Contractual Financial Institutions

Life Insurance companies have been classified as "Contractual Financial Institutions "

Mutuality & Diversification

It is one of the most important ways to reduce risk in financial markets, the other being diversification

Diversification

• The  funds are spread out amount various assets (placing the eggs in different baskets)
• we have funds flowing from one source to many destinations

Mutuality 

• Under Mutuality or Pooling, the funds of various individuals are combined (Placing all eggs in one basket)
• we have funds flowing from many source to one

Level Premium

It is a premium fixed such that it does not increase with age but remains constant throughout the contract  period.

It has 2 components :

• Term or Protection Component

It consists of that portion of premium actually needed to pay the cost of the risk.

• Cash value Element

It is made up of accumulated excess payments of the policy holder. It constitutes the saving component.

Premiums collected in early years of the contract are held in trust by the insurance company for the benefit of its policy holders. The amount  so collected is called a "reserve". An insurance company keeps this reserve to meet the future obligations of the insurer. The excess amount also creates a fund known as the "Life Fund". Life Insurers invest this fund and earn an interest.

Difference between Life Insurance and General Insurance

General  ( Non Life ) Insurance                                                           Life Insurance

Indemnity : It Means the loss which has been                           Life Insurance policies are contracts 

occurred will be compensated to the extent of loss                    of assurance. The principle of 

It is applicable only for non life insurance except personal        Indemnity is not applicable for life 

 accident insurance                                                                        insurance

Uncertainty : In general  insurance contracts, the risk event     In the case of life insurance, there is 

protected against is uncertain                                                      no question whether the event death 

                                                                                                     would occur or not. Death is certain                                                                                                           once a person is born. What is                                                                                                                    uncertain is the time of Death

Increase in probability : The Probability of the                        The probability of death increases       happening of the event does not increase with time.                    with age

Short term : to be renewed every year / occasion                      Long Term : run for 10,20 or more                                                                                                              years

Life Insurance Involves

1. ASSET - a kind of property that yields value or a return
2. Human Life Value (HLV):

• Developed by prof.Hubener
• HLV concept considers human life as  a kind of property or asset that earns an income
• It measures the value of human life based on an individual's  expected Net future earnings. these earnings are capitalized, using an appropriate interest rate to discount them.
• Helps to determinr how much insurance one should have for full protection 
• the amount of insurance should be around 10 to 15 times of one's annual income

     3. Typical concerns faced by ordinary people

• Dying too early
• Living too long
• Living with disability

    

Role of Insurance in society

1. Insurance benefits society economically and socially
2. It also provides employment
3. The  money raised from premium is invested in to the development of infrastructure needs.
4. Removes the fear, worry and anxiety associated with one's future

Govt Sponsored Insurance Schemes

Employees state insurance corporation, Crop Insurance Schemes(RKBY). Rural insurance schemes.

Run by insurer and not supported by Govt schemes

Janata Personal Accident, Jan Arogya

Insurance vs Assurance

Insurance is one of the major forms of risk transfer, and it permits uncertainty to be replaced by certainty through insurance indemnity

Insurance

• Refers to protection against an event that might happen
• Provides cover against a risk

Assurance

• Refers to protection against an event that will  happen 
• covers an event that is definite
• Assurance policies are associated with life cover

Considerations before opting for insurance

• Don't risk a lot for a litte
• Don't risk more than what you can afford to lose
• consider outcomes of the risk carefully

Types of Risk Burden

• Primary Burden of Risk

Consists of  losses that are actually suffered by households as a result of pure risk events. These  losses are often direct & easily measurable.

• Secondary Burden of Risk

Consists  of costs and strians that one has to bear merely from the fact that one is exposed to loss situation. Even if the event does not occur, these burdens have still to  be borne.

Risk Management Techniques:

• Risk Avoidance
• Controlling risk by avoiding a loss situation
• Risk Retention
• Retaining or handling risks on your own known as Self insurance
• Risk retention and control
• Means taking steps to lower the chance of occurence of loss and to reduce severity of its impact if such loss should occur

Loss Prevention  

Measures to reduce chance of occurence

Loss Reduction 

Measures to reduce degree of loss

Risk retention thro Self financing 

           Involves self payment for any losses as they occur

Risk Transfer 

•               Transfer the risk to someone who can handle it
•                Insurance is a risk transfer mechanism

Sterling Insurance Services

Asset

An Asset is a kind of property that yields value or a return

• May be physical 
•  May be  Non -physical 
• May be Personal

Risk

• is a chance of Loss or damage
• is applied to certain assets that can be insured such as man life, house, car etc..
• is doubt concerning the outcome of the situation

Peril 

Cause of loss or damage(eg earthquake,fire etc..)

Pooling

collecting numerous individual contributions (premiums) from various persons. These persons have similar assets which are exposed to similar risks.

Life Insurance

• In 1912, the Life Insurance Companies Act and the Provident Fund Act were passed to regulate the insurance business

• The Life Insurance Companies Act 1912 made it compulsory that premium - rate tables and periodical  valuation of companies be certified by an actuary

• The Insurance Act 1938 was the first legislation enacted to regulate the conduct of insurance companies in India.

• Life Insurance business was nationalized on 1st September 1956 by merging 170 insurance companies and 75  Provident Fund  Societies and Life Insurance corporation of  India (LIC) was formed

• Non-Life Insurance business was nationalized in 1972  by amalgamating 106 insurers, General Insurance corporation of India (GIC) and its 4 subsidiaries was formed.

• Malhotra Committe and IRDA:
• Malhotra Committe - setup in 1993 to explore and recommend changes for development & it submitted the report in 1994
• IRDA - Insurance regulatory and  Development Authority was set up by an IRDA Act 1999as a statutory regulatory body for both life and non life.

• Life Insurance Industry Today:
• Life Insurance corporation of India(LIC) is a public sector company
• There are 23 life insurance companies in the private sector
• The postal department, under the Government of India, also transacts life insurance business via Postal Life Insurance, but is exempt from the purview of the regulator

• Insurance
•  Process of sharing the losses of few by many
• It is a contract between insurance company and the policy holder
• It is a risk transfer  mechanism

Introduction to Insurance

Insurance

 Provides protection against economic losses arising as a result of unforeseen events and serves as an instrument of risk transfer

History of Insurance in India

• It began with marine insurance business
• Modern Insurance in India began in early 1800 or thereabouts

The First Life Insurance Company in India was an English Company 

• The Oriental Life Insurance Co.Ltd

The First Non-Life Insurance Company established  in India

• Triton Insurance co Ltd

The First Life Insurance Company in the world founded in 1706 in London

• Amicable society for a perpetual assurance

The First Indian Insurance Company was formed in 1870 in Mumbai

• Bombay Mutual Assurance Society Ltd

Oldest  Insurance Company in India - National Insurance Company Ltd was founded in 1906 & still in business