Globally, the history of general insurance can be traced back to the early civilization. As the incidence of losses increased with the advancement of civilization, slowly the idea and concept of loss pooling and loss sharing started taking roots. Historical facts show that the Aryans through their cooperatives practiced the loss of profits insurances. The Mediterranean merchants also practised insurances from as early as the 4th century BC through the issue of bottomry bonds, which is an advance of money in a ship during the period of voyage, repayable on the arrival of the ship. The Code of Manu also indicates the practice of marine insurance by Indian with their counter parts in SriLanka, Egypt and Greece. Marine insurance is the oldest type of insurance originating in England, as early as in the 12th century. The earliest transaction of insurance as practised today can be traced back to the 14th century AD in Italy. General insurance as a whole, developed with the industrial revolution in the West and with the consequent growth of seafaring trade and commerce in the seventh century. In India too, evidence of insurance in some form can be traced as early as from the Aryan period. The British and some of the other foreign insurance companies through their agencies transacted insurance business in India. The first general insurance company in India was the Triton Insurance company Ltd., established in Calcutta in 1850 AD, with the British holding major share. The first general insurance company by Indian promoters was the Indian Mercantile Insurance company Ltd. started in Bombay in 1906-07. Following the First World War, several foreign insurance companies started insurance business in India, capturing about 40 percent of the insurance market in India at the time of Independence.
Insurance business in India is governed by the Insurance Act of 1938, which was amended later in 1969. However, in 1971, the government by an ordinance nationalized the general insurance business, under the General insurance Nationalization Act, 1972 to ensure orderly and healthy growth of the business. The then existing 107 companies were brought under the aegis of General Insurance Corporation (GIC) of India. The GIC was thus entrusted with the responsibility of superintending, controlling, and ensuring smooth and healthy conduct of the general insurance business in India along with its four subsidiaries in all the zones in India.
THE INSURANCE MARKET IN INDIA
A contract of insurance can be defined as a contract whereby one person, called the ‘insurer’ undertakes in return for a consideration, called the ‘premium’, to pay to another person called ‘assured’, a sum of money or its equivalent on the happening of a specified event. The happening of the specified event must involve some loss to the assured or at least should expose him to adversity, which in insurance parlance is called ‘risk’. The underlying concept of insurance is to transfer the loss suffered by an individual to a willing and capable professional.
Providers The Insurance market comprises the insurers, the buyers, and the intermediaries who mediate between the two parties and are rewarded for their efforts by the insurer. The insurance market in India hitherto consisted of the General Insurance Corporation of India (GIC) and its four subsidiaries namely: National Insurance Co. Ltd. with Head Office in Kolkata. United India Insurance Co. Ltd. with Head Office in Chennai. The New India Assurance Co. Ltd. with Head Office in Mumbai. The Oriental Insurance Co. Ltd. with Head Office in New Delhi The GIC was formed on 1st January, 1973, under the Insurance Act, 1938 in accordance with the provisions of the General Insurance Business (Nationalization) Act, 1972. All the existing companies carrying on general insurance business in India were merged under Section 16 of the Nationalization Act, and notified by the government on 31.12.1972. Thus, from 1.1.1973, the four subsidiaries of GIC as mentioned above started insurance operations.
A brief review of the four public sector companies as subsidiaries of GIC under the nationalization program in chronological order is examined in the following paragraphs. National Insurance Company is one of the four public sector companies. Since its incorporation in the year 1906 headquartered in Kolkata, the company had been carrying out general insurance business under private management until 1972, the year of its nationalisation. In the same year, 21 foreign and 11 Indian Insurance Companies were amalgamated with National Insurance Company Limited, as a subsidiary company of General Insurance Corporation of India. The New India Assurance Company was incorporated on 23rd July, 1919 and commenced business from 14th October, 1919 with head office in Mumbai. In 1972, the year of its nationalisation, Government of India took over the management of the company along with all other non-life insurers in the country. New India Assurance (NIA) was subsequently reconstituted taking over 23 companies under the Scheme of Merger, following the nationalization of General Insurance Business in 1973. United India Insurance Company Limited was incorporated as a Company on 18th February 1938 with its head office in Chennai, with 12 Indian Insurance Companies, 4 Cooperative Insurance Societies and Indian operations of 5 Foreign Insurers, besides General Insurance operations of southern region of Life Insurance Corporation of India were merged with United India Insurance Company Limited. The Oriental Fire & General Insurance Co. Ltd., with its head office in New Delhi was incorporated in the year 1947 as a subsidiary of Oriental Government Security Life Assurance Co. Ltd. In 1956, Oriental became a subsidiary of the Life Insurance.
Corporation of India until 13th May 1971, when the Government of India (GOI) took over the management of all general insurance companies in India. This was followed by the nationalisaton of general insurance business with effect from 1st January 1973 and the Oriental Fire and General insurance company came under the General Insurance Corporation of India as one of the four subsidiaries. It commenced its operations from 1st January 1975. Later on in 2002, with the passage of Insurance amendment Bill (2002), all the four Public sector companies were delinked from GIC and are functioning as independent companies since then. Following convergence of the financial services and financial institutions, the Indian government also initiated reforms based on the recommendations made in the Report of the Malhotra Committee, set up in 1993. As a result, the insurance sector was opened up to private participation to make the sector efficient, vibrant, and competitive. At present, the Insurance Regulatory and Development Authority (IRDA), is the statutory body entrusted with the responsibility of regulation of operations of the insurance companies as well ensuring orderly development and growth of the insurance business in India. The primary concern of the IRDA is the protection of the policyholder’s interest. Following are the Life and General insurance companies operating their business. (Position as of 18th October 2008).
INSURANCE COMPANIES OPERATING IN INDIA
LIFE INSURERS
PUBLIC SECTOR PRIVATE SECTOR
1. Life Insurance Corporation of India (LIC)
1. Bajaj Allianz Life Insurance Co. Ltd.
2. Birla Sun Life Insurance Co. Ltd. (BSLI)
3. HDFC Standard Life Insurance Co. Ltd. (HDFC STD LIFE)
4. ICICI Prudential Life Insurance Co.Ltd. (ICICI PRU)
5. ING Vysa Life Insurance Co.Ltd. (ING VYSYA)
6. Max New York Life Insurance Co. Ltd. (MNYL)
7. MetLife India Insurance Co.Ltd. (METLIFE)
8. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.
9. SBI Life Insurance Co. Ltd. (SBI LIFE)
10. TATA AIG Life Insurance Co. Ltd. (TATA AIG)
11. Reliance Life Insurance Co. Ltd.
12. Aviva Life Insurance Co. Ltd. (AVIVA)
13. Sahara India Life Insurance Co. Ltd. (SAHARA LIFE)
14. Shriram Life Insurance Co. Ltd.
15. Bharti AXA Life Insurance Company Ltd.
16. Future Generali India Life Insurance Company Limited
17. IDBI Fortis Life Insurance Company Ltd.
18. Canara HSBC Oriental Bank of Commerce Life Insurance Company Ltd.
19. AEGON Religare Life Insurance Company
20. DLF Pramerica Life Insurance Co. Ltd.
NON–LIFE INSURERS
PUBLIC SECTOR PRIVATE SECTOR
1. The New India Assurance Co. Ltd
2. National Insurance Co. Ltd.
3. The Oriental Insurance Co. Ltd.
4. United India Insurance Co. Ltd.
5. Export Credit Guarantee Corporation Ltd.
6. Agriculture Insurance Company of India (AIC)
1. Bajaj Allianz General Insurance Co. Ltd. (BAJAJ ALLIANZ)
2. ICICI Lombard General Insurance Co. Ltd. (ICICI LOMBARD)
3. IFFCO Tokio General Insurance Co. Ltd. (IFFCO TOKIO)
4. Reliance General Insurance Co. LTD. (RELIANCE)
5. Royal Sundaram Alliance Insurance Co. Ltd. (ROYAL SANDARAM)
6. TATA AIG General Insurance Co. Ltd. (TATA AIG)
7. Cholamandalam MS General Insurance Co. Ltd. (CHOLAMANDALAM)
8. HDFC ERGO General Insurance Co. Ltd. (HDFC CHUBB)
9. Star Health and Allied Insurance Company Limited
10. Apollo DKV Insurance Company Limited
11. Future Generali India Insurance Company Limited
12. Universal Sompo General Insurance Company Ltd.
13. Shriram General Insurance Company Ltd.
14. Bharti AXA General Insurance Company Ltd
RE-INSURER:
General Insurance Corporation of India (GIC)
BUYERS
The buyers in the insurance market are the general public, traders, exporters, importers, industrial and commercial organizations, clubs, associations, hospitals, schools, etc. The intermediaries are the agents, and now-a-days new channels include brokers, corporate agents and financial institutions like banks (Bancassurance), micro-finance institutions etc. All the intermediaries are to be duly licensed by the Insurance Regulatory and Development Authority (IRDA).
INSURANCE INTERMEDIARIES INSURANCE COMPANIES
Sell their products mainly through the following:
i. Agents (who are the representatives of the Insurer)
ii. ii. Independent Intermediaries (who are the representatives of the Buyer)
iii. iii. Direct Sales including through ‘online’ and ‘Referrals’.
iv.
AGENTS
In Insurance industry the term “Agent” is ordinarily applied to a person engaged by the insurer to procure new business. An Agent can work for one life insurer and/or one non-life insurer and in addition to this, to one ‘exclusive health insurer’. Insurance agents are intermediaries whose activities include soliciting, procuring, and servicing the general insurance market. An agent must fulfill the statutory requirements of his competence prescribed by the regulator and for which he has to pass the stipulated examination to satisfy the regulator after undergoing specified number of hours of training at accredited institutions (online / off-line). Upon the successful completion of the examination, all the agents in the insurance business are given license granted as provided under Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000, as amended upto date. Application for the same are to be made in prescribed form. The contact of agency between the company and agent defines the authority and responsibility and sets forth the agreement of the parties with respect to commissions and other details of the relationship. Agency license can also be granted to cooperative societies, panchayats, corporate entities, and banks. Renewal of license should be done in time by paying the prescribed fees. However, no license can be granted, if the individual suffers from any of the following disqualification: if the person is a minor. if found to be of unsound mind by a competent court. if found guilty of or connived at any fraud, dishonesty or misrepresentation against any insured or insurer.
The appointment of agents is governed by Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations, 2000. The IRDA has prescribed both qualifications and disqualification for a person to be given a licence under section 42 of the Insurance Act. A person must a) Be at least of 18 years of age. b) Have passed at least 12th standard or equivalent examination appointed if he/she resides in a place having a population of five thousand or more as per the last census, or 10th standard otherwise. c) Have undergone a training program of 50 hours in Life or General insurance business or any other pre-recruitment examination recognized by IRDA. (However there are reduction in the required hours based on insurance qualifications, etc. of the applicant for Agency.) d) For a composite agency, a person should have completed 75 hours of training in Life and General insurance business spread over 6 to 8 weeks. An agency licence is usually given for 3 years, which may be either renewed or cancelled later. But before renewal of the licence, it is a prerequisite that the agent should have undergone 25 hours of practical training in Life and General Insurance business or at least 50 hours practical training in subject for a composite agency renewal. The agent is expected to procure a minimum premium amount depending upon the company rules and targets.
The agent is paid commission as remuneration for discharge of all his functions, the commission rates are subject to the guide lines issued from time to time by the IRDA. Corporate Agents The IRDA has also allowed Corporate Agents to act as insurance intermediaries to sell insurance products. As per the Act, a Corporate Agent means any person specified in clause (k) of the Act, and licensed to act as such, while a Composite Corporate Agent means a Corporate Agent who holds a licence to act as an insurance agent for a life insurer and a general insurer.
Qualifications – The corporate agent should ensure that depending upon the nature of the entity, the Partnership Deed, Memorandum of Association or any other document evidencing the constitution of the entity shall contain as one of its main objects soliciting or procuring insurance business as a Corporate Agent. – The corporate insurance executive shall possess the minimum qualification of a pass in 12th Standard or equivalent examination conducted by any recognised Board/Institution, where the applicant resides in a place with a population of five thousand or more as per the last census, and a pass in 10th Standard or equivalent examination from a recognised Board/Institution if the applicant resides in any other place. – Should have completed from an approved institution, at least, fifty hours’ practical training which may be spread over one to two weeks, in either life or general insurance business, as the case may be. – Or shall have completed from an approved institution, at least, seventy five hours’ practical training both in life and general insurance business, where such an applicant is seeking licence for the first time to act as a composite corporate agent.
The applicant seeking the Corporate Agency from the authority or any other corporate insurance executive of the applicant should be a professional as mentioned below: (a) an Associate/Fellow of the Insurance Institute of India, Mumbai; (b) an Associate/Fellow of the Institute of Chartered Accountants of India, New Delhi; (c) an Associate/Fellow of the Institute of Costs and Works Accountants of India, Calcutta; (d) an Associate/Fellow of the Institute of Company Secretaries of India, New Delhi; (e) an Associate/Fellow of the Actuarial Society of India, Mumbai; (f) a Master of Business Administration of any Institution/ University recognised by any State Government or the Central Government; or (g) possessing Certified Associateship of Indian Institute of Bankers (CAIIB); or (h) possessing any professional qualification in marketing from any Institution/ University recognised by any State Government or the Central Government; (i) (from 1.4.2009, it is compulsory that a Broker should have the Designated Person with qualification of AIII / FIII).
Besides individuals, some of the companies are making use of banks, building societies and others as agents to increase the new business volumes. Further, tied agency has also become a popular channel of distribution where in the tied agents are representatives of the company drawing commissions as remuneration. Banks, under the contract of “bancasurrance” which is the strategic alliance between an insurance company and the bank, where in the banks use their resources and client base to augment sales of insurance policies. This arrangement provides mutual benefit to the bank as well as the insurance company and more importantly value addition to the customer, who can derive insurance services also from his bank counter. Independent Intermediaries (Brokers) Brokerage has also become a very popular distribution channel for marketing Life and General insurance business. Also known as Independent financial advisors (IFAs), these advisors have become the popular source of procurement of business in the advanced markets. Brokers canvas the business and place the same with insurers either on standard or negotiated terms. They are also authorized to negotiate with insurers for tailor-made policies to cater to the customer’s specific needs. A broker usually does business with more than one company and in return gets commission. However, he does not charge anything from the client. He is bound by the IRDA Regulations to give best advice to his client and acts on behalf of the advice seekers. Basically, a Broker is the representative of the insurance buyer.
A broker is a through professional who is registered and licensed to offer his professional advice to the clients. IRDA has prescribed guidelines for Brokerage registrations under INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY (INSURANCE BROKERS) REGULATIONS, 2002. An insurance broker is an individual / firm / Company / Co-op. Society who advises policyholders on insurance matters and places business with the insurers. A high standard of professional skill and conduct is expected of a broker. Moreover, if he fails to maintain the required standard he may be liable for damages to his principal. Although brokers are agents of the proposer, they are usually paid by the insurers with whom they place business. In India, there are many licensed brokers who are engaged in procuring business in the domestic markets and also in international exchange of reinsurance business. Besides, these brokers also provide risk management consultancy services. Agency and brokerage systems are most common and contribute maximum share of insurance business in the developing and developed countries.
IRDA REGULATIONS LIMITS ON PAYMENT OF COMMISSION OR BROKERAGE ON GENERAL INSURANCE BUSINESS
The IRDA under Section 14 of the Insurance Regulatory and Development Authority Act, 1999 and in terms of the provisions of Sections 40(1), 40A(3) and Section 42E of the Insurance Act, 1938, has laid down the percentage of premium that can be paid by way of commission or brokerage on a general insurance policy not exceeding the percentages of premiums set out below. The IRDA also specifies that no brokerage can be paid in respect of an insurance where agency commission is payable and likewise, no agency commission can be paid in respect of an insurance where brokerage is payable. The following are the current rates of commission as recommended by IRDA:
AGENCY COMMISSION STRUCTURE
Class of business Agency commission (% of premium) Brokerage commission (% of Premium)
1. Fire, engineering insurances
i. Individuals
ii. Corporate clients (including PSUs) whose paid up capital is: a) Upto Rs.15 crores b) Between Rs.15 crs & 25 crs c) Over Rs.25 crores
iii. Risks qualifying as large risks under para 19(v) of File & Use Guidelines 10% 10% 6.25% 5% 5% 12.5% 12.5% 7.25% 6.25% 6.25%
2. Motor insurance business (other than third party)*,
3. WC/ EL and statutory PL Business 10% 10% 3. Marine Hull insurance 10% 12.5% 4. Marine Cargo business 15% 17.5% 5. All other business 15% 17.5%
Please Note No commission shall be paid on motor third party insurance. Evidence of paid up capital can be taken from the latest Balance Sheet which is in public domain as per the requirements of the Companies Act, 1956. In case of a balance sheet which is 2 years prior to the relevant year of placing insurance, an auditor’s certificate must be produced. In case of sole proprietorship and partnership firms a certificate from a Chartered Accountant to the client should be acceptable. In respect of branches in India of a foreign company reference should be made to the paid up capital of the company in the country in which it is incorporated converting it into Indian Rupees at the current exchange rate on the date of insurance. No payment of any kind, including “administration or servicing charges” is permitted to be made to the agent or the broker in respect of the business in respect of which he is paid agency commission or brokerage. These rates supersede all existing directions on the subject and shall take effect in respect of insurances or renewals commencing on or after 1st January, 2007.
Development Officers (DO) This arrangement is in vogue in Public Sector Insurers, both in Life and Non-Life. This is purely an internal arrangement in organizing the marketing force of an Insurer. They are not covered under any Regulation of IRDA or other Statutes. They are governed by the service conditions of his/her employer only. Functionally, Development officer is a link between the branch manager in an insurance company and the agent. In particular, the Development Officer is a field worker and plays an important role in the promotion of insurance business and in increasing the sales of insurance policies. The development staff procures the General insurance business in India either directly or through agents. The development staff is usually full-time employees of the insurance companies. They are also required to procure the targeted business in the classes of business deemed as non-traditional classes. Some of the main functions or duties of the Development officer as envisaged in the act include: Soliciting, negotiating, procuring, or effectuating an insurance contract or a renewal of an insurance contract Disseminating information relating to coverage or rates Forwarding an insurance application Servicing or delivering an insurance policy or contract.
Inspecting a risk Setting a rate Investigating or assessing a claim Transacting a matter after the effectuation of the contract Representing or assisting an insurer or other person in any other manner in the transaction of insurance with respect to a subject matter of insurance. Some of the other general functions include: assist their agents in matters connected with procurement of new business make various plans for the development of insurance conduct research for the development of insurance business recruit, train, guide, and motivate agents for procuring business develop general insurance business in the area under their jurisdiction make rules for appointment, transfers, and promotions of various cadres of agents arrange training programs for agents review system of accounts from time to time to prepare and issue cover notes and kutcha ( temporary) receipts for the business written.
Thus, the development officer acts as a vital link for the company. The insurance company monitors the activities of these officers through the integrated and monthly reports prepared by them. The reports show the work done by the officer, number of new policies issued, business procured, premium collected and the difficulties faced by them. Inefficient and non-performing officers are given training and motivation to perform better. Direct Sales The direct Sales force (DSA) refers to sales activity procured by the staff of the company itself has become a popular channel of distribution of insurance products now-days. The main advantage in this channel is that commissions need not be paid to the salaried staff. Generally this advantage of the commission savings is passed on to the consumers by way of premium discount by the life insurance companies. Nowadays, sales through internet or online sales is picking up particularly in case of retail insurance of Motor and Health. Payments are made through credit cards / internet banking. Receipts are generated online but the policies are dispatched by the Insurer subsequently. Referrals also contribute to direct sales and this mode is also picking up faster. Referrals provide the database already available with them, such as banks, associations, etc. Referrals are not paid any commission but are compensated by way of fees, whether the individuals referred by the referrals ultimately buy insurance or not.
INSURANCE INTERMEDIARIES IN OVERSEAS MARKETS
The insurance intermediaries in the U.K. comprise part-time agents such as solicitors, accountants, bank managers, building societies, and estate agents who introduce their own clients to an insurance company. It is the brokers, who are full-time specialists, who are regarded as professionals with expert knowledge of insurance. Besides arranging for insurance, these brokers also offer risk management services, such as risk analysis, loss prevention advice, adequate insurance programming and placement of insurance with companies or at Lloyds of London (a corporate of individual underwriters who accept marine insurance business on their own behalf) at best possible rates. These brokers are required to be registered with the Brokers Registration Council (Registration) Act, 1977. The U.S. insurance intermediaries are composed of three categories, such as Independent agents, who represent a number of companies, Exclusive agents, who work for a single company, and the General Agent, who in turn hire and train full-time agents to procure business under his direction and supervision. These General agents are empowered to accept and underwrite risks on behalf of the insurance companies and also issue policies. In Japan, the agents are individuals, partnerships or corporate bodies who procure majority of the insurance business except marine. Marine insurance is sold directly through the staff of the insurance companies (direct distribution). Besides, the usual agents, there are also canvassers who sell monthly payment insurance schemes such as the householders and storekeepers policy, dwelling/ apartment fire insurance policy.
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