Investment Opportunities in Insurance Sector


By

Ms. Mini Amit Arrawatia
Assistant Professor
Arya Institute of Engineering and Technology
Jaipur
 


INTRODUCTION

Insurance means to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, property and business. It is also referred to as Assurance. The term Assurance is basically the earlier term and was used alike for both life and general insurance. The term insurance was initially used in 1635 in connection with Fire insurance and was quickly adopted as extensively as Assurance. In 1826, it was proposed that the term insurance be used for general insurance and the term assurance restricted for life insurance.

References to practices similar to insurance are found in the ancient Indian texts of Rigveda. Rigveda refers to the concept of "Yogakshema"1 - loosely meaning 'the well being, prosperity and security of people'. Archaeological excavation at the site of Aryan civilization has yielded evidence of a practice similar to insurance, insuring loss of profits in industry.

Insurance is mainly of two types: life insurance and general insurance. General insurance means Fire, Marine and Miscellaneous insurance which includes insurance against burglary or theft, fidelity guarantee, insurance for employer's liability, and insurance of motor vehicles, livestock and crops.

The insurance sector is of considerable importance to every developing economy; it inculcates the savings habit, which in turn generates long-term funds for infrastructure building. The nature of insurance business ensures constant inflow of funds - the payout is staggered and contingency related - thereby making it readily available for investment on infrastructure building.

Insurance is one sector whose contribution to GDP is quite significant. Post independence, the Indian Government nationalized the private life insurance companies with a view to raise funds for the infrastructure developments, which lagged behind pathetically. The scatter of general insurance companies was brought under one umbrella the General Insurance Company in 1972.

INSURANCE IN INDIA

The Insurance sector in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act, 1956, General Insurance Business (Nationalization) Act, 1972, Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related Acts.

The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries. Nationalization however brought with it the public sector bureaucracies, cumbersome procedures and inefficiencies but still these nationalized companies managed to have millions of policyholders.

History of Insurance in India

The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. Some of the important milestones in the life insurance business in India are:

1818: Oriental Life Insurance Company, the first life insurance company on Indian soil started functioning.

1870 : Bombay Mutual Life Assurance Society, the first Indian life insurance company started its business.

1912:   The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.

1938:   Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.

1956 :  245 Indian & foreign insurers and provident societies taken over by the central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British.

Some of the important milestones in the general insurance business in India are:

1907: The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business.

1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.

1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.

1972: The General Insurance Business (Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973. 107 insurers 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. GIC incorporated as a company.

OBJECTIVE OF INSURANCE COMPANIES

1) Social objective- The core objective of insurance company is social commitment, to provide maximum risk coverage to the investor.

2) Spread Insurance and provide risk coverage Another objective is to spread insurance whether life or non-life to each and every corner of the country especially rural areas, to socially and economically backward classes and provide them reasonably priced financial cover against risk.

3) Encourage savings Other objectives include encouraging people to save for the future by making insurance linked savings more attractive and secure.

4) Nation building The funds created are then utilized and invested for nation building.

ADVANTAGES OF INSURANCE OVER OTHER SAVINGS

1) Protection: Savings through insurance guarantee full protection against risk. In case of demise, life insurance assures payment of the entire amount assured (with bonus wherever applicable) whereas in other savings schemes, only the amount saved (with interest is payable).

2) Aid to savings: Life insurance encourages savings. It allows long term savings since payments can be made effortlessly because of the easy instalment facility. Premium can be paid either monthly, quarterly, half yearly or yearly.

3) Liquidity: In case of insurance, it is easy to acquire loan on the security of any policy that has acquired loan value.

4) Tax Relief: Life insurance is the best way to enjoy tax deductions on income tax. This is available for amounts paid by way of premium for life insurance.

5) Money when you need it: An investor can meet its certain monetary needs, which may arise from time to time, by investing in a combination of different plans. Expenses like children's education, marriage or even periodical needs of cash over a stretch of time can be less stressful with the help of these policies.

 

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Source: E-mail November 13, 2010

          

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