for the applicant's age at that time.
Level premium term can be purchased in 5, 10, 15, 20, 25, 30 or 35 year terms. The premium
and death benefit stays level during these terms.
(B) Permanent life insurance
Permanent life insurance is life insurance that cannot be cancelled for any reason
except fraud, so long as the owner regularly pays his premiums. Any such cancellation must
occur within a period of time (usually two years) defined by law. A permanent insurance
policy accumulates a cash value up to its date of maturation, reducing the risk to which the
insurance company is exposed as well as the policy's expense to the company. Such policies
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will be more expensive to older people than to younger ones. The owner can access the
money in the cash value by withdrawing money, borrowing the cash value, or surrendering
the policy and receiving the surrender value.
The four basic types of permanent insurance are whole life, universal life, limited pay, and
endowment.

Whole life coverage

Whole life insurance provides lifetime death benefit coverage for a level premium.
For younger people, whole life premiums are much higher than term insurance premiums, but
because term insurance premiums rise with increasing age of the insured, the cumulative
value of all premiums paid under whole and term policies are roughly equal if policies are
maintained to average life expectancy. Part of the insurance contract stipulates that the
policyholder is entitled to a cash value reserve that is part of the policy and guaranteed by the
company. This cash value can be accessed at any time through policy loans that are received
income tax-free and paid back according to mutually agreed-upon schedules. These policy
loans are available until the insured's death. If any loans amounts are outstandingi.e., not
yet paid backupon the insured's death, the insurer subtracts those amounts from the policy's
face value/death benefit and pays the remainder to the policy's beneficiary.
The advantages of whole life insurance are its guaranteed death benefits; guaranteed
cash values; fixed, predictable premiums; and mortality and expense charges that do not
reduce the policy's cash value. The disadvantages of whole life are the inflexibility of its
premiums and the fact that the internal rate of return of the policy may not be competitive
with other savings and investment alternatives.
Death benefit amounts of whole life policies can also be increased through
accumulation and/or reinvestment of policy dividends, though these dividends are not
guaranteed and may be higher or lower than earnings at existing interest rates over time.
According to internal documents from some life insurance companies, the internal rate of
return and dividend payment realized by the policyholder is often a function of when the
policyholder buys the policy and how long that policy remains in force. Dividends paid on a
whole life policy can be utilized in many ways.

Universal life coverage

Universal life insurance (UL) is a relatively new insurance product, intended to

combine permanent insurance coverage with greater flexibility in premium payments, along
with the potential for greater growth of cash values. There are several types of universal life
insurance policies, including interest- sensitive (also known as "traditional fixed universal life
insurance"), variable universal life (VUL), guaranteed death benefit, and equity-indexed
universal life insurance.

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Universal life insurance policies have cash values. Paid-in premiums increase their
cash values; administrative and other costs reduce their cash values.
Universal life insurance addresses the perceived disadvantages of whole life namely
that premiums and death benefits are fixed. With universal life, both the premiums and death
benefit are flexible. With the exception of guaranteed-death-benefit universal life policies,
universal life policies trade their greater flexibility off for fewer guarantees.
"Flexible death benefit" means the policy owner can choose to decrease the death
benefit. The death benefit can also be increased by the policy owner, usually requiring new
underwriting. Another feature of flexible death benefit is the ability to choose option A or
option B death benefits and to change those options over the course of the life of the insured.
Option A is often referred to as a "level death benefit"; death benefits remain level for the life
of the insured, and premiums are lower than policies with Option B death benefits, which pay
the policy's cash valuei.e., a face amount plus earnings/interest. If the cash value grows
over time, the death benefits do too. If the cash value declines, the death benefit also declines.
Option B policies normally feature higher premiums than option A policies.

Limited-pay

Another type of permanent insurance is limited-pay life insurance, whose premiums

are paid over a specified period, commonly ten or twenty years, after which no additional
premiums are due. Benefits are sometimes paid out at the age of 65; other ages can include
75, 85, and 100.
Other limited pay policies do not pay out at a set age, but become "paid up", leaving
the policyholder with a guaranteed death benefit and no further premiums to pay.

Endowments

Endowments are policies whose face values equal a benefit amount at a given age,
called the endowment age, rather than a death benefit amount. Endowments require higher
premiums than whole life and universal life policies because premiums are paid over shorter
periods and maturation dates are earlier.
The US Technical Corrections Act of 1988 tightened the rules on tax shelters such as
modified endowments. These follow the same tax rules as annuities and IRAs. Endowments
mature and are paid out after a prespecified period (e.g. 15 years) or at a prespecified age
(e.g., 65), whether the insured is alive or has already died.

Accidental death

Accidental death insurance is a type of limited life insurance that is designed to cover
the insured should they die as the result of an accident. "Accidents" run the gamut from
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abrasions to catastrophes but normally do not include deaths resulting from non-accidentrelated health problems or suicide. Because they only cover accidents, these policies are
much less expensive than other life insurance policies.
Such insurance can also be accidental death and dismemberment insurance or AD&D.
In an AD&D policy, benefits are available not only for accidental death but also for the loss
of limbs or body functions such as sight and hearing.
Accidental death and AD&D policies very rarely pay a benefit, either because the
cause of death is not covered by the policy or because death occurs well after the accident, by
which time the premiums have gone unpaid. To know what coverage they have, insureds
should always review their policies. Risky activities such as parachuting, flying, professional
sports, or military service are often omitted from coverage.
Accidental death insurance can also supplement standard life insurance as a rider. If a
rider is purchased, the policy generally pays double the face amount if the insured dies from
an accident. This was once called double indemnity insurance. In some cases, triple
indemnity coverage may be available.

1.4.

LIFE INSURANCE COMPANIES IN INDIA

Life Insurance Corporation of India (LIC) is the only Public Sector insurance
company, the rest all being private insurance players. The Life Insurance sector was opened
up for private players to participate in the year 2000. Most of the private players have tied up
with international insurance biggies for their life insurance foray.
1. Life Insurance Corporation Of India.
2. Max New York Life Insurance Co. Ltd.
3. HDFC Standard Life Insurance Company Ltd.
4. ICICI Prudential Life Insurance Company Ltd.
5. Om Kotak Mahindra Life Insurance Co. Ltd.
6. Birla Sun Life Insurance Company Ltd.
7. Tata AIG Life Insurance Company Ltd.
8. SBI Life Insurance Company Limited.
9. ING Vysya Life Insurance Company Private Limited.
10. Allianz Bajaj Life Insurance Company Ltd.
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11. MetLife India Insurance Company Pvt. Ltd.

12. Reliance Life Insurance Company Ltd.
13. Shriram Life Insurance Company Ltd.
14. Sahara India Life Insurance Company Ltd.
15. Bharti AXA Life Insurance Company Ltd.
16. Aviva Life Insurance Company Ltd.
17. Exide Life Insurance Company Ltd.
18. India First Life Insurance Company Ltd.

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CHAPTER 2
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LITERATURE REVIEW

Praveen Sanu, Gaurav Jaiswal and Vijay Kumar Panday (2009) in their article,
A Study of Buying Behavior of Consumers towards Life Insurance Company, Prestige
institute of Management and Research, Gwalior, revealed that in present Indian market, the
investment habits of Indian consumers are changing very frequently. The individuals have
their own perception towards various types of investment plans.
A study conducted by Keerthi, P. and Vijayalakshmi, R. (2009) A Study on the
Expectations and Perceptions of the Services in Private Life Insurance Companies reveals
that the policyholders expectations are well met in the case of certain factors reacting to
service quality. But in the case of other variables, there exists a significant gap which means
that policyholders have experienced low levels of service as against their expectations. If all
the players in the Life insurance industry focus on the effective delivery of services, they can
win the hearts of customers and anticipate their increased market share.
Vijay Kumar Pandey August 2009 India is a country where the average selling of
life insurance policies is still lower than many western and Asian countries, with the second
largest population in world the Indian insurance market is looking very prospective to many
multinational and Indian insurance companies for expanding their business and market share.
Before the opening of Indian market for Multinational Insurance Companies, Life Insurance
Corporation (LIC) was the only company which dealt in Life Insurance and after opening of
this sector to other private companies, all the world leaders of life insurance have started their
operation insignia. With their world market experience and network, these companies have
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offered many good schemes to lure all type of Indian consumers but unfortunately failed to
get the major share of market. Still the LIC is the biggest player in the life insurance market
with approx 65% market share. But why Indian consumers do not trust on many companies
and why the major population of India do not have any life insurance policy or what are the
factors plays major role in buying behavior of consumers towards life insurance policies.
Girish kumar and eldhose (2008), published in insurance chronicle icfai monthly
magazine august 2008 in their paper titled "customer perception on life insurance services: a
comparative study of public and private sectors", well explained the importance of quality
services and its significance in raising customer satisfaction level. A comparative study of
public and private sectors help in understanding the customer perception, satisfaction and
awareness on various life insurance services.
praveen kumar tripathi (2008), in his summer training project report titled
customer buying behavior with a focus on market segmentation conduct a research based
study on buying pattern in the insurance industry with a special focus on hdfc standard life
insurance. The various segments of the markets divided in terms of insurance needs, age
groups, satisfaction levels etc were taken into account to know the customer perception and
expectation from private insurers.

Athma. P and kumar. R (2007) in the research paper titled an explorative study of
life insurance purchase decision making: influence of product and non-product factors". The
empirical based study conducted on 200 sample size comprising of both rural and urban
market. The various product and non-product related factors have been identified and their
impact on life insurance purchase decision-making has been analyzed. Based on the survey
analysis; urban market is more influenced with product based factors like risk coverage, tax
benefits, return etc. Whereas rural population is influenced with non-product related factors
such as: credibility of agent, companys reputation, trust, customer services. Company
goodwill and money back guarantee attracts many people for life insurance.
The paper examines the level of awareness of the importance Life Insurance policy
among the Nigerian students using students of Lagos State University, Ojo-Lagos, in the
South-West part Nigeria as our case study. This University was better known in the mid
nineties for incessant Cult clashes right in the University campus, which resulted to unwanted
deaths and maiming of innocent Students and Staff alike. We discovered that lost their lives ,
lost entirely because most of them were not insured. It was discovered through the simple
descriptive survey adopted for this study, that most students are actually aware of the
significance of Life Insurance policy especially the financial benefits one can derive in case
of unexpected death of their parents but they are handicapped of possessing the policy
because they cannot afford to buy one. The survey revealed that 71 percentages see taking
LifeInsurance necessary, 22 percentage see taking Life Insurance Compulsory, while 7
percentage did not see to why someone should considered taking Life Insurance. The study
also found that taking care of Childrens future took approximately 67 percentage as main
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goal for the University Students taking Life Insurance in the future. Whereas 20 percentage
perceived Wealth creation as the reason of taking Life Insurance policy after graduating from
the University, while other reasons took 13 percentage. Conclusively, it is suggested that the
various stakeholders should make extra effort to let people know the importance of having
Life Insurance at the early stage. University Students are most potential group because most
of them are ready to buy this policy after they have graduated from the University.
Association of British Insurers (2005) conducted one of the most extensive surveys
ever on customers perceptions in late 2005. This survey consists of nearly 9,000 customers
of 13 insurance companies. The Customer Impact Index has been constructed to measure the
issues that matter most to customers. This includes customers views on the quality of
products, the image of the insurer, the effectiveness of processes and the quality of service.
The Index is far more than a simple measure of customer satisfaction and an authoritative
guide to how well the companies serve their customers. The Customer Impact Index scores
indicate the solid performance against challenging customer expectations. The Customer
Impact Survey measure how well companies were delivering on each of those Commitments.
They found that companies also need to provide excellent service after the point of sale,
working with advisers appropriately. In addition, customers tend to regard their own company
more highly than the industry as a whole. This survey concludes at customers are less
positive about the return they get on their investment than they are about service.
The Insurance Institute of India (1987) prepared a project report on performance of
life insurance. This project was undertaken to examine the awareness attitudes and beliefs of
people on life insurance and LIC. The important conclusions arrived at from the study are life
insurance agents do not maintain regular contacts with the policy holders. But most of them
are available whenever they are called and most of the policy holders have brought security
to the family and one seventh of the insured policy holders are not sure of the benefits under
the life insurance.

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