Insurance

INSURANCE COMPANIES - Life Insurance

- General Insurance

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MEANING OF INSURANCE Insurance is a contract between two parties whereby one party called insurer undertakes in exchange for a fixed sum called premium, to pay the other party called insured a fixed amount of money on the happening of certain event. Insurance indemnifies assets and income. Every asset (living and non-living) has a value and it generates income to its owner. The income has been created through the expenditure of effort, time and money. 10/19/09

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MEANING OF INSURANCE contd… Every asset has expected lifetime during which it may depreciate and at the end of life period it may not be useful, till then it is expected to function. Some times it may cease to exist or may not be able to function partially or fully before the expected life period due to accidental occurrences like burglary, collisions, earthquakes, fire, flood, theft, etc. These types of possible occurrences are “risks”.

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MEANING OF INSURANCE contd… Future is uncertain, no body knows what is going to happen? It may or may not? Insurance is the concept of risk management – the need to manage uncertainty on account of above stated risks. Insurance is a way of financing these risks either fully of partially. Insurance industry has both economic and social purpose and relevance Insurance business in India can be broadly divided into two categories such as Life Insurance and General Insurance of Non-life insurance. 10/19/09

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Phase

HISTORY OF INSURANCE IN INDIA

Phase I a. Life Insurance b. General Insurance Phase II a.Life Insurance b.General Insurance

Phase III Life Insurance and General Insurance

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Period

Industry

1818 to 1956 Many (245) private sector companies only, (about 138 yrs) competitive market. 1850 to 1972 Many (107) private sector companies only, (about 122 yrs) competitive market. 1956 to 2000 (about 44 yrs)

Nationalization, public sector or State monopoly, only one company.

1972 to 2000 (about 28 yrs)

Nationalization, public sector monopoly, only one company with its four subsidiaries.

After 2000

Opened to the entry of private domestic and foreign companies, mixed sector of public and private sector units, oligopoly of public sector companies (14 life insurance and 12 general insurance companies) 7

HISTORY OF INSURANCE IN INDIA contd.. -1818 First life insurance company “Oriental Life Insurance Company (in Calcutta). - 1850 First general insurance company “Tritan Insurance Company (in Calcutta) - Till 1956/1972 life and general insurance industry grown in terms of number of companies (life 245 and General 107 with complete private sector ownership), the volume of premium, investible resources, and so on. And both type of insurance companies were competitive. - The insurance was regulated through the Insurance Act, 1938. - The picture changed after the Independence. 10/19/09

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HISTORY OF INSURANCE IN INDIA contd.. - In 1956, 245 Indian and Foreign life insurers and provident societies were nationalized, and new single entity namely “LIC” was established by passing the LIC Act, 1956. - Similarly, in 1972, 107 general insurers were nationalized through the passing of General Insurance Business (Nationalisation) Act, 1972. - The existing 107 insurers were amalgamated and grouped into Five companies, viz., National Insurance Company (NIC), New India Assurance Company (NIAC), Oriental Insurance Company (OIC), United India Insurance Company (UIIC), and General Insurance Corporation (GIC). - Then insurance industry transformed into monopoly and Oligopolistic state or public sector insurance industry in India. 10/19/09

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CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR

• 1818 - Establishment of British firm Oriental Life Insurance Company in Calcutta • 1823 - Establishment of Bombay Life Assurance Company • 1912 - The Indian Life Assurance Companies Act 1912 (First statutory measure to regulate Life Insurance business) • 1938 – The Act 1928 was consolidated and amended by the Insurance Act with effective control over the activities of insurers • 1950 – The Act was amended resulting in far reaching changes in the insurance sector, including, a statutory requirement of equity capital for companies carrying on life insurance business, ceiling on share holdings in such companies, strict control on investments, submission of periodical returns relating to investments and such other information to the controller.

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CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR cotd… • 1956 – 154 Indian insurers, 16 foreign insurers and 75 provident societies were carrying on life insurance business in India mostly concentrated in Urban Areas • 1956 – January 19, the management of life insurance business of 245 Indian and Foreign insurers and provident fund societies, then operating in India, was taken over by the Central Government. By an Act of Parliament, viz., LIC Act 1956, with a capital contribution of Rs.50 million, Life Insurance Corporation (LIC) was formed in September 1956. • 1971 – Management of Non-Life insurers was taken over by the Central Government as a prelude to nationalization 10/19/09

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CHRONOLOGICAL DEVELOPMENT OF INSURANCE SECTOR cotd… 1972 – General insurance was urban-centric, catering mainly to the needs

of organized trade and Industry. 107 insurers including branches of foreign companies operating in the country were amalgamated and grouped into four companies, viz., The National Insurance Company Ltd., The Oriental Insurance Company Ltd., The New India Assurance Company Ltd., and The United India Insurance Company Ltd. • 1973 – Watershed in the history of General Insurance Business in India. The General Insurance Business was nationalized with effect from January 1, 1973 by the General Insurance Business (Nationalisation) Act, 1972. GIC was incorporated as a company in 1972 and commenced business on January 1st 1973. • 1993 – First Step to Liberalisation. In April 1993 Malhotra Committee formed to recommend measures to deregulate Indian Insurance Sector, and submitted its report in January 1994. •

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LIBERALISATION OF INSURANCE SECTOR • 1990s saw the emergence of liberalisation. Liberalisation meant lifting government controls, permits, licenses and allowing competition to play its role in the economy. With respect to the insurance business, liberalisation means allowing private enterprises, including MNCs, to operate in the area that was hitherto monopolised by the Government of India. • As a first step towards allowing private sector entry, Government of India appointed a committee under the chairmanship of Sri. Malhotra. The Committee submitted its report in 1994, recommended, among after things, that the insurance sector in India be thrown open to private sector. Government accepted the recommendations and allowed private players to offer insurance cover to Indian citizens. 10/19/09

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MALHOTRA COMMITTEE RECOMMENDATIONS Structure • Government stake in the insurance Companies to be brought down to 50 per cent. • Government should take over the holdings of GIC and its subsidiaries, to act these as independent companies. • All insurance companies should be given greater freedom to operate. No special dimension is given to government companies. • Increase of capital base of LIC and GIC up to Rs. 200 crores, half retained by the government and the rest sold to the public at large with suitable reservations for its employees. 10/19/09

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MALHOTRA COMMITTEE RECOMMENDATIONS Contd… Competition • Private Companies are allowed to enter insurance industry with a minimum paid up capital of Rs. 1billion. • No company should deal in both Life and General Insurance through a single entity. • Foreign insurance may be allowed to enter the industry by floating an Indian company as joint venture with Indian partner. • Postal Life Insurance should be allowed to operate in the rural market. Only and one State Level Life Insurance Company should be allowed to operate in each State. 10/19/09

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MALHOTRA COMMITTEE RECOMMENDATIONS Contd… Regulatory Body • Establishment of a strong and effective insurance regulatory body in the form of a statutory autonomous board on the lines of SEBI. • Controller of Insurance to be made independent Investments • Mandatory Investments of LIC Life Fund in government securities to be reduced from 75 per cent to 50 per cent. • GIC and its subsidiaries are not to hold more than five per cent in any company (the current holdings to be brought down to this level over a period of time) 10/19/09

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MALHOTRA COMMITTEE RECOMMENDATIONS Contd… 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. • Computerisation of operations and updating of technology to be carried out in insurance industry.

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WHY LIBERALISATION OF INSURANCE SECTOR? • To avoid monopolized (by the State run LIC and GICs) market. • Create awareness in urban areas about the needs and benefits of insurance. • To reduce the yawning gap between the needs of customers and products being offered by the state owned companies. • To mobilize funds from the economy for the infrastructure development. • To provide multiple innovative products. • To provide better customers’ service from existing state owned players. 10/19/09

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INSURANCE INDUSTRY IN INDIA

Public Sector

Life

Private Sector

General

Life ( 16 Companies)

General (09 Companies)

GIC and its Four subsidiaries

LIC of India

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Post Office Insurance 19

CURRENT SCENARIO

-Several leading private sector companies have entered in the field of insurance sector, both in life and non-life insurance. -There are several MNCs, in Joint Venture with Indian private sector firms, have started operations in a big way. Private Players in the Life Insurance Business Regd. Date of Name of the Company Who Owns it (in percentage) No. Regd. 101

23.10.00 HDFC Standard Life

Standard Life, UK - 18 and HDFC – 82

104

15.11.00 Max New York Life

New York Life - 26 and Max India – 74

105

24.11.00 ICICI Prudential Life

Prudential, UK - 26 and ICICI Bank – 74

107

10.01.01 Om Kotak Mahindra

Old Maruthi, South Africa – 26 and Kotak Mahindra – 74

109

31.01.01 Birla Sunlife

Sun Life of Canada–26 and Birla Capital– 74

110

12.02.01 Tata AIG

AIG, US – 26 and Tatas – 74

111

30.03.01 SBI Life

Cardif SA, France – 26 and State Bank of India – 74

114

02.08.01 ING Vysya

ING, Holland–26 and GMR Group, Hyd–54 20 and ING Vysya Bank–20

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CURRENT SCENARIO

contd….

Private Players in the Life Insurance Business Regd. Date of Name of the Who Owns it (in percentage) No. Regd. Company 116

03.08.01 Allianz Bajaj

Allianz AG, Germany – 26 and Bajaj Auto – 74

117

06.08.01 Metlife

Metlife, US–26, Shapoorji Pallonji–30 and J&K Bank–25

121

03.01.02 AMP Sanmar

AMP, Australia–26 and Sanmar Group, Chennai– 74

122

03.01.02 Aviva

Aviva PLC, UK– 26 and Dabur Investments – 74

***

***

Reliance Life

***

***

Bharathi AXA

127

06.02.04 Sahara India Insurance

128

07.11.05 Shriram Insurance

Life

Source: ). Indian Insurance Sector: A report, The Analyst, July 2002, p.9. 2). Cover Charge: An Economic Times Exclusive on Insurance’ The Economic Times, B’lore, Jan.2003, 10/19/09 21 p.1. Note: *** Data not available

CURRENT SCENARIO

contd….

Private Players in the General Insurance Business Regd. Date of Name of the Company Who Owns it (in percentage) No. Regd. 113

02.05.01 Bajaj Allianz

115

03.08.01 ICICI Lombard

106

04.12.00 IFFCO-Tokio

103

23.10.02 Reliance

102

23.10.02 Royal Sundaram Alliance

108

22.01.01 Tata AIG

123

15.07.02 Cholamandalam

124

27.08.02 Export Credit Guarantee

125

27.08.02 HDFC Chubb

Source: ). Indian Insurance Sector: A report, The Analyst, July 2002, p.9. 2). Cover Charge: An Economic Times Exclusive on Insurance’ The Economic Times, B’lore, Jan.2003, p.1. Note: *** Data not available 10/19/09

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STATUS OF INSURANCE INDUSTRY

Beginning in the year 1818, insurance business in India has travelled a long way. As at the of financial year 2001 the insurance business is well entrenched as shown in Table -1 Table -1 Growth of Life Insurance Business in India Financial Year

Particulars

1997

1998

1999

2000

2001

78

85

92

109

129

Number of Policies-million

12.28

13.33

14.86

16.99

19.67

Sum assured-Rs. Billion

569.93

639.28

756.06

914.90

1,249.51

Annual Premium Receivable-Rs. Billion

33.61

38.59

48.81

60.26

88.63

Number of Policies in force-million New Business

Life Fund ICRA Information Services," Industry 878Comment 1,058–The1,274 1,540 1,860 Source: Indian Insurance Industry”, Hyderabad, 2002, 10/19/09

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LIC OF INDIA Life Insurance Corporation of India (LIC) was formed in September 1956 by an Act of Parliament, LIC Act 1956 with a contribution of Rs. 50 million. The then Finance Minister Mr. C. D. Deshmukh while piloting the bill for nationalization outlined the objectives of LIC thus: “To conduct the business with utmost economy with the spirit of trusteeship; to charge premium no higher than warranted by strict actuarial considerations; to invest the funds for obtaining maximum yield for the policy holders consistent with safety of capital; to render prompt and efficient service to policy holders thereby making Insurance widely popular”.

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LIC OF INDIA contd…

Presently the LIC has a network of seven zones; 100 divisions and 2,048 branches, personnel exceed seven lakhs employees and over six lakhs agents. Vision: A trans-nationally competitive financial conglomerate of significance to societies and Pride of India. Mission: To explore and enhance the quality of the life of people through financial security by providing products and services of aspired attributes with competitive returns and by rendering resources for economic development. Values: Caring and Courtesy, Initiatives and Innovation, Integrity and Transparency, Quality and Returns, Participation and Relationship, and Trustworthiness and Reliability Culture: Agility (quickness), Adaptability, Collaboration, Commitment, Discipline, Empowerment, Sensitivity, and Excellence.

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LIC OF INDIA contd… Objectives • Spread Life Insurance widely and in particular to the rural areas. • Maximise mobilization of people’s savings by making insurancelinked savings adequately attractive. • Deployment of funds to the best of advantage of the investors as well as the community as whole, keeping in view national priorities and obligations of attractive return. • Conduct of business at most economy and with the full realisation that the money belongs to the policyholders. • Act as trustee of the insured public in their individual and collective capacities.

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LIC OF INDIA contd… Objectives contd…. • Meet the various life insurance needs of the community that would arise in the changing social and economic environment. • Involve all people working in the Corporation to the best of their capability in furthering the interests of public by providing efficient service with courtesy. • Promote amongst all agents and employees of the Corporation a sense of participation, pride and job satisfaction through discharge of their duties with dedication towards achievement of Corporate Objectives.

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WHY TO TAKE LIFE INSURANCE POLICY? Contract of Insurance: A contract of insurance is a contract of utmost good faith technically known as uberrima fides. The doctrine of disclosing all material facts is embodied in this important principle, which applies to all forms of insurance. At the time of taking a policy, policyholder should ensure that all questions in the proposal form are correctly answered. Any misrepresentation, non-disclosure or fraud in any document leading to the acceptance of the risk would render the insurance contract null and void. Protection: Savings through life insurance guarantee full protection against risk of death of the saver. Also, in case of demise, life insurance assures payment of the entire amount assured (with bonuses wherever applicable) whereas in other savings schemes, only the amount saved (with interest) is payable. 10/19/09

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WHY TO TAKE LIFE INSURANCE POLICY? Aid To Thrift (economy): Life insurance encourages 'thrift'. It allows longterm savings since payments can be made effortlessly because of the 'easy instalment' facility built into the scheme. (Premium payment for insurance is either monthly, quarterly, half yearly or yearly). For example: The Salary Saving Scheme popularly known as SSS, provides a convenient method of paying premium each month by deduction from one's salary. In this case the employer directly pays the deducted premium to LIC. The Salary Saving Scheme is ideal for any institution or establishment subject to specified terms and conditions. Liquidity: In case of insurance, it is easy to acquire loans on the sole security of any policy that has acquired loan value. Besides, a life insurance policy is also generally accepted as security, even for a commercial loan. 10/19/09

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WHY TO TAKE LIFE INSURANCE POLICY? Tax Relief: Life Insurance is the best way to enjoy tax deductions on income tax and wealth tax. This is available for amounts paid by way of premium for life insurance subject to income tax rates in force. Assesses can also avail of provisions in the law for tax relief. In such cases the assured in effect pays a lower premium for insurance than otherwise. Money When You Need It: A policy that has a suitable insurance plan or a combination of different plans can be effectively used to meet certain monetary needs that may arise from time-to-time. Children's education, start-in-life or marriage provision or even periodical needs for cash over a stretch of time can be less stressful with the help of these policies. Alternatively, policy money can be made available at the time of one's retirement from service and used for any specific purpose, such as, purchase of a house or for other investments. Also, loans are granted to policyholders for house building or for purchase of flats (subject to certain conditions). 10/19/09

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TYPES OF INSURANCE POLICIES as on 1.10.2003

I. Basic Life Insurance Plans  Whole Life Assurance Plan -low cost insurance plan where the Sum assured is payable on the death of the life assured whenever it occurs.  Endowment Assurance Plan –Under this plan the Sum assured is payable on maturity or on death of the life assured, if earlier.  Jeevan Anand –this plan combines the features of the Endowment and Whole life plans. The basic Sum assured plus accrued bonus is payable to the policyholders on his survival till the end of the premium paying term. An additional sum assured is payable to the nominee on death of the policyholder after expiry of premium paying term.

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TYPES OF INSURANCE POLICIES contd…

II. Term Assurance Plans  Anmol Jeevan-I: Pure term assurance policy for term varying 5 to 25 years and provides for payment of Sum assured on death of the policyholder during the term of the policy.  Convertible Term Assurance Plan: It provides for term assurance for 5 to 7 years with an option to convert to a Limited Payment Whole Life Policy or an Endowment Assurance Policy without having to undergo fresh medical examination. The option of converting may be exercised at any time during the specified term except during the last 2 years provided the policy is in full force.  New Bhima Kiran: In addition to return on premiums paid, this plan provides for Loyalty addition, if any, in-built accident cover and a term Cover is in full force. 10/19/09

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TYPES OF INSURANCE POLICIES contd… III. Specific Plans for Children  Childern’s Deferred Endowment Assurance  Jeevan Balya  Komal Jeevan  Jeevan Kishore  Jeevan Chaya  Jeevan Sukaya (for female children) IV. Pension Plans  New Jeevan Akshay-I  Varishtha Pension BIma Yojana  New Jeevan Dhara-I  New Jeevan Suraksha V. Plans for Handicapped Dependents  Jeevan Adhar Jeevan Viswas 10/19/09

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TYPES OF INSURANCE POLICIES contd…

VI. Other Plans  Mortage Redemption

 Bhavishya Jeevan

 New Jana Raksha  Money Back Plans  Jeevan Surabhi  Jeevan Rekha  Jeevan Samriddhi  Jeevan Saathi  Jeevan Mitra  LIC’s Jeveen Shree-I  Asha Deep-II  Jeevan Asha-II  Jeevan Bharathi  Bima NIvesh Triple Cover  Varishtha Pension Bima Yojana  Fixed Term (Marriage) Endowment / Educational Annuity VII. Unit Linked Plans

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TYPES OF INSURANCE POLICIES contd… VIII. Group Schemes  Group Term Insurance Scheme  Group Superannuation Scheme  Group Gratuity Scheme  Group Leave Encashment Scheme VII. Unit Linked Plans

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VALUATION OF LIFE POLICIES

- The life fund is being valued from time to time. - The valuation being based on the method of discounting future income and expenditure back to the present (present value). - The rate of discount is used is usually equal to the rate of interest with the fund’s assets are expected to earn on an average and allowance may be made for increase in interest rates, future bonuses (in the case of “with profit” policies) while determining the discount rate. - A life fund is in surplus if the valuation of fund is greater than the PV of future liabilities. - The surplus is partly available for distribution to policy (only with profit policies) holders and partly for adding to reserves. 10/19/09

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VALUATION OF LIFE POLICIES contd…. Methods of Distributing Surplus Funds to policyholders 1. Cash form as a reduction in premium, 2. As an addition to the value of policy (Reversionary Bonus). Bonus may be declared as a simple reversionary bonus, calculated on the original sum assured, or A compound reversionary bonus, calculated on the original sum assured, plus any bonuses already declared. Types of Surplus A. Revenue surplus (an excess of future income over future outgoings), and B. Capital surplus (Value of the fund is balanced by the values of the various assets of the life fund as recorded in the balance sheet)

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VALUATION OF LIFE POLICIES contd…. - LIC has valued its funds about every TWO years b/w 1979 and 1985. - It conducted special valuation in March 1986 and announced its results on (1st Sept.) its 30th anniversary. - LIC has decided to conduct valuation for every six months (to declare increased reversionary bonus per thousand of rupees). - The 25th valuation in 1994-95 showed a surplus of Rs.3,197 crore, of which the amount of Rs. 3,057.93 crore was allocated to participating policyholders. - The valuation as on 31.03.2003 showed a surplus of Rs.9,733 crore, of which Rs. 9,246 crore (95per cent) is distributed as bonus to policyholders of with profit policies.

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PRINCIPLES AND INVESTMENT POLICY OF LIC’s 1. 2.

Security of funds, and Maximization of return of investment,

Investment Policy in 1995 (GOI, Economic Survey, 1996-97, p-65) 1. Central Govt. marketable securities being not less than

20%

2. Loans to Housing Bank including above (1) being not less than

25%

3. State Govt. securities including Govt. Guaranteed marketable securities, inclusive of (2) above being not less than

50%

4. Socially oriented sectors including public sector, co-operative sector house building by policyholders, own house scheme, inclusive of (3) above not less than 75% 5. Private corporate sector, loans to policyholders for construction and acquisition of immovable property 25% 10/19/09

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Investment Policy in 2003 (IRDA Report, 2001-2002) 1. Govt. securities

25%

2. Govt. securities or approved securities (including above 1) Not less than 50% 3. Approved Investments as specified in schedule – 1 infrastructure and social sector Not less than 15% 4. Others to be governed by Exposure Norms

Not less than 35%

(investments in “other than in Approved Investments” in no case exceed 15% of the fund)

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INFORMATION TECHNOLOGY AND LIC LIC has been one of the pioneering organizations in India who introduced the leverage of Information Technology in servicing and in their business. Data pertaining to almost 10 crore policies is being held on computers in LIC. We have gone in for relevant and appropriate technology over the years. 1964 saw the introduction of computers in LIC. Unit Record Machines introduced in late 1950’s were phased out in 1980’s and replaced by Microprocessors based computers in Branch and Divisional Offices for Back Office Computerization. Standardization of Hardware and Software commenced in 1990’s. Standard Computer Packages were developed and implemented for Ordinary and Salary Savings Scheme (SSS) Policies. 10/19/09

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AWARDS

Awaaz Consumer Award 2006

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Awaaz Consumer Award 2005

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GENERAL INSURANCE CORPORATION (GIC) • Prier nationalization there were 68 Indian insurers (including LIC) and 45 non-Indian insurers did the business. • In Nov. 1972, the general insurance business was nationalized by the General Insurance Business (Nationalized), Act 1972 (GIBNA) and vested in the hand of the GIC and its four subsidiaries viz. 1. National Insurance Co. Ltd., 2. New India Assurance Co. Ltd., 3. Oriental Fire and General Insurance Co. Ltd., and 4. United India Insurance Co. Ltd.

• GIC was incorporated as a holding company in 1992. • General Insurance Business is completely owned by the government. • The paid up capital of GIC was fully subscribed by the Government and of four subsidiaries. • It was controlled by a single organization with four subsidiaries. 10/19/09

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G I C contd…

• GIC’s four subsidiaries: 1. National Insurance Co. Ltd., 2. New India Assurance Co. Ltd., 3. Oriental Fire and General Insurance Co. Ltd., and 4. United India Insurance Co. Ltd. • The Govt on India took over Control, supervision, and policy making is with GIC. • But certain structural and ownership of capital changes have been since the presentation of Malhotra Committee Report. • The premium income for GIC comes mainly through the obligatory reinsurance premium on a quota share basis from subsidiaries on their direct business in India (almost 20% of subsidiaries business come to GIC). • GIC’s direct business is only in the form of aviation insurance. 10/19/09

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G I C contd… Classification of General Insurance Business 1. Marine, (relatively less importance to India) 2. Fire, (Major business but its share is coming down) and 3. Miscellaneous (grown substantially) theft, loss, damage, etc. Other Policies (non-traditional schemes) - Manages Comprehensive Crop Insurance Scheme introduced by the Central Govt. in 1985.

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G I C contd…

TYPES AND STRUCTURE OF BUSINESS - General insurance policies are not financial claims. - There is no guarantee of renewal of policy on the same terms or on any terms. - The contract is short-term contract. - The general insurance companies do not collect savings. - Policy claims are unpredictable. - Assets are held in relatively liquid form. - GIC meets the requirements of industrial, manufacturing, commercial, services, household, and agricultural sectors through wide rage of 115 products, granting insurance coverage. - GIC has been promoting insurance cover in the field of livestock, poultry, sericulture, horticulture, pump sets, and personal accidents. and its subsidiaries 10/19/09

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PRINCIPLES AND INVESTMENT POLICY GIC 1. Central Govt. securities being not less than

20%

2. State Govt. securities and other government guaranteed securities, including (1) above, being not less than 30% 3. Loans to HUDCO/DDA/GIC-HF and to state govts. For housing and fire fighting equipment, not less than 15% 4. Market sector not more than

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55%

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I R D A

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IRDA’S MISSION To protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.

Composition of Authority under IRDA Act, 1999 As per the section 4 of IRDA Act' 1999, Insurance Regulatory and Development Authority (IRDA, which was constituted by an act of parliament) specify the composition of Authority. The Authority is a ten member team consisting of a. a Chairman; b. five whole-time members; c. four part-time members, (all appointed by the Government of India) 10/19/09

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Duties, Powers and Functions of IRDA Section 14 of IRDA Act, 1999 lays down the duties, powers and functions of IRDA. 1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include: a. issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; 10/19/09

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Duties, Powers and Functions of IRDA contd… b. protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; c.

specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents;

d.

specifying the code of conduct for surveyors and loss assessors;

e. promoting efficiency in the conduct of insurance business; 10/19/09

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Duties, Powers and Functions of IRDA contd… f.

promoting and regulating professional organisations connected with the insurance and re-insurance business;

g.

levying fees and other charges for carrying out the purposes of this Act;

h.

calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business;

i.

control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); 10/19/09

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Duties, Powers and Functions of IRDA contd… j.

specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;

k.

regulating investment of funds by insurance companies;

l.

regulating maintenance of margin of solvency;

m.

adjudication of disputes between insurers intermediaries or insurance intermediaries;

and

n. supervising the functioning of the Tariff Advisory Committee; 10/19/09

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Duties, Powers and Functions of IRDA contd… o.

specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations referred to in clause (f);

p. specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and q. exercising such other powers as may be prescribed

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Miscellaneous

NBF INTERMEDIARIES

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INTRODUCTION TO NBFCs -

NBFCs faces serious definitional and data difficulties. NBFCs are thousands of companies. Only small portion of NBFCs reports to RBI. Large categories, due to the emergence of multi-service companies. NBFC: The RBI (Amendment) Act, 1997 defined as an institution or company whose principal business is to accept deposits under any scheme or arrangement or in any other manner, and to lend in any manner (including a number of loan, investment companies in NBFC category).

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CATEGORIES OF NBFC 1.

Equipment Leasing Company (ELC) – activity of leasing of equipment of the financing such activity.

2.

Hire-Purchase Finance Company (HPFC) – activity of HP transactions, or the financing of such transactions.

3.

Housing Finance Company (HFC) – financing of acquisition, or construction of houses, or development of plots of land in connection therewith.

4.

Investment Company (IC) – activity of acquisition of securities.

5.

Loan Company (LC) – providing finance whether by making loans or advances, or any activity other than its own.

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CATEGORIES OF NBFC contd… 6. Mutual Benefit Financial Company (MBFC) – any company

which is notified by the Central Government under section 620A of the Companies Act, 1956.

7. Miscellaneous (MNBC) – Chit funds 8. Residuary Non-banking Company (RNBC)- A Company

which receives any deposit under any scheme or arrangement, by whatever name called, in one lumpsum or in installments by way of contributions or subscriptions or by sale of units or certificates or other instruments, or any other manner and which according to the definitions contained in the NBFCs (Reserve Bank) Directions, 1977 or as the case may be, the Miscellaneous NBCs (Reserve Bank) Directions, 1977 is not an insurance company or a company belonging to one to seven above.

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IMPORTANCE OF NBFCs Necessary for promoting the growth of an efficient and competitive economy. -

Perform a diversified range of financial functions,

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Offer various financial services to individuals, corporate, and institutional clients.

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Helps to bridge the credit gaps in several sectors.

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Serving the household, form and SSI.

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STRUCTURE AND GROWTH OF NBFCs • •

Thousands of market players Majority (80 to 85 per cent) are private limited companies

RESOURCES OF NBFCs 1. Deposits (regulated and exempted), and 2. Net Owned Funds Deposit-means any money received by a non-banking company by way of a deposit or a loan, or in any other form (inter corporate loans, and borrowings by private ltd). Regulated Deposit- means a deposit which is subject to certain ceilings and other restrictions as imposed by the regulatory measures. 10/19/09

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RESOURCES OF NBFCs contd…

Regulated Deposit- means a deposit which is subject to certain

ceilings and other restrictions as imposed by the regulatory measures. It includes, a. Non-convertible debentures, b. Deposits received by companies from their shareholders, c. Deposits guaranteed by directors in their personal capacity, d. Fixed deposits received from the public, and e. Inter corporate deposits.

Exempted Deposits- signifies those types of deposits/ borrowings

which are outside the scope of the regulatory measures. It includes, a. Borrowings from banks and specified FIs, b. Money received from Central/State/Foreign governments, c. Advances received against orders, d. Convertible debentures., etc 10/19/09

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MAJOR FEATURES OF THE GROWTH OF NBFCs 1. 2. 3. 4. 5.

Total deposits increased. Net owned funds constitute the core funds. Exempted deposits far exceeded regulated deposits. Growth of NBFCs deposits exceeded that of commercial banks. Ratio of NBFCs deposits to Bank deposits increased.

REASONS FOR GROWTH OF NBFCs 1. 2. 3. 4. 5.

They provide tailor made services to the clients. Larger degree of regulation of NBFCs compared to Banks. High level of customer orientation, simplicity, and seedy services. Monetary and fiscal policy have created “unsatisfied fringe of borrowers”. High interest rates offered by NBFCs. 10/19/09

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REGULATION OF NBFCs -

Regulated by RBI (except HFCs - NHB).

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RBI (Amendment) Act, 1997 brought all NBFCs under this Act.

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Minimum net owned funds Rs.25 lakhs for registration.

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Existing companies also should improve net owned funds to Rs.25 lakhs by 8-7-1997.

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Maintain 10 and 15% of their deposits in liquid assets effective from 1st Jan and 1st April 1998 respectively.

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Create reserve fund and transfer not less than 20% of their net deposits to it every year.

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RBI can direct them on issues of disclosures, prudential norms, credit, investment, tec., 10/19/09

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REGULATION OF NBFCs -

Nomination facility is now made available to depositors of these companies.

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Unincorporated bodies engaged in financial activity can not accet deposit from the public from 1st April, 1997.

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They have to achieve a minimum capital adequacy norm of 8% by 31.3.1996.

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Need to obtain minimum credit rating from anyone of the three credit rating agencies.

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A ceiling of 15% interest rate on deposits has been prescribed for MBFCs or nidhis, effective from JUly8, 1996.

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The interest rate ceiling on deposits as also the ceiling on the quantum of deposits for NBFCs have been removed, subject to compliance with the RBI directives and guidelines. 10/19/09

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PRESENT POSITION OF NBFCs - Major business of NBFCs is givign loans, ICDs, investment in securities and provide hire purchase credit. - Major source of funds are Public deposits, convertible debentures, borrowings from banks, IC borrowings. - Interest rates reduced form 12.5% to 11& w.e.f 2003. - NBFCs mobilized funds primarily short-term deposits (not more than 3 years period). - Stability n the ratio of public deposits o net owned funds. - Increase in NPAs. - Little improvement in the operational efficiency. - RBI imposes penalty (apart from cancellation of registration) for not submitting annual reports to RBI. - NBFCs prohibited to undertake sale of govt. securities as broker. - RBI allowed to participate in insurance business. 10/19/09

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LOAN COMPANIES - Constitute the major part of the NBFCs sector. - Mostly partnership companies, and their operations are generally confined to a few places in India, particularly Gujarat and Mysore. - Deposits accepted by them mainly fixed deposits (some also accepted call deposits). - They attract deposits by prize and gift schemes, recurring deposits, insurance linked deposits. - High rate of interest on deposits compared to banks (with 8% difference) - Gives loans (unsecured form) to wholesale and retail traders, SSIs, self employed persons. - Interest rate on loans is equivalent to rates charged by money lenders varying b/w 18 to 36%. - Other services: Discounting post-dated cheques, collecting dividends for their customers, purchasing and discounting hundies. 10/19/09

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INVESTMENT COMPANIES - Small in number and specialized. - Offers higher rates of interest for attracting deposits. - Provides loans (unsecured) for consumption, commerce, and trading purposes. - Interest rate charged is higher than commercial banks and orgd. FIs. - Need for Regulation: Managements of investment companies are dishonest (depositors interests are neglected), undermining the goals of monetary policy by providing loans to speculative business.

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INVESTMENT COMPANIES -

Small in number and specialized. Offers higher rates of interest for attracting deposits. Provides loans (unsecured) for consumption, commerce, and trading purposes. Interest rate charged is higher than commercial banks and orgd. FIs. Need for Regulation: Managements of investment companies are dishonest (depositors interests are neglected), undermining the goals of monetary policy by providing loans to speculative business.

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VENTURE CAPITAL

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