What is Insurance?

An insurance contract provides risk coverage to the insuree. A purchaser of insurance pays a
fixed premium in exchange for a promise of compensation in the event of some specified loss.
Insurance is bought because it gives peace of mind to the holders. This comfort level is
important in personal and business life. Though, the primary purpose of insurance is to provide
risk coverage, when the contract period extends over a long time, as in the case of life insurance,
premium payments comprise of two components – one for buying risk coverage and the
other towards savings. This bundling together of risk coverage and savings is peculiar to life
insurance and is more common in developing countries like India. In the industrially advanced
countries, this is not necessarily so and short duration life insurance contracts without a saving
components are equally popular. In the developing economies because of the savings component
and the long nature of the contract, life insurance has become an important instrument of
mobilising long-term funds. The savings component puts the life insurance in direct competition
with other financial institutions and savings instruments.

India Insurance Policies at a Glance

Indian insurance companies offer a comprehensive range of insurance plans, a range that is
growing as the economy matures and the wealth of the middle classes increases. The most
common types include: term life policies, endowment policies, joint life policies, whole life
policies, loan cover term assurance policies, unit-linked insurance plans, group insurance
policies, pension plans, and annuities. General insurance plans are also available to cover motor
insurance, home insurance, travel insurance and health insurance.

Due to the growing demand for insurance, more and more insurance companies are now
emerging in the Indian insurance sector. With the opening up of the economy, several
international leaders in the insurance sector are trying to venture into the India insurance
industry.
Regulations:
The following ten Regulations notified in the Gazette of India on 14th July, 2000:

1. Appointed Actuary : IRDA (Qualification of Actuary) Regulations, January 2004     

2. Actuarial Report and Abstract

3. Assets, Liabilities, and Solvency Margin of Insurers

4. Licensing of Insurance Agents : IRDA(Licensing Of Insurance Agents ) (Amendment)

Regulations, 2002

5. General Insurance - Reinsurance    

6. Registration of Indian Insurance Companies:

IRDA(Registration of Indian Insurance Companies) (Amendment) Regulations, 2003

IRDA(Registration of Indian Insurance Companies) (Second Amendment) Regulations, 2008

7. Insurance Advertisement and Disclosure

8. Obligations of Insurers to Rural Social Sectors:

IRDA(Obligations of Insurers to Rural Social Sectors) (Amendment) Regulations, July 2004.

IRDA(Obligations of insurer's to Rural or Social Sector)(Fourth Amendment) Regulations'2008

IRDA(Obligations of insurer's to Rural or Social Sector)(Third Amendment) Regulations'2008

9. The IRDA (Meetings)

10. The Insurance Advisory Committee (Meetings)

Indian Insurance: Sector Reform
The formation of the Malhotra Committee in 1993 initiated reforms in the Indian insurance
sector. The aim of the Malhotra Committee was to assess the functionality of the Indian
insurance sector. This committee was also in charge of recommending the future path of
insurance in India. The Malhotra Committee attempted to improve various aspects of the
insurance sector, making them more appropriate and effective for the Indian market.

The recommendations of the committee put stress on offering operational autonomy to the
insurance service providers and also suggested forming an independent regulatory body.

The Insurance Regulatory and Development Authority Act of 1999 brought about several crucial
policy changes in the insurance sector of India. It led to the formation of the Insurance
Regulatory and Development Authority (IRDA) in 2000. The goals of the IRDA are to safeguard
the interests of insurance policyholders, as well as to initiate different policy measures to help
sustain growth in the Indian insurance sector.

The Authority has notified 27 Regulations on various issues which include Registration of
Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers
to Rural and Social sector, Investment and Accounting Procedure, Protection of policy holders'
interest etc. Applications were invited by the Authority with effect from 15th August, 2000 for
issue of the Certificate of Registration to both life and non-life insurers. The Authority has its
Head Quarter at Hyderabad.
The Insurance Laws (Amendment) Bill, 2008
The Insurance Laws (Amendment) Bill, 2008 was introduced on Dec 22, 2008 in the Rajya
Sabha. The Bill was referred to the Standing Committee on Finance (Chairperson: Shri Ananth
Kumar), which is scheduled to submit its report by the first day of the next session.

The Bill amends three Acts: the Insurance Act, 1938; the General Insurance Business
(Nationalisation) Act, 1972; and the Insurance Regulatory and Development Authority (IRDA)
Act, 1999. The amendments include raising the maximum limit for foreign equity in Indian
insurance companies, permitting foreign re-insurers to open branches and providing for
permanent registration of the insurers.

The Bill adds, modifies and omits certain definitions in the 1938 Act. It defines “health insurance
business” as a contract that provides for sickness benefits and medical expenses on the basis of
an indemnity, reimbursement, service or prepaid plan. It amends the definition of “actuary” to
bring it in line with definition in the Actuaries Act, 2006.

The Bill increases the maximum permitted limit of foreign equity in Indian insurance companies
from 26% to 49%. The cap of 26% for insurance co-operative societies is not modified.

Every insurer has to be registered in order to carry on insurance business. In order to be

registered, each category of insurer requires a minimum amount of capital:

 Life insurance or general insurance, the minimum paid up capital required is Rs 100
crore;
 Health insurance, the minimum paid up capital required is Rs 50 crore;
 Re-insurance business, the minimum paid up capital required is Rs 200 crore.
A foreign re-insurance business needs to have a minimum of Rs 5000 crore as net owned
funds to be registered under the law.

There is provision for permanent registration of the insurers with annual renewal fee and
right to cancel registration if the insurer violates any conditions specified by IRDA.
The Bill amends the capital structure, voting rights and maintenance of registers of beneficial
owners of shares of public limited companies. It also provides for maintenance of accounts
and balance sheets, conduct of audits and submission of returns and actuarial reports.

The Bill seeks to provide for investment of assets in the prescribed manner. It prohibits any
insurer from investing funds of policy holders outside India.

The Bill seeks to facilitate the entry of Lloyd’s of London in the insurance business in India
as a foreign company in joint venture with Indian partners and also as a branch of foreign re-
insurer.

Every insurer who conducts business of general insurance shall underwrite a specified
percentage of insurance business in third party risks of motor vehicles.

The Act allows the transfer or assignment of life insurance policy in the specified manner.
The Bill amends this provision. It states that an assignment in favour of a person made on
certain conditions is valid provided that a conditional assignee shall not be entitled to obtain
a loan on the policy or surrender a policy.

The Act allows the holder of a policy of life insurance to nominate to whom the policy
money shall be paid in the event of the holder’s death. The Bill makes provision for the
holder to indicate whether a nominee is a “beneficiary nominee” or a “collector nominee”.

A “beneficiary nominee” is entitled to receive the entire proceeds payable under the policy.
A “collector nominee” is any person other than a beneficiary nominee who is liable to pay
benefits arising out of the policy to the beneficiary nominee or legal heirs of the policy
holder.

The Bill makes the insurers responsible for appointing insurance agents and the IRDA for
regulating their eligibility and qualifications.

No life insurance policy shall be questioned on any ground whatsoever after five years from
the date of the policy. The Bill also limits the ground for challenge within the period of five
years.
Bill omits provisions related to Tariff Advisory Committee in view of the detariffing of rates
and premiums.

The Bill empowers the Life Insurance Council and General Insurance Council to frame bye
laws for elections, meetings, and collection of fees from its members.

The Bill enhances penalties for offences such as carrying on business of insurance without
registration or not complying with the obligation toward rural and social sector and third
party insurance of motor vehicles.

The IRDA shall appoint an adjudicating officer (minimum rank of Joint Director) for holding
an inquiry in the prescribed manner. After completion of inquiry, IRDA may impose the
specified penalty after giving an opportunity to the concerned person of being heard. Any
person aggrieved by an order of IRDA may appeal to the Securities Appellate Tribunal.

The Bill provides for crediting sums from penalties to the Consolidated Fund of India It also
allows insurance companies to raise capital through new financial instruments on pattern of
banks.

The Bill amends the General Insurance Business (Nationalisation) Act, 1972 by allowing
nationalised general insurance companies to raise money from the market with the
permission of the central government for increasing their business in the rural and social
sector, meeting solvency margins and any other prescribed purposes.

The Bill amends the Insurance Regulatory and Development Authority Act, 1999 by
including “insurance agents” in the definition of “insurance intermediaries”.

The government was committed to permit 49 per cent and the necessary legislation was
pending before the Parliament. The Insurance Amendment Bill to this effect is pending
before the Parliament since 2008.The present norms restrict overseas firms to invest not more
than 26 per cent in a private-sector insurance company. Even though the government wanted
to reform the insurance sector, it could not do it because of strong opposition from the Left
parties, whose support was crucial for the minority government. The insurance industry feels
 that higher FDI is necessary as all private insurers are now making losses. Most of the
overseas partners have expressed willingness to raise shareholding in their joint ventures.

The Capital Adequacy Standard

The Solvency Standard requires that the statutory fund of a life company has available a
minimum level of capital in excess of Best Estimate Liabilities - the Solvency Requirement - to
provide for the security of the policy owners’ guaranteed entitlements under a range of adverse
conditions.

However, the prudent regulation of the life insurance industry requires that the level of security
offered to policy owners exceed that of a standard which secures solvency. The Capital
Adequacy Standard requires that the statutory fund have available capital sufficient to provide
confidence in the longer term financial strength of the fund. A capitally adequate fund
would have the ability to write new business, in an unfettered manner, with the expectation of
remaining solvent into the future.

The Capital Adequacy Requirement is determined by considering the various risks which could
impact the longer term security of the policy owners’ entitlements, and requiring the provision of
a prudent level of reserve against such risks. These risks, and an assessment of the prudent
provision, are considered in the context of an ongoing operation; a fund open to new business
and meeting policy owner expectations in a competitive market. A statutory fund that meets the
Capital Adequacy Requirement would be considered by the Australian Prudential Regulation
Authority a financially strong fund - however this does not imply an absolute guarantee of
security to policy owners.
At any time, the value of the assets of the statutory fund of a life company must be of an amount
considered sufficient to allow the company to continue to meet, into the future, its:

a) obligations to, and the reasonable expectations of, policy owners referable to the fund;
b) obligations to creditors referable to the fund.
This is referred to as the Capital Adequacy Requirement.

Scenario of Adverse Conditions:

In assessing the Capital Adequacy Requirement of a statutory fund consideration is given to:
 the risks which may affect the value of the liabilities under policies;
 the risks which may affect the value of the assets supporting those liabilities.
The Capital Adequacy Requirement broadly comprises the following components:

The Capital Adequacy Liability:

A calculation of the value of the liabilities under the policies on the basis of assumptions which
are more conservative (anticipate a more adverse experience) than best estimate assumptions.

The Other Liabilities

The value of the liabilities of the statutory fund to other creditors, but excluding subordinated
debt arrangements.

The Resilience Reserve

Mismatching of asset and liability exposures necessitates the provision of a reserve for adverse
movements in the investment markets to the extent they will not be matched by a corresponding
movement in the liabilities.

The Inadmissible Assets Reserve

A reserve against the risks associated with holdings in associated financial entities; and
concentrated asset exposures.

The New Business Reserve

Provision for planned new business over a prescribed future period of three years, with the
intention of securing the continued solvency of the fund over that period.
The Capital Adequacy Requirement must provide for a value of the liabilities of the statutory
fund in respect of obligations to policy owners and creditors, on a basis more conservative than
best estimate.
The Capital Adequacy Requirement, in considering scenarios of adverse experience, must
provide for risks associated with both the valuation of the policy liabilities and the valuation of
the assets.

CAPITAL ADEQUACY ASSUMPTIONS:

QUANTITATIVE RANGE FOR
BASE TO WHICH MARGIN APPLIED
MARGIN
Service Exps See Note-1 2.5% 20%
Investment Earnings Best Estimate 40 basis points 300 basis points
Assumption
Insured lives Best Estimate 10% 40%
Assumption
Annuitants Best Estimate
-Base Assumption
-Improvements See Note-2
Age <75 2% 5%
Age >74 1% 2.5%
Total Permanent Best Estimate 20% 50%
Disability Assumption
Disability Income Best Estimate 40% 80%
-Active lives Assumption
Disabled lives Best Estimate 20% 35%
-Claims in payment Liability
Trauma Best Estimate 30% 60%
Assumption
Other Insured Events Best Estimate 30% 60%
Assumption
Voluntary Best Estimate 25% 100%
Discontinuance Assumption
Options Best Estimate 10% 40%
Assumption
Investment-Linked Capital Adequacy 0.5% 2.5%
Risks Liability – See Note
3
Notes:

(1) In determining the Capital Adequacy Assumption for Servicing Expenses, the margin is to be
applied to the greater of the unit costs required to cover:
  The actual cost of servicing each policy in the twelve months prior to the valuation date,
appropriately adjusted for one-off expenses; and

 he expected costs, on Best Estimate Assumptions, of servicing each policy in the twelve
months subsequent to the valuation date.

(2) The allowance for annuitant mortality improvements is applied as a percentage per annum
improvement in the Capital Adequacy Assumption used in the first year.

(3) This is the Capital Adequacy Liability as determined immediately prior to the inclusion of the
margin for investment-linked risks.

Risk Coverage
Insurance policies decide what they will cover and what they won't through two different
approaches: "all-risk" or "named peril."

With "named peril coverage," only damages that are mentioned in the policy are covered. So if,
for example, your policy says it will cover you for fire and theft and a construction boom knocks
out your window, the insurance company will not help pay to fix your window because damage
from construction was not specifically mentioned in your policy.

With "all-risk coverage" anything that happens to your house is covered, unless it is specifically
excluded in your policy. So if something happens that no one ever thought of, like an escaped
circus elephant destroying your living room, you will be covered.

All insurance policies will exclude floods, earthquakes and nuclear war. But, if you live in an
area that gets earthquakes and floods you should probably buy special flood or earthquake
insurance.

Builders Risk Coverage:

An insurance policy that covers residential and commercial structures while they are under
construction or being remodeled or renovated. Covered building components include
foundations, fixtures, machinery, equipment used to service the building, building materials and
supplies, and debris removal in the event of a loss.

The policy may not include land, landscaping, satellites or antennas, construction materials
in transit, scaffolding, construction trailers, theft of materials from the job site and signs that are
not attached to the building. It may be possible to obtain additional coverage for things not
included in the standard policy.

Network Risk Coverage:

It covers various types of network losses:

 Business Interruption Caused by Loss of Network:

This coverage will cover losses of income and extra expenses caused by a network
outage. Make sure the policy includes coverage for point of service attacks, physical
network damage, hacker attacks and, most importantly, employee attacks or malicious
insider attacks.

 Digital Data Protection:

This coverage will cover the costs and damages incurred by the loss of physical data or
information caused by network outage.

 Compliance Cost Coverage:

When a network outage occurs or a malicious attack puts private information in your
database at risk, several federal and state laws require notification to customers and
others affected by the potential security breach. This notification can be expensive. The
policy covers the costs associated with such compliance.

 Cyber Crimes Coverage:

You will want coverage for specific intentional acts such as cyber terrorism or extortion.
  Third Party Lawsuits:

If your network fails and causes damage to a third-party for whatever reason, and that
party sue your business, your network risk policy should cover these losses and provide
for a defense.

High Risk Life Insurance Coverage:

High risk life insurance coverage is helping people to shield your loved ones, business
partners, and others in the event of your premature death. In dealing with underwriting, you
will be generally underwritten and designated a rate based on your present health class.
However, frequently the individual seeking life insurance coverage could possibly be linked
to activities that underwriters would consider as high risk.

Usually, it is possible to insure many more risks if sufficient expense is incurred. This is
called high risk, or substandard life insurance coverage. Folks who take part in types of high-
risk activities, be it for work or for entertainment, can obtain life insurance provided they are
willing to incur the higher premium costs.

Reference:
www.thehindubusinessline.com

www.irda.gov.in

www.ibef.org

www.economywatch.com