I.

PROFILE OF INSURANCE INDUSTRY

1.1. GLOBAL INSURANCE

With the size of world's population reaching gigantic proportions, global insurance is also
gaining in stature. Private as well government insurance agencies around the world are running
for insuring lives of millions. In fact, the insurance industry is a key component of the world
economy today owing to its premiums, its investment and, above all, the social and economic
role it plays in covering personal and business risks.

To illustrate the steady growth in the global insurance industry in recent times, in 2004, global
insurance premiums grew by 9.7% to reach $3.3 trillion. While life insurance premiums grew by
9.8% during the year due to rising demand for annuity and pension products, non-life insurance
premiums grew by 9.4%.

1.2. Insurance Companies In India

Insurance Companies

 Bajaj Allianz Life Insurance Company Limited

 Birla Sun Life Insurance Co. Ltd
 HDFC Standard life Insurance Co. Ltd
 ICICI Prudential Life Insurance Co. Ltd.
 ING Vysya Life Insurance Company Ltd.
 Life Insurance Corporation of India
 Max New York Life Insurance Co. Ltd
 Met Life India Insurance Company Ltd.
 Kotak Mahindra Old Mutual Life Insurance Limited
 SBI Life Insurance Co. Ltd
 Tata AIG Life Insurance Company Limited
 Reliance Life Insurance Company Limited.
 Aviva Life Insurance Co. India Pvt. Ltd.
 Shriram Life Insurance Co, Ltd.
 Sahara India Life Insurance
 Bharti AXA Life Insurance
 Future Generali Life Insurance
 IDBI Fortis Life Insurance
 Canara HSBC Oriental Bank of Commerce Life Insurance
 Religare Life Insurance
 DLF Pramerica Life Insurance
 Star Union Dai-ichi Life Insurance
 Agriculture Insurance Company of India
 Apollo DKV Insurance
 Cholamandalam MS General Insurance
 HDFC Ergo General Insurance Company
 ICICI Lombard General Insurance
 IFFCO Tokio General Insurance
 National Insurance Company Ltd
 New India Assurance
 Oriental Insurance Company
 Reliance General Insurance
 Royal Sundaram Alliance Insurance
 Shriram General Insurance Company Limited

Tata AIG General Insurance

 United India Insurance

 Universal Sompo General Insurance Co. Ltd
Insurance sector in India is one of the booming sectors of the economy and is growing at the rate
of 15-20 per cent annum. Together with banking services, it contributes to about 7 per cent to the
country's GDP. Insurance is a federal subject in India and Insurance industry in India is governed
by Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and General Insurance
Business (Nationalisation) Act, 1972, Insurance Regulatory and Development Authority (IRDA)
Act, 1999 and other related Acts.

The origin of life insurance in India can be traced back to 1818 with the establishment of the
Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide for English
Widows. In those days a higher premium was charged for Indian lives than the non-Indian lives
as Indian lives were considered riskier for coverage. The Bombay Mutual Life Insurance Society
that started its business in 1870 was the first company to charge same premium for both Indian
and non-Indian lives. In 1912, insurance regulation formally began with the passing of Life
Insurance Companies Act and the Provident Fund Act.
By 1938, there were 176 insurance companies in India. But a number of frauds during 1920s and
1930s tainted the image of insurance industry in India. In 1938, the first comprehensive
legislation regarding insurance was introduced with the passing of Insurance Act of 1938 that
provided strict State Control over insurance business.

Insurance sector in India grew at a faster pace after independence. In 1956, Government of India
brought together 245 Indian and foreign insurers and provident societies under one nationalised
monopoly corporation and formed Life Insurance Corporation (LIC) by an Act of Parliament,
viz. LIC Act, 1956, with a capital contribution of Rs.5 crore.

The (non-life) insurance business/general insurance remained with the private sector till 1972.
There were 107 private companies involved in the business of general operations and their
operations were restricted to organised trade and industry in large cities. The General Insurance
Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with
effect from January 1, 1973. The 107 private insurance companies were amalgamated and
grouped into four companies: National Insurance Company, New India Assurance Company,
Oriental Insurance Company and United India Insurance Company. These were subsidiaries of
the General Insurance Company (GIC).

In 1993, the first step towards insurance sector reforms was initiated with the formation of
Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra.
The committee was formed to evaluate the Indian insurance industry and recommend its future
direction with the objective of complementing the reforms initiated in the financial sector.

1.3.

LIFE INSURANCE

Life insurance or life assurance is a contract between the policy owner and the insurer, where
the insurer agrees to pay a designated beneficiary a sum of money upon the occurrence of the
insured individual's or individuals' death or other event, such as terminal illness or critical illness.
In return, the policy owner agrees to pay a stipulated amount at regular intervals or in lump
sums. There may be designs in some countries where bills and death expenses plus catering for
after funeral expenses should be included in Policy Premium. In the United States, the
predominant form simply specifies a lump sum to be paid on the insured's demise.

As with most insurance policies, life insurance is a contract between the insurer and the policy
owner whereby a benefit is paid to the designated beneficiaries if an insured event occurs which
is covered by the policy.

The value for the policyholder is derived, not from an actual claim event, rather it is the value
derived from the 'peace of mind' experienced by the policyholder, due to the negating of adverse
financial consequences caused by the death of the Life Assured.

To be a life policy the insured event must be based upon the lives of the people named in the
policy.

1.3.1.Insured events that may be covered include:

  Serious illness

Life policies are legal contracts and the terms of the contract describe the limitations of the
insured events. Specific exclusions are often written into the contract to limit the liability of the
insurer; for example claims relating to suicide, fraud, war, riot and civil commotion.

Life-based contracts tend to fall into two major categories:

 Protection policies - designed to provide a benefit in the event of specified event,

typically a lump sum payment. A common form of this design is term insurance.
 Investment policies - where the main objective is to facilitate the growth of capital by
regular or single premiums. Common forms (in the US anyway) are whole life, universal
life and variable life policies.

1.3.2.Parties to contract

There is a difference between the insured and the policy owner (policy holder), although the
owner and the insured are often the same person. For example, if Joe buys a policy on his own
life, he is both the owner and the insured. But if Jane, his wife, buys a policy on Joe's life, she is
the owner and he is the insured. The policy owner is the guarantee and he or she will be the
person who will pay for the policy. The insured is a participant in the contract, but not
necessarily a party to it. However, "insurable interest" is required to limit an unrelated party from
taking life insurance on, for example, Jane or Joe.

The beneficiary receives policy proceeds upon the insured's death. The owner designates the
beneficiary, but the beneficiary is not a party to the policy. The owner can change the beneficiary
unless the policy has an irrevocable beneficiary designation. With an irrevocable beneficiary,
that beneficiary must agree to any beneficiary changes, policy assignments, or cash value
borrowing.

In cases where the policy owner is not the insured (also referred to as the celui qui vit or CQV),
insurance companies have sought to limit policy purchases to those with an "insurable interest"
in the CQV. For life insurance policies, close family members and business partners will usually
be found to have an insurable interest. The "insurable interest" requirement usually demonstrates
that the purchaser will actually suffer some kind of loss if the CQV dies. Such a requirement
prevents people from benefiting from the purchase of purely speculative policies on people they
expect to die. With no insurable interest requirement, the risk that a purchaser would murder the
CQV for insurance proceeds would be great. In at least one case, an insurance company which
sold a policy to a purchaser with no insurable interest (who later murdered the CQV for the
proceeds), was found liable in court for contributing to the wrongful death of the victim (Liberty
National Life v. Weldon, 267 Ala.171 (1957)).

1.3.4.Contract terms

Special provisions may apply, such as suicide clauses wherein the policy becomes null if the
insured commits suicide within a specified time (usually two years after the purchase date; some
states provide a statutory one-year suicide clause). Any misrepresentations by the insured on the
application is also grounds for nullification. Most US states specify that the contestability period
cannot be longer than two years; only if the insured dies within this period will the insurer have a
legal right to contest the claim on the basis of misrepresentation and request additional
information before deciding to pay or deny the claim.

The face amount on the policy is the initial amount that the policy will pay at the death of the
insured or when the policy matures, although the actual death benefit can provide for greater or
lesser than the face amount. The policy matures when the insured dies or reaches a specified age
(such as 100 years old).

1.3.5.Costs, insurability, and underwriting

The insurer (the life insurance company) calculates the policy prices with intent to fund claims to
be paid and administrative costs, and to make a profit. The cost of insurance is determined using
mortality tables calculated by actuaries. Actuaries are professionals who employ actuarial
science, which is based in mathematics (primarily probability and statistics). Mortality tables are
statistically-based tables showing expected annual mortality rates. It is possible to derive life
expectancy estimates from these mortality assumptions. Such estimates can be important in
taxation regulation.
The three main variables in a mortality table have been age, gender, and use of tobacco. More
recently in the US, preferred class specific tables were introduced. The mortality tables provide a
baseline for the cost of insurance. In practice, these mortality tables are used in conjunction with
the health and family history of the individual applying for a policy in order to determine
premiums and insurability. Mortality tables currently in use by life insurance companies in the
United States are individually modified by each company using pooled industry experience
studies as a starting point. In the 1980s and 90's the SOA 1975-80 Basic Select & Ultimate tables
were the typical reference points, while the 2001 VBT and 2001 CSO tables were published
more recently. The newer tables include separate mortality tables for smokers and non-smokers
and the CSO tables include separate tables for preferred classes.

Recent US select mortality tables predict that roughly 0.35 in 1,000 non-smoking males aged 25
will die during the first year of coverage after underwriting. Mortality approximately doubles for
every extra ten years of age so that the mortality rate in the first year for underwritten non-
smoking men is about 2.5 in 1,000 people at age 65. Compare this with the US population male
mortality rates of 1.3 per 1,000 at age 25 and 19.3 at age 65 (without regard to health or smoking
status).

The mortality of underwritten persons rises much more quickly than the general population. At
the end of 10 years the mortality of that 25 year-old, non-smoking male is 0.66/1000/year.
Consequently, in a group of one thousand 25 year old males with a $100,000 policy, all of
average health, a life insurance company would have to collect approximately $50 a year from
each of a large group to cover the relatively few expected claims. (0.35 to 0.66 expected deaths
in each year x $100,000 payout per death = $35 per policy). Administrative and sales
commissions need to be accounted for in order for this to make business sense. A 10 year policy
for a 25 year old non-smoking male person with preferred medical history may get offers as low
as $90 per year for a $100,000 policy in the competitive US life insurance market.

The insurance company receives the premiums from the policy owner and invests them to create
a pool of money from which it can pay claims and finance the insurance company's operations.
The majority of the money that insurance companies make comes directly from premiums paid,
as money gained through investment of premiums can never, in even the most ideal market
conditions, vest enough money per year to pay out claims. Rates charged for life insurance
increase with the insurer's age because, statistically, people are more likely to die as they get
older.

Given that adverse selection can have a negative impact on the insurer's financial situation, the
insurer investigates each proposed insured individual unless the policy is below a company-
established minimum amount, beginning with the application process. Group Insurance policies
are an exception.

This investigation and resulting evaluation of the risk is termed underwriting. Health and
lifestyle questions are asked. Certain responses or information received may merit further
investigation. Life insurance companies in the United States support the Medical Information
Bureau (MIB), which is a clearinghouse of information on persons who have applied for life
insurance with participating companies in the last seven years. As part of the application, the
insurer receives permission to obtain information from the proposed insured's physicians.

Underwriters will determine the purpose of insurance. The most common is to protect the
owner's family or financial interests in the event of the insurer's demise. Other purposes include
estate planning or, in the case of cash-value contracts, investment for retirement planning. Bank
loans or buy-sell provisions of business agreements are another acceptable purpose.

Life insurance companies are never required by law to underwrite or to provide coverage to
anyone, with the exception of Civil Rights Act compliance requirements. Insurance companies
alone determine insurability, and some people, for their own health or lifestyle reasons, are
deemed uninsurable. The policy can be declined (turned down) or rated. Rating increases the
premiums to provide for additional risks relative to the particular insured.

1.3.5.Death proceeds

Upon the insured's death, the insurer requires acceptable proof of death before it pays the claim.
The normal minimum proof required is a death certificate and the insurer's claim form
completed, signed (and typically notarized). If the insured's death is suspicious and the policy
amount is large, the insurer may investigate the circumstances surrounding the death before
deciding whether it has an obligation to pay the claim.

Proceeds from the policy may be paid as a lump sum or as an annuity, which is paid over time in
regular recurring payments for either a specified period or for a beneficiary's lifetime.

1.3.6.Insurance vs Assurance

The specific uses of the terms "insurance" and "assurance" are sometimes confused. In general,
in these jurisdictions "insurance" refers to providing cover for an event that might happen (fire,
theft, flood, etc.), while "assurance" is the provision of cover for an event that is certain to
happen. "Insurance" is the generally accepted term, but people using this description are liable to
be corrected. In the United States both forms of coverage are called "insurance", principally due
to many companies offering both types of policy, and rather than refer to themselves using both
insurance and assurance titles, they instead use just one.

1.3.7.Types of life insurance

Life insurance may be divided into two basic classes – temporary and permanent or following
subclasses - term, universal, whole life and endowment life insurance.

1.3.8.Term Insurance

Term assurance provides life insurance coverage for a specified term of years in exchange for a
specified premium. The policy does not accumulate cash value. Term is generally considered
"pure" insurance, where the premium buys protection in the event of death and nothing else.

There are three key factors to be considered in term insurance:

1. Face amount (protection or death benefit),

2. Premium to be paid (cost to the insured), and
 3. Length of coverage (term).

Various insurance companies sell term insurance with many different combinations of these
three parameters. The face amount can remain constant or decline. The term can be for one or
more years. The premium can remain level or increase. Common types of term insurance include
Level, Annual Renewable and Mortgage insurance.

Level Term policy has the premium fixed for a period of time longer than a year. These terms are
commonly 5, 10, 15, 20, 25, 30 and even 35 years. Level term is often used for long term
planning and asset management because premiums remain consistent year to year and can be
budgeted long term. At the end of the term, some policies contain a renewal or conversion
option. Guaranteed Renewal, the insurance company guarantees it will issue a policy of equal or
lesser amount without regard to the insurability of the insured and with a premium set for the
insured's age at that time. Some companies however do not guarantee renewal, and require proof
of insurability to mitigate their risk and decline renewing higher risk clients (for instance those
that may be terminal). Renewal that requires proof of insurability often includes a conversion
options that allows the insured to convert the term program to a permanent one that the insurance
company makes available. This can force clients into a more expensive permanent program
because of anti selection if they need to continue coverage. Renewal and conversion options can
be very important when selecting a program.

Annual renewable term is a one year policy but the insurance company guarantees it will issue a
policy of equal or lesser amount without regard to the insurability of the insured and with a
premium set for the insured's age at that time.

Another common type of term insurance is mortgage insurance, which is usually a level
premium, declining face value policy. The face amount is intended to equal the amount of the
mortgage on the policy owner’s residence so the mortgage will be paid if the insured dies.

A policy holder insures his life for a specified term. If he dies before that specified term is up
(with the exception of suicide see below), his estate or named beneficiary receives a payout. If he
does not die before the term is up, he receives nothing. However, in some European countries
(notably Serbia), insurance policy is such that the policy holder receives the amount he has
insured himself to, or the amount he has paid to the insurance company in the past years. Suicide
used to be excluded from ALL insurance policies [when?], however, after a number of court
judgments against the industry, payouts do occur on death by suicide (presumably except for in
the unlikely case that it can be shown that the suicide was just to benefit from the policy).
Generally, if an insured person commits suicide within the first two policy years, the insurer will
return the premiums paid. However, a death benefit will usually be paid if the suicide occurs
after the two year period.

1.3.9.Permanent Life Insurance

Permanent life insurance is life insurance that remains in force (in-line) until the policy matures
(pays out), unless the owner fails to pay the premium when due (the policy expires OR policies
lapse). The policy cannot be canceled by the insurer for any reason except fraud in the
application, and that cancellation must occur within a period of time defined by law (usually two
years). Permanent insurance builds a cash value that reduces the amount at risk to the insurance
company and thus the insurance expense over time. This means that a policy with a million
dollar face value can be relatively expensive to a 70 year old. The owner can access the money in
the cash value by withdrawing money, borrowing the cash value, or surrendering the policy and
receiving the surrender value.

The four basic types of permanent insurance are whole life, universal life, limited pay and
endowment.

1.3.10.Whole life coverage

Whole life insurance provides for a level premium, and a cash value table included in the policy
guaranteed by the company. The primary advantages of whole life are guaranteed death benefits,
guaranteed cash values, fixed and known annual premiums, and mortality and expense charges
will not reduce the cash value shown in the policy. The primary disadvantages of whole life are
premium inflexibility, and the internal rate of return in the policy may not be competitive with
other savings alternatives. Also, the cash values are generally kept by the insurance company at
the time of death, the death benefit only to the beneficiaries. Riders are available that can allow
one to increase the death benefit by paying additional premium. The death benefit can also be
increased through the use of policy dividends. Dividends cannot be guaranteed and may be
higher or lower than historical rates over time. Premiums are much higher than term insurance in
the short-term, but cumulative premiums are roughly equal if policies are kept in force until
average life expectancy.

Cash value can be accessed at any time through policy "loans" and are received "income-tax
free". Since these loans decrease the death benefit if not paid back, payback is optional. Cash
values support the death benefit so only the death benefit is paid out.

Dividends can be utilized in many ways. First, if Paid up additions is elected, dividend cash
values will purchase additional death benefit which will increase the death benefit of the policy
to the named beneficiary. Another alternative is to opt in for 'reduced premiums' on some
policies. This reduces the owed premiums by the unguaranteed dividends amount. A third option
allows the owner to take the dividends as they are paid out. (Although some policies provide
other/different/less options than these - it depends on the company for some cases)

1.3.11.Limited-pay

Another type of permanent insurance is Limited-pay life insurance, in which all the premiums
are paid over a specified period after which no additional premiums are due to keep the policy in
force. Common limited pay periods include 10-year, 20-year, and paid-up at age 65.

1.3.12.Endowments

Endowments are policies in which the cash value built up inside the policy, equals the death
benefit (face amount) at a certain age. The age this commences is known as the endowment age.
Endowments are considerably more expensive (in terms of annual premiums) than either whole
life or universal life because the premium paying period is shortened and the endowment date is
earlier.

In the United States, the Technical Corrections Act of 1988 tightened the rules on tax shelters
(creating modified endowments). These follow tax rules as annuities and IRAs do.
Endowment Insurance is paid out whether the insured lives or dies, after a specific period (e.g.
15 years) or a specific age (e.g. 65).

1.3.13.Accidental Death

Accidental death is a limited life insurance that is designed to cover the insured when they pass
away due to an accident. Accidents include anything from an injury, but do not typically cover
any deaths resulting from health problems or suicide. Because they only cover accidents, these
policies are much less expensive than other life insurances.

It is also very commonly offered as "accidental death and dismemberment insurance", also
known as an AD&D policy. In an AD&D policy, benefits are available not only for accidental
death, but also for loss of limbs or bodily functions such as sight and hearing, etc.

Accidental death and AD&D policies very rarely pay a benefit; either the cause of death is not
covered, or the coverage is not maintained after the accident until death occurs. To be aware of
what coverage they have, an insured should always review their policy for what it covers and
what it excludes. Often, it does not cover an insured who puts themselves at risk in activities
such as: parachuting, flying an airplane, professional sports, or involvement in a war (military or
not). Also, some insurers will exclude death and injury caused by proximate causes due to (but
not limited to) racing on wheels and mountaineering.

Accidental death benefits can also be added to a standard life insurance policy as a rider. If this
rider is purchased, the policy will generally pay double the face amount if the insured dies due to
an accident. This used to be commonly referred to as a double indemnity coverage. In some
cases, some companies may even offer a triple indemnity cover.

1.3.14.Annuities

An annuity is a contract with an insurance company whereby the insured pays an initial premium
or premiums into a tax-deferred account, which pays out a sum at pre-determined intervals.
There are two periods: the accumulation (when payments are paid into the account) and the
annuitization (when the insurance company pays out). IRS rules restrict how you take money out
of an annuity. Distributions may be taxable and/or penalized.

1.4.Tax and life insurance

1.4.1.Taxation of life insurance in the United States

Premiums paid by the policy owner are normally not deductible for federal and state income tax
purposes.

Proceeds paid by the insurer upon death of the insured are not included in gross income for
federal and state income tax purposes; [6] however, if the proceeds are included in the "estate" of
the deceased, it is likely they will be subject to federal and state estate and inheritance tax.

Cash value increases within the policy are not subject to income taxes unless certain events
occur. For this reason, insurance policies can be a legal and legitimate tax shelter wherein
savings can increase without taxation until the owner withdraws the money from the policy. On
flexible-premium policies, large deposits of premium could cause the contract to be considered a
"Modified Endowment Contract" by the Internal Revenue Service (IRS), which negates many of
the tax advantages associated with life insurance. The insurance company, in most cases, will
inform the policy owner of this danger before applying their premium.

The tax ramifications of life insurance are complex. The policy owner would be well advised to
carefully consider them. As always, the United States Congress or the state legislatures can
change the tax laws at any time.

1.4.2.Taxation of life assurance in the United Kingdom

Premiums are not usually allowable against income tax or corporation tax, however qualifying
policies issued prior to 14 March 1984 do still attract LAPR (Life Assurance Premium Relief) at
15% (with the net premium being collected from the policyholder).
Non-investment life policies do not normally attract either income tax or capital gains tax on
claim. If the policy has as investment element such as an endowment policy, whole of life policy
or an investment bond then the tax treatment is determined by the qualifying status of the policy.

Qualifying status is determined at the outset of the policy if the contract meets certain criteria.
Essentially, long term contracts (10 years plus) tend to be qualifying policies and the proceeds
are free from income tax and capital gains tax. Single premium contracts and those run for a
short term are subject to income tax depending upon your marginal rate in the year you make a
gain. All (UK) insurers pay a special rate of corporation tax on the profits from their life book;
this is deemed as meeting the lower rate (20% in 2005-06) liability for policyholders. Therefore a
policyholder who is a higher rate taxpayer (40% in 2005-06), or becomes one through the
transaction, must pay tax on the gain at the difference between the higher and the lower rate.
This gain is reduced by applying a calculation called top-slicing based on the number of years
the policy has been held. Although this is complicated, the taxation of life assurance based
investment contracts may be beneficial compared to alternative equity-based collective
investment schemes (unit trusts, investment trusts and OEICs). One feature which especially
favors investment bonds is the '5% cumulative allowance' – the ability to draw 5% of the original
investment amount each policy year without being subject to any taxation on the amount
withdrawn. If not used in one year, the 5% allowance can roll over into future years, subject to a
maximum tax deferred withdrawal of 100% of the premiums payable. The withdrawal is deemed
by the HMRC (Her Majesty's Revenue and Customs) to be a payment of capital and therefore the
tax liability is deferred until maturity or surrender of the policy. This is an especially useful tax
planning tool for higher rate taxpayers who expect to become basic rate taxpayers at some
predictable point in the future (e.g. retirement), as at this point the deferred tax liability will not
result in tax being due.

The proceeds of a life policy will be included in the estate for death duty (in the UK, inheritance
tax (IHT)) purposes, except that policies written in trust may fall outside the estate. Trust law and
taxation of trusts can be complicated, so any individual intending to use trusts for tax planning
would usually seek professional advice from an Independent Financial Adviser (IFA) and/or a
solicitor.
1.4.3.Pension Term Assurance

Although available before April 2006, from this date pension term assurance became widely
available in the UK. Most UK product providers adopted the name "life insurance with tax
relief" for the product. Pension term assurance is effectively normal term life assurance with tax
relief on the premiums. All premiums are paid net of basic rate tax at 22%, and higher rate tax
payers can gain an extra 18% tax relief via their tax return. Although not suitable for all, PTA
briefly became one of the most common forms of life assurance sold in the UK until the
Chancellor, Gordon Brown, announced the withdrawal of the scheme in his pre-budget
announcement on 6 December 2006. The tax relief ceased to be available to new policies
transacted after 6 December 2006, however, existing policies have been allowed to enjoy tax
relief so far.

Insurance began as a way of reducing the risk of traders, as early as 2000 BC in China and 1750
BC in Babylon. Life insurance dates only to ancient Rome; "burial clubs" covered the cost of
members' funeral expenses and helped survivors monetarily. Modern life insurance started in
17th century England, originally as insurance for traders [7] : merchants, ship owners and
underwriters met to discuss deals at Lloyd's Coffee House, predecessor to the famous Lloyd's of
London.

The first insurance company in the United States was formed in Charleston, South Carolina in
1732, but it provided only fire insurance. The sale of life insurance in the U.S. began in the late
1760s. The Presbyterian Synods in Philadelphia and New York created the Corporation for
Relief of Poor and Distressed Widows and Children of Presbyterian Ministers in 1759;
Episcopalian priests organized a similar fund in 1769. Between 1787 and 1837 more than two
dozen life insurance companies were started, but fewer than half a dozen survived.

Prior to the American Civil War, many insurance companies in the United States insured the
lives of slaves for their owners. In response to bills passed in California in 2001 and in Illinois in
2003, the companies have been required to search their records for such policies. New York Life
for example reported that Nautilus sold 485 slaveholder life insurance policies during a two-year
period in the 1840s; they added that their trustees voted to end the sale of such policies 15 years
before the Emancipation Proclamation.

1.4.4.Market trends

Life insurance premiums written in 2005

Stranger Originated Life Insurance

Stranger Originated Life Insurance or STOLI is a life insurance policy that is held or financed by
a person who has no relationship to the insured person. Generally, the purpose of life insurance is
to provide peace of mind by assuring that financial loss or hardship will be lessened or
eliminated in the event of the insured person's death. STOLI has often been used as an
investment technique whereby investors will encourage someone (usually an elderly person) to
purchase life insurance and name the investors as the beneficiary of the policy. This undermines
the primary purpose of life insurance as the investors have no financial loss that would occur if
the insured person were to die. In some jurisdictions, there are laws to discourage or prevent
STOLI.

1.4.5.Criticism

Although some aspects of the application process (such as underwriting and insurable interest
provisions) make it difficult, life insurance policies have been used in cases of exploitation and
fraud. In the case of life insurance, there is a motivation to purchase a life insurance policy,
particularly if the face value is substantial, and then kill the insured. Usually, the larger the claim,
and/or the more serious the incident, the larger and more intense will be the number of
investigative lawyers, consisting in police and insurer investigation, eventually also loss
adjusters hired by the insurers to work independently.[8]

The television series Forensic Files has included episodes that feature this scenario. There was
also a documented case in 2006, where two elderly women are accused of taking in homeless
men and assisting them. As part of their assistance, they took out life insurance on the men. After
the contestability period ended on the policies (most life contracts have a standard contestability
period of two years), the women are alleged to have had the men killed via hit-and-run car
crashes.

Recently, viatical settlements have created problems for life insurance carriers. A viatical
settlement involves the purchase of a life insurance policy from an elderly or terminally ill policy
holder. The policy holder sells the policy (including the right to name the beneficiary) to a
purchaser for a price discounted from the policy value. The seller has cash in hand, and the
purchaser will realize a profit when the seller dies and the proceeds are delivered to the
purchaser. In the meantime, the purchaser continues to pay the premiums. Although both parties
have reached an agreeable settlement, insurers are troubled by this trend. Insurers calculate their
rates with the assumption that a certain portion of policy holders will seek to redeem the cash
value of their insurance policies before death. They also expect that a certain portion will stop
paying premiums and forfeit their policies. However, viatical settlements ensure that such
policies will with absolute certainty be paid out. Some purchasers, in order to take advantage of
the potentially large profits, have even actively sought to collude with uninsured elderly and
terminally ill patients, and created policies that would have not otherwise been purchased.
Likewise, these policies are guaranteed losses from the insurers' perspective.

1.4. Insurance Sector in India: Towards the 2020 Vision by Planning

Commission: March 11, 2004

Government of India has set out a goal where it would be in 2020 in different dimensions. In this
paper, we posit the role insurance will play in this scenario. First, we assess the general
macroeconomic trends in India. In doing so, we discuss policy goals, economic realities to
achieve those policy goals and political realities to implement them. India has professed to
commit itself to a long term goal: a quadrupling the real Gross Domestic Product by the year
2020 (Planning Commission, 2003). To make this vision a reality, simple arithmetic shows that it
requires a 7%-8% growth in real GDP over a period of 17 years (2004-2020).
The proponents of this vision are quite positive about this vision. They write, “The compounded
effect of achieving the targeted annual GDP growth rate of 8.5 to 9 percent over the next 20
years would result in a quadrupling of the real per capita income and almost eliminating the
percentage of Indians living below the poverty line. This will raise India's rank from around 11th
today to 4th from the top in 2020 among 207 countries given in the World Development Report
in terms of GDP. Further, in terms of per capita GDP measured in ppp India's rank will rise by a
minimum of 53 ranks from the present 153 to 100. This will mean, India will move from a low
income country to an upper middle income country. This is a very real possibility for us to seize
upon and realise.”

In 2003, economists at Goldman and Sachs used a routine model of economic growth1 to project
the total GDP for a number of countries up to 2050. In the following table, we have reproduced a
selection of those up to 2020. The simple conclusion is that total real GDP in India will be on par
with France and the UK by 2020 and somewhat smaller than Germany.
he authors of the paper do not use optimistic assumptions to come up with these
figures. They also point out that if the same model were applied to Japan/Korea in 1960,
they would underestimate the current actual GDP of Japan/Korea.

Table 1: Projected GDP in 2000 US dollars

Year India France Germany UK
2000 469 1,311 1,875 1,437
2005 604 1489 2011 1,688
2015 1,411 1,767 2,386 2,089
2020 2,104 1,930 2,524 2,285

1.4.1.Saving, Investment and Economic Growth

The ask rate is critically dependent on how the economy is able to absorb macroeconomic
shocks. Specifically, it depends how well the economy can cope with risks of bad monsoons. Let
us examine the positives and the negatives of this equation.
The Positives
When India became independent in 1947, it was a vastly rural economy where
traditional agriculture dominated the economic landscape. This situation has been
changing steadily over the past five decades. The changing landscape can be seen vividly
in the following (see Figure 1). They use a simple Cobb-Douglas production function, with a
saving rate in India of 22%. This assumption is conservative (see below).

It shows that the share of the primary sector in the economy has gone from 58%
of total GDP in 1950 to under 30% by 1995. On the other hand, the contribution of the
secondary sector (where the largest segment is manufacturing) to the GDP has grown
steadily to occupy the same importance in the economy as the primary sector. The share
of transport sector in the GDP has also increased steadily. Although the share of services
in the GDP has not grown as much, the composition of it has also changed behind the
scenes. Traditional services have been replaced by more modern types of services.

1.4.2.Share of Economic Pie

Primary
Secondary
Transport
Service
The second positive element for India is the direction of saving and investment.
Economic growth comes from higher saving rate leading to higher investment (capital
formation) leading to economic growth. The causality of higher saving leading to higher

GDP cannot be theoretically settled. It is taken as an article of faith. In some cases, such a
faith is misplaced. For example, Sinha and Sinha (1998) have shown that in the case of
Mexico, higher saving precedes higher economic growth and never the other way around.
In the case of India, however, preliminary analysis shows that indeed higher saving leads
to higher economic growth (Sinha, 2004a). Where is all the saving concentrated in India?
Document from the Reserve Bank of India (RBI) (http://www.rbi.org.in/sec3/31188.pdf, Table
2.1) drawing on the data from the Central Statistical Organization (CSO) shows that in 2001,
around 11% of saving are in financial assets with additional 10% in the physical assets.
Corporate saving account for 4% of the GDP. In addition, there is a small dissaving by the
Government sector.
How does India measure with respect to growing saving and investment? The
following figure (Figure 2) answers that question. It shows a very clear trend: over a
period of fifty years, both saving and investment are rising. Coupled with the observation
that economic growth in India follows higher saving, we conclude that this trend can be
considered a “good thing” for India.
1.4.3.As a percentage of GDP
Investment
Saving
In 1950, the saving and investment rates in India hovered around10% of GDP. They have risen
to around 25% of GDP by 1999. Note that investment rate does not necessarily track saving rate
exactly. The difference is usually financed either through domestic or foreign borrowing. For
developing countries with largely closed economies, with restrictive access to both domestic and
international capital markets, the gap between saving and investment rates can be worrisome. In
1956-7, 1966-7 and again in 1990-1, the difference reached 3% or more of the GDP. The most
traumatic was the 1990-1 event. International lenders began to doubt the capacity of the Indian
Government to finance such a debt given the dwindling foreign exchange reserves precipitating
in a crisis for the Indian economy.

In the spirit of “Look East” policy initiatives, it is instructive to compare the saving rate of India
with that of the other rapidly growing countries in the region. The first striking feature of Table 2
is that with the exception of Indonesia and the Philippines, all other countries in the reference set
have higher saving rate (than India) over the past seven years.

1.4.4.The Negatives
One important element of the Indian economy is agriculture. In the past, India had tremendous
dependence on agriculture. It has fallen steadily over the past two decades (see Table 2).
Nevertheless, some 25% of GDP in India comes directly from agriculture.
Table 2: Sectors share of GDP at factor cost

Sector Percentage Percentage

Agriculture, forestry, and fishing 38 25
Industry 26 26
Services 36 49
Total 100 100

Source: Central Statistical Organization.

In terms of employment, this dependence is even stronger. Some 55% to 60% of working
population depends either directly or indirectly on agriculture. Dependence of agriculture is
problematic. The amount of land under irrigation (even with generous definition) is less than
40%. This leaves a huge gap between what is irrigated and what is not. To put it differently,
more than half of the land under cultivation is at the mercy of Mother Nature. Thus, a large
chunk of the economic output depends on the generosity of monsoons. In addition, micro-
climatic conditions do not allow uniform outcome in every part of the country. Therefore, there
will always be variation across the country even at a given point in time.

Moreover, the natural phenomena such as floods and cyclones also affect India at an elevated
rate. Some 2.25% of Indian GDP and 12.15% of Central Government outlay has been eaten up
by the vagaries of weather. The following table (Table 4) shows how high India’s vulnerability
is. Along with Bangladesh, India ranks among the top five spots on vulnerability index
(constructed using the frequency and severity of weather related phenomena). The other
countries in top five are island nations (with the exception of Bangladesh). For the insurance
industry, high vulnerability can be an opportunity. If, for example, weather related insurance
products take off, India can become a big market. There are already some small beginnings. For
example, instead of traditional crop insurance (which always loses money) rainfall index related
policies are being sold to small farmers in Andhra Pradesh.
The second negative element of the present Indian economy is the consistent budget deficit that
is leading to rising government debt. What effects do deficits and debts have on the economic
growth? A recent speech given by Martin Feldstein at the Reserve Bank of India highlights this
effect: “To get a sense of the magnitude of these effects, consider just the impact of India’s
recent deficits on capital formation and growth. If India did not have its current central
government deficit of some 6 percent of
GDP, the gross rate of capital formation could rise from 24 % of GDP to 30%. The net
rate of investment would rise relatively more. Over the next decade, this greater rate of
net capital accumulation would be enough to add nearly a full percentage point to the
annual growth rate, raising India’s level of GDP a decade from now by about 10
percent.” (http://www.rbi.org.in/sec5/50482.pdf)
The source of worry that Feldstein alluded to, can be seen in the following figure

1.4.5. Debt at a percentage of GDP

Domestic
Foreign
There are two clear trends in Figure 3. First, the value of domestic debt as a percent of GDP is
growing steadily. Foreign debt, however, is falling over time. Thus, we have a “bad news/good
news” situation. The dependence of the government on foreign debt has gone down over the past
three decades but at the same time there has been a marked growth in domestic debt, especially
in the past five years. This is a definite source of weakness for putting brakes on economic
growth. This reduction in foreign debt (and rising foreign exchange reserves) has prompted Fitch
and Moody's to raise the foreign currency rating for India.

1.4.6.The Role of Insurance and Risk Management

What is the fundamental role of insurance? Insurance has the fundamental role of
smoothing out fluctuation of cash flows. For households, life insurance can reduce the
drastic fall in income of the family if the insured person dies. Through pension plans, a
fall in retirement income can also be mitigated. Similarly, companies may be able to
avoid bankruptcy through the use of risk management in general and insurance in
particular.
What role does the insurance sector play in this story of saving and investment in
India? In general, saving is channeled into several specific financial institutions. For most
countries, a substantial proportion is invested in banks. Some of it is invested in longer
term markets for capital such as stocks and bonds. In many cases, a significant portion
goes to the insurance sector. It could take the form of life insurance, pension plans, health
insurance and others. In Table 5, we show what role insurance plays in different
countries. In general, high per capita income is associated with high proportion of GDS
(and also with high proportion of GDP) coming from the insurance sector. Thus, higher
level of development seems to come with high level of activities in the insurance sector.

Table 3 : Life Insurance Premium as Percentages of the Gross Domestic Saving (GDS)
and that of the Gross Domestic Product (GDP) Rank Country % of GDS % of GDP
Rank COUNTRY % of GDP % of GDP

1. United Kingdom 52.50 7.31

2. South Africa 51.55 10.32
3. Japan 32.46 10.10
4. France 26.20 4.91
5. USA 25.20 3.63
6. South Korea 23.66 9.10
7. Finland 23.10 4.98
8. Switzerland 21.92 5.99
9. Netherlands 19.04 4.51
10. Israel 18.84 4.41
11. Sweden 17.88 3.51
12. Australia 17.78 3.48
13. Canada 17.05 3.04
14. Zimbabwe 15.88 6.27
15. Ireland 14.96 4.59
 16. Greece 13.87 1.12
17. New Zealand 12.75 3.04
18. Taiwan 12.29 3.64
19 Denmark 12.00 2.71
20. Spain 11.68 2.23
21. Germany 11.40 2.80
22. Norway 9.57 2.33
23. Belgium 9.13 2.38
24. Portugal 8.76 1.65
25. Austria 6.96 2.10
26. Chile 6.96 1.95
27. India 5.95 1.29
28. Italy 5.60 1.13
29. Malaysia 5.35 2.30
30. Singapore 4.72 2.73

In general, when various components of the insurance market develop, insurance

sector takes on a bigger share of the GDS and of the GDP. Sinha (2004b) has examined
the relation between insurance and GDP in India. A tentative conclusion is that a rise of
one percent of real GDP leads to a rise of two percent of rise insurance demand in the
context of India. Thus, rough estimates would suggest that quadrupling of GDP in India
by 2020 will lead to an eight-fold rise in insurance demand. Of course, this rise in
demand will not be spread equally across different segments of the market. For example,
there will be bigger impact on the life and pension markets. This effect will be tempered
by a smaller rise in fire, auto, marine and fire insurance sub-sectors.

1.4.7.Comparing Banking and Insurance in Economic Crises

Banking always leads the financial sector – especially in developing countries. The reason is
clear. For businesses to grow, for commercial activities to flourish, loans from banks pave the
way. Stock market usually plays the second fiddle. In most cases, insurance pays the third fiddle!
For the countries with developed markets, this is not
necessarily the case.
It is important to keep in mind how hard economic crises hit banking and how costly it is to
rescue the banks (which, even in the absence of formal deposit insurance, most countries end up
undertaking).

Table 6 vividly illustrates this issue. Rescuing banks can drain huge resources. In contrast,
insurance companies do not require similar rescue missions as they have a much bigger cushion
in the form of reserves.

Date Country Cost % of GDP

1980–1982 Argentina 55
1997–ongoing Indonesia 50
1981–1983 Chile 41
1997–ongoing ongoing Thailand 33
1997–ongoing ongoing South 27
Korea
1997–ongoing Malaysia 16
1994–1997 Venezuela 22
1995 Mexico 19
1990–ongoing Japan 20
1989–1991 Czech Republic 12
1991–1994 Finland 11
1991–1995 Hungary 10
1994–1996 Brazil 13
1987–1993 Norway 8
1998 Russia 5 to 7
1991–1994 Sweden 4
1984–1991 United States 3

Source: Daniela Klingebiel and Luc Laewen, eds., Managing the Real and Fiscal Effects of
Banking Crises, World Bank Discussion Paper No. 428 (Washington: World Bank, 2002).
In India, the crisis of 1991-92 left a number of banks very undercapitalized. The government
started the long and slow process of infusing more money to these public sector banks . The total
amount of money exceeded eight percent of the GDP.2 But, since, they were undertaken over a
long time, the problems of banks in India 2 No recapitalization support was provided to banks
for the years 1999-2000 and 2000-01. Subsequently, the Union Budget 2000-01 announced that
the Government would consider recapitalization of the weak banks to achieve the prescribed
capital adequacy norms, provided a viable restructuring program acceptable never came under
the “crisis” category. Recent economic boom has also helped India to bring the proportion of
nonperforming assets down. Since the definition of nonperforming assets vary across countries,
it is difficult to compare India with other countries.

1.4.8. Where will the Indian market be in 2020?

Vision 2020 identified the following factors as the engines of economic growth in India: Rising
education level, rates of technological innovation, cheaper and faster communication, availability
of information, and globalization. It makes no mention of the financial sector. Economic growth
does not take place in vacuum. There are two critical ingredients needed. First, there has to be a
well-defined legal environment. Legal framework has big impact on the development of the
financial sector. As a result, it also has a huge impact on economic growth (see La Porta et al.,
1998). Second, there has to be a well functioning financial market (see Sinha, 2001). Vision
2020 document mentions “insurance” eight times in the 108 pages. On the other hand, it
mentions banking only once! Given that services sector will become the largest in India, both
insurance and banking will play a critical role along with the stock market. This document does,
however, contain a paragraph about a particular area of insurance: health insurance. “Health
insurance can play an invaluable role in improving the overall health care system. The insurable
population in India has been assessed at 250 million and this number will increase rapidly in the
coming two decades. This should be supplemented by innovative insurance products and
programmes by panchayats with reinsurance backup by companies and government to extend
coverage to much larger sections of the population.” (Planning Commission, 2003, page 55). At
present, health insurance is not being discussed much. But, Indians spend close to 5% of their
income out of pocket for health related issues. Thus, it is easy to see why this is an easy pick. So
is the pension market. At present, private pension is its infancy in India. It will not remain so in
the coming decades. Let us conduct the following thought experiment using Table 1 for getting
an idea of where the Indian market might be in 2020. First, let us follow an extremely
conservative projection: insurance demand goes exactly in line with income. In this case, we are
assuming that in 2020, even in the face of rising income, the penetration of insurance
(premium/GDP) stays exactly the same as in 2002. In that case, we will simply multiply the
current premium volume figure four-fold. In Sigma 8/2003, such figures are available for 2002
for India. In such a case, the premium volume will be USD 67 billion. Of course, evidence from
other countries show that rising income below certain threshold has a nonlinear impact on
insurance demand (the so-called S curve of insurance demand). So, insurance penetration is not
likely to stay at 3.2% for India (the figure for 2002) in 2020. If the penetration rises to 5% (more
plausible if we believe in the S curve), then the premium volume will rise to USD 105 billion. If
it rises to 6%, then the premium volume would rise to USD 121 billion. This thought experiment
above does not even address the two future potential growth drivers: private pensions and health
insurance. Given that Indians are already spending 5% of their income out of pocket for health
care, this could easily add another USD 30 to 40 billion by 2020. This will raise the premium
volume to USD 135 to USD 160 region by 2020.

1.4.9. Key Recommendations of Malhotra Committee

Structure

 Government stake in the insurance Companies to be brought down to 50%.

 Government should take over the holdings of GIC and its subsidiaries so that these
subsidiaries can act as independent corporations.
 All the insurance companies should be given greater freedom to operate.

1.4.9. Competition

 Private Companies with a minimum paid up capital of Rs.1billion should be allowed to

enter the industry.
 No Company should deal in both Life and General Insurance through a single Entity.
 Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies.
  Postal Life Insurance should be allowed to operate in the rural market.
 Only one State Level Life Insurance Company should be allowed to operate in each state.

1.4.10. Regulatory Body

 The Insurance Act should be changed.

 An Insurance Regulatory body should be set up.
 Controller of Insurance should be made independent.

1.4.11. Investments

 Mandatory Investments of LIC Life Fund in government securities to be reduced from

75% to 50%.
 GIC and its subsidiaries are not to hold more than 5% in any company.

1.4.12. 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 the
insurance industry.

Malhotra Committee also proposed setting up an independent regulatory body - The Insurance
Regulatory and Development Authority (IRDA) to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act as independent
companies with economic motives.

Insurance sector in India was liberalized in March 2000 with the passage of the Insurance
Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private
players and allowing foreign players to enter the market with some limits on direct foreign
ownership. There is a 26 percent equity cap for foreign partners in an insurance company. There
is a proposal to increase this limit to 49 percent. The opening up of the insurance sector has led
to rapid growth of the sector. Presently, there are 16 life insurance companies and 15 non-life
insurance companies in the market. The potential for growth of insurance industry in India is
immense as nearly 80 per cent of Indian population is without life insurance cover while health
insurance and non-life insurance continues to be well below international standards.

1.5. The Best Life Insurance Broker’s Career Path

Anyone seeking a life insurance policy wants to be sure that they have the best life insurance
possible, especially in risky financial times. With such a major decision to make, a potential
client wants to be confident that their beneficiaries will be well looked after in the event of their
death.

A professional insurance broker will help to ensure this peace of mind. A properly trained broker
has a great deal of knowledge of the industry, gained through training, examination and many
years’ experience within the sector. They are perfectly placed to find the best life insurance for
their clients thanks to their extensive network of contacts.

A career as a life insurance broker can be a rewarding one, with a good salary and a good degree
of professional recognition. There is also a great deal of satisfaction to be found in finding the
best life insurance for a client and thus providing them not only with the right product, but the
knowledge that their family and dependents will be properly taken care of.

There are several stages that a prospective broker will need to pass through before becoming
fully trained and registered. At best this will involve experience of the life insurance industry
itself, plus study for professional exams and the subsequent qualifications gained. It is possible
for aspiring brokers to join a brokerage firm immediately after their GCSEs but, due to
competition, many companies prefer to see A-levels – especially those in subjects such as
accounting, business, economics or management.

If a candidate’s GCSEs and/or A-levels are more arts or scientifically related, then a brokerage
firm will most likely demand that they undertake a period of apprenticeship with an established
insurance firm. This can attract industry funding, if the candidate is between 16 and 24 years old.

Entering an insurance firm with the intention of becoming a broker usually means beginning as a
trainee insurance technician. During this period, a candidate is required to garner first-hand
experience of all the best life insurance types and to sit for several industry-based examinations.
Different qualifications are required for each branch of the insurance industry, and for life
insurance, a candidate will be expected to gain Competent Advisor Status (CAS) via FSA-
approved exams in insurance, financial advice, or both.

One can find training centers all across the UK which are overseen by the British Insurance
Brokers’ Association. Here, candidates are able to study the technical aspects of life insurance
and find out how to identify the best life insurance policies.

1.6. Information Solutions for Commercial Insurance

• Gain a deeper understanding of a client's industry, market position, and business

requirements.
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defined criteria.
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• Extend coverage to subsidiaries and branches by understanding corporate affiliations.
• Access comprehensive business information covering 1.7 million public and private
companies and 6 million executives.
1.7. Insight And Advantage For Commercial Insurance

• Commercial insurers are focused on increasing profitability in the face of enormous

losses, investment downturns, and other adverse conditions.

• Today, more than ever, insurers are counted on to make informed decisions that generate
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