1 INSURANCE

1.1 INTRODUCTION

Everyone is exposed to various risks. Future is very uncertain, but there is way to protect
one’s family and make one’s children’s future safe. Life Insurance companies help us to
ensure that our family’s future is not just secure but also prosperous.

Life Insurance is particularly important if you are the sole breadwinner for your family. The
loss of you and your income could devastate your family. Life insurance will ensure that if
anything happens to you, your loved ones will be able to manage financially.

This study titled “Study of Consumers Perception about Life Insurance Policies” enables the
Life Insurance Companies to understand how consumer’s perception differs from person to
person. How a consumer selects, organizes and interprets the service quality and the product
quality of different Life Insurance Policies, offered by various Life Insurance Companies.

Insurance is a tool by which fatalities of a small number are compensated out of funds
(premium payment) collected from plenteous. Insurance companies pay back for financial
losses arising out of occurrence of insured events e.g. in personal accident policy death due to
accident, in fire policy the insured events are fire and other allied perils like riot and strike,
explosion etc. hence insurance safeguard against uncertainties.

It provides financial recompense for losses suffered due to incident of unanticipated events,
insured with in policy of insurance. Moreover, through a number of acts of parliament,
specific types of insurance are legally enforced in our country e.g. third party insurance under
motor vehicles Act, public liability insurance for handlers of hazardous substances under
environment protection Act. Etc.

1.2 WHAT IS INSURANCE?

It is a commonly acknowledged phenomenon that there are countless risks in every sphere of
life .for property, there are fire risk; for shipment of goods. There are perils of sea; for human
life there are risk of death or disability; and so on .the chances of Occurrences of the events
causing losses are quite uncertain because these may or may not take place. Therefore, with
this view in mind, people facing common risks come together and make their small
contribution to the common fund. While it may not be possible to tell in advance, which
person will suffer the losses, it is possible to work out how many persons on an average out
of the group, may suffer losses. When risk occurs, the loss is made good out of the common
fund .in this way each and every one shares the risk .in fact they share the loss by payment of
premium, which is calculated on the likelihood of loss .in olden time, the contribution make
the above-stated notion of insurance.

1.3 DEFINITION OF INSURANCE

Insurance has been defined to be that in, which a sum of money as a premium is paid by the insured in
consideration of the insurer’s bearings the risk of paying a large sum upon a given contingency. The
insurance thus is a contract whereby:

a) Certain sum, termed as premium, is charged in consideration.

b) Against the said consideration, a large amount is guaranteed to be paid by the insurer who
received the premium.

c) The compensation will be made in certain definite sum, i.e., the loss or the policy amount
which ever may be and

d) The payment is made only upon a contingency.

More specifically, insurance may be defined as a contact between two parties, wherein one party (the
insurer) agrees to pay to the other party (the insured) or the beneficiary, a certain sum upon a given
contingency (the risk) against which insurance is required.

1.4 TYPES OF INSURANCE

Insurance occupies an important place in the modern world because of the risk, which can be
insured, in number and extent owing to the growing complexity of present day economic
system. The different type of insurance have come about by practice within insurance
companies, and by the influence of legislation controlling the transacting of insurance
business, broadly, insurance may be classified into the following categories:

1. Classification from business point of view

a) Life insurance, and

b) General insurance

2. Classification on the basis of nature of insurance

a) Life insurance

b) Fire insurance
 c) Marine insurance

d) Social insurance, and

e) Miscellaneous insurance

3. Classification from risk point of view

a) Personal insurance

b) Property insurance

c) Liability insurance

d) Fidelity general insurance

1.5 THE IMPORTANCE OF INSURANCE

Insurance benefits society by allowing individuals to share the risks faced by many people.
But it also serves many other important economic and societal functions. Because insurance
is available and affordable, banks can make loans with the assurance that the loan’s collateral
(property that can be taken as payment if a loan goes unpaid) is covered against damage. This
increased availability of credit helps people buy homes and cars.

Insurance also provides the capital that communities need to quickly rebuild and recover
economically from natural disasters, such as tornadoes or hurricanes. Insurance itself has
become a significant economic force in most industrialized countries. Employers buy
insurance to cover their employees against work-related injuries and health problems.
Businesses also insure their property, including technology used in production, against
damage and theft. Because it makes business operations safer, insurance encourages
businesses to make economic transactions, which benefits the economies of countries. In
addition, millions of people work for insurance companies and related businesses. In 1996
more than 2.4 million people worked in the insurance industry in the United States and
Canada. Insurance as an investment that offers a lot more in terms of returns, risk cover & as
also that tax concessions & added bonuses not all effects of insurance are positive ones. The
possibility of earning insurance payments motivates some people to attempt to cause damage
or losses. Without the possibility of collecting insurance benefits, for instance, no one would
think of arson, the willful destruction of property by fire, as a potential source of money.

1.6 THE INSURANCE INDUSTRY TODAY

Since the 1970s, the insurance business has grown dramatically and undergone tremendous
changes. As a result of the deregulation of financial services businesses— including
insurance, banking, and securities trading—the roles, products, and services of these formerly
distinct businesses have become blurred. For instance, citizens in the U.S. state of California
voted in 1988 to allow banks to sell insurance in that state. In Canada, banks may also soon
be allowed to sell insurance.

Advances in communications technology have also allowed traditionally distinct financial

businesses to keep instantaneous track of developments in other businesses and compete for
some of the same customers. Some insurance companies now offer deposit accounts and
mortgages. In the United States, life insurance companies now sell more pension plans and
other asset management services than they do conventional life insurance.

Developments in computer technology that have given insurance providers the ability to
quickly access and process information have allowed them to custom-design policies to fit
the needs of individual customers. But the increasing complexity of policies has also made
some aspects of buying and selling insurance more difficult.

In addition, improvements in geological and meteorological technology have the potential to

change the way property insurers calculate risks of damage. For example, as scientists
improve their abilities to predict severe weather patterns, such as hurricanes, and geological
disturbances, such as earthquakes, insurers may change how they provide protection against
losses from such events

1.7 EVOLUTION OF INSURANCE IN INDIA

The marine insurance is the oldest form of insurance. If we trace Indian history there are
evidence that marine insurance was practiced here about three thousand years ago. The code
of Manu indicates that there was the practice of marine insurance carried out by the traders in
India with those of Srilanka, Egypt and Greece .it is wonderful to see that Indians had even
anticipated the doctrine of average and contribution. Fright was fixed according to season and
was then very much at the mercy of the wind and other elements. Travelers by sea and land
were very much exposed to the risk of losing their vessels and merchandise because of piracy
on open seas and highway robbery of caravans was very common. The practice of insurance
was very common during the rule of Akbar to Aurangzeb, but the nature and coverage of the
insurance in this period is not well known. It was the British insurer who introduced general
insurance in India in the modern form. The Britishers opened general insurance in India
around the year 1700 .the first company known as the sun insurance office was set up in
Calcutta in the year 1710.

This was followed by several insurance companies like London assurance and royal exchange
assurance (1720), Phoenix Assurance Company (1782). Etc. General insurance business in
the country was nationalized with effect from 1st January 1973 by the General Insurance
Business (Nationalization) Act, 1972. More than 100 non-life insurance companies including
branches of foreign companies operating within the country were amalgamated and grouped
into four companies, viz., the National Insurance Company Ltd., the New India Assurance
Company Ltd., the Oriental Insurance Company Ltd., and the United India Insurance
Company Ltd. with head offices at Calcutta, Bombay, New Delhi and Madras, respectively.

Life insurance in the current form came in India from united kingdom with the establishment
of a British firm, oriental life assurance company in 1818 followed by Bombay life assurance
company in 1823, the madras equitable life insurance society in 1829 and oriental life
assurance company in 1874.prior to 1871, Indian lives were treated as sub standard and
charged an extra premium of 15% to 20%. Bombay mutual life assurance society, an Indian
insurer that came in to existence in 1871, was the first to cover Indian lives at normal rates.
The Indian insurance company Act 1923 was enacted inter alia, to enable the government to
collect statistical information about life and nonlife insurance business transacted in India by
Indian and foreign insurer, including the provident insurance societies.

The first half of the 20th century marked by two world war, the adverse affects of the World
War I and World War II on the economy of India, and in between them the period of world
wide economic crises triggered by the Great depression. The first half of the 20th century was
also marked by struggles for India’s independence. The aggregate effect of these events led to
a high rate of bankruptcies and liquidation of life insurance companies in India. This had
adversely affected the faith of the general public in the utility of obtaining life cover

In this background, the Parliament of India passed the Life Insurance of India Act on 19th
June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956,
by consolidating the life insurance business of 245 private life insurers and other entities
offering life insurance services.
Since 1972, the insurance sector has been totally under the control of government of India
through LIC and GIC and its subsidiaries. As a result, revenue of both of them increased in
the last years .the amount of savings pooled by LIC increased from Rs.2704 crores in 1974 to
Rs .57670 in 1994 with an annual growth rate of 16.53%. similarly premium underwritten by
GIC rose from 280 crores in 193 to 7647 crores in 1998 showing an annual growth rate of
25.18%.

Despite increase in premium collected by both LIC and GIC their were inefficiency and red
tapeisum creeped in to the insurance sector. Apart from that a major policy shift by the
Narasimha Rau government during 1990’s.the Indian economy opened for foreign
competition .In this background The government of India in 1993 had set-up a high powered
committee by R.N Malhothra ,former governor reserve bank of India, to examine the
structure of Indian insurance sector and recommended changes to make it more efficient and
competitive keeping in view structural changes in other part of the financial system of the
country.

Insurance sector has been opened up for competition from Indian private insurance
companies with the enactment of Insurance Regulatory and Development Authority Act,
1999 (IRDA Act). As per the provisions of IRDA Act, 1999, Insurance Regulatory and
Development Authority (IRDA) was established on 19th April 2000 to protect the interests of
holder of insurance policy and to regulate, promote and ensure orderly growth of the
insurance industry. IRDA Act 1999 paved the way for the entry of private players into the
insurance market, which was hitherto the exclusive privilege of public sector insurance
companies/ corporations.

1.8 EVOLUTION OF INSURANCE ORGANIZATION

With a view to serve the society, the insurance organizations have been developed in
different forms with innovation of insurance practice for social welfare and development;
some of these forms are outlined here.

a) Self-insurance

The arrangement in which an individual or concern sets up a private fund to meet the future
risk. If some losses happened in the future the firm meets the loss out of the fund. While it
may be called ‘self insurance’ it is not a single matter of fact, insurance at all because there is
no hedge, no shifting, or distributing the burden of risk among larger Persons. It is merely a
provision to meeting the unforeseen event. Here the insured become the insurer for the
particular risk. But it can be effectively worked only when there is wide distribution of risks
subjected the same hazard.

b) Partnership

A partnership firm may also carry on the insurance business for the sake of profit. Since it is
not an entity distinct from the persons comprising it, the personal liability of partners in
respect to the partnership debts is unlimited. In case of huge loss the partners may have to pay
from their own personal funds and it will not be profitable to them to starts insurance
business .in the early period before the advent of joint stock companies many insurance
undertakings were partnership firms or unincorporated companies

c) Joint stock companies

The joint stock companies are those, which are organized by the shareholders who subscribe
the necessary capital to start the business. These are formed for earning profits for the
stockholders who are the real owners of the companies. The management of a company is
entrusted to a board of directors who is elected by the shareholders from amongst themselves.
The company can operate insurance business and policyholders have nothing to do with the
management of the concern. But in life insurance it is the practice to share certain portion of
profit among the certain policyholders.

d) Mutual fund companies

The mutual fund companies are co- operative association formed for the purpose of effecting
insurance on the property of its members. The policyholders are themselves the shareholders
of the companies each member is insured as well as insured.

They have power to participate in management and in the profit sharing to the full extent.
Whenever the income is more than the expenses and claims, it is accumulated I the form of
saving and is entitled in reducing the rate of premium. Since the insured are insurers also,
they always try to reduce the management expenses and to keep the business at sound level.
e) Co-operative insurance organizations

Cooperative insurance organizations are those concerns, which are incorporated and
registered under Indian cooperative societies Act. The concerns are also called ‘co operative
insurance societies’ these societies like mutual fund companies are non profit organization
.the aim is to provide insurance protection to its members at the lowest reasonable net cost
.the Indian insurance Act. 1938, has provided special provisions for the co-operative
insurance societies, but after nationalization the societies have ceased to exist.

f) Lloyd’s Association

Lloyd’s association is one of the greatest insurance institutions in the world. Taking its name
from the coffee house Lloyd where underwriters assembled to transact business and pick-up
news. The organization traces its origins to the latter part of the seventeenth century .so it is
the oldest insurance organization in existing form in the world. In 1871,Lloyds Act was
passed incorporating the members of the association into a single corporate body with
perpetual succession and a corporate seal .the powers of Lloyds corporation were extended
from the business of marine insurance to the other insurance and guarantee business. The
Lloyds Association also publishes, Lloyds list and register of shipping for the information of
insuring public and the insurers

g) State Insurance

The government of a nation, some times, owns the insurance and runs the business for the
benefit of the public. The sate insurance is defined as that insurance which is under public
sector. In Brazil, Japan and Mexico, the insurance are largely nationalized. Previously, the
state undertook only those insurances, which were regarded as vital for the national interest.

1.9 INSURANCE SECTOR REFORMS

Having looked at the insurance sector, the efforts made by the government to make the
industry more dynamic and customer friendly. To begin with, the Malhotra committee was
set up with the objective of suggesting changes that would achieve the much required
dynamism.

The Mallhotra Committee Report:

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R. N.
Malhotra, was formed to evaluate the Indian insurance industry and recommend its future
direction. In 1994, the committee submitted the report and gave the following
recommendations:

Structure

• Government stake in the insurance Companies to be brought down to 50%

• Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act as independent corporations

• All the insurance companies should be given greater freedom to operate

Competitions.

• Private Companies with a minimum paid up capital of Rs.1bn should be allowed to

enter the industry

• No Company should deal in both Life and General Insurance through a single entity

• Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies.

• Postal Life Insurance should be allowed to operate in the rural market.

• Only one State Level Life Insurance Company should be allowed to operate in each
stat

Regulatory Body

• The Insurance Act should be changed.

• An Insurance Regulatory body should be set up.

• Controller of Insurance (Currently a part from the Finance Ministry)

Investments

• Mandatory Investments of LIC Life Fund in government securities to be reduced from

75% to 50%.

• GIC and its subsidiaries are not to hold more than 5% in any company (There current
Holdings to be brought down to this level over a period of time).

Customer Service

• LIC should pay interest on delays in payments beyond 30 days.

• Insurance companies must be encouraged to set up unit linked pension plans.

• Computerization of operations and updating of technology to be carried out in the

insurance industry.

• Overall, the committee strongly felt that in order to improve the customer services and
increase the coverage of the insurance industry should be opened up to competition.

• But at the same time, the committee felt the need to exercise caution as any failure on
the part of new players could ruin the public confidence in the industry

Few Life Insurance policies are:

Whole life policies - Cover the insured for life. The insured does not receive money while he
is alive; the nominee receives the sum assured plus bonus upon death of the insured.
Endowment policies - Cover the insured for a specific period. The insured receives money on
survival of the term and is not covered thereafter.

Money back policies - The nominee receives money immediately on death of the insured. On
survival the insured receives money at regular intervals during the term.

These policies cost more than endowment with profit policies. Annuities / Children's policies
- The nominee receives a guaranteed amount of money at a pre-determined time and not
immediately on death of the insured. On survival the insured receives money at the same pre-
determined time. These policies are best suited for planning children's future education and
marriage costs.

Pension schemes - are policies that provide benefits to the insured only upon retirement. If
the insured dies during the term of the policy, his nominee would receive the benefits either
as a lump sum or as a pension every month. Since a single policy cannot meet all the
insurance objectives, one should have a portfolio of policies covering all the needs

BACKGROUND OF THE STUDY

“Life Insurance is a contract for payment of a sum of money to the person assured on the
happening of the event insured against”. Usually the insurance contract provides for the
payment of an amount on the date of maturity or at specified dates at periodic intervals or at
unfortunate death if it occurs earlier. Obviously, there is a price to be paid for this benefit.
Among other things the contracts also provides for the payment of premiums, by the assured.

Life Insurance is universally acknowledged as a tool to eliminate risk, substitute certainty for
uncertainty and ensure timely aid for the family in the unfortunate event of the death of the
breadwinner. In other words, it is the civilized world’s partial solution to the problems caused
by death. Life insurance helps in two ways dealing with premature death, which leaves
dependent families to fend for themselves and old age without visible means of support.

The most common types of life insurance are whole life insurance and term life insurance.
Whole life insurance provides a lifetime of protection as long as you pay the premiums to
keep the policy active. They also accrue a cash value and thus offer a savings component.
Term life insurance provides protection only during the term of the policy and the policies are
usually renewable at the end of the term

There are many Life Insurance Companies like

• LIFE INSURANCE CORPORATION OF INDIA

• BAJAJ ALLIANZ LIFE INSURANCE COMPANY

• ICICI PRUDENTIAL LIFE INSURANCE COMPANY

• HDFC STANDARD LIFE INSURANCE COMPANY

• BIRLA SUN-LIFE INSURANCE COMPANY

• ING VYSYA LIFE INSURANCE COMPANY

• METLIFE INSURANCE COMPANY

• TATA AIG LIFE INSURANCE COMPANY

• MAX NEW YORK LIFE INSURANCE COMPANY