2. In double insurance, the property is the focus of the insurance contract, under which policies are obtained from different insurers. Reinsurance, on the other hand, is taken to cover the liability of the original insurer. 3. In the event of double insurance, the insured may seek compensation from all insurers. Reinsurance, on the other hand, allows the insured to seek compensation from the original insurer, who then seeks compensation from the reinsurer. 4. In double insurance, all of the insurers share the real amount of liability suffered in proportion to the sum insured. In reinsurance, however, the reinsurer is responsible for a portion of the risk reinsured by the ceding firm. 5. Reinsurance is concerned with reducing the insurer's risk obligation, while double insurance guarantees the benefits of insurance. 6. The insured has an insurable interest in the insurance policy in double insurance. In reinsurance, on the other hand, the original insured is uninterested in reinsurance. 7. Double insurance is only possible with the agreement of the insured. Reinsurance, on the other hand, does not require the insured's permission. 8.5 ESSENTIALS OF REINSURNACE PROGRAMS AS PER IRDA Some things never change for a practitioner who has been consulting mainly on insurance law for more than a decade. For example, despite almost every other sector having higher FDI thresholds, the foreign direct investment (FDI) policy on insurance continues to recommend a cap of 26%. The sudden and somewhat abrupt shift in reinsurance reporting standards comes as a surprise to an industry fighting several battles at the same time in the face of this seemingly nonchalant and laid-back attitude impacting the insurance sector. The Insurance Regulatory and Development Authority (IRDA) issued the \"Guidelines on submission of information on cross-border reinsurers not having any presence in India\" (the Cross-Border Guidelines) through circulars dated 6 January 2012 and 31 January 2012 (which went into effect on 1 April 2012) and subsequently clarified the methodology to be followed by unregistered reinsurers to comply with the Cross-Border Guidelines. Although most cross-border reinsurers are adjusting to the new registration/information demands, there 151 CU IDOL SELF LEARNING MATERIAL (SLM)
is a lot of scepticism in the sector about the likely outcome if the registration process is followed. The Indian reinsurance market, which is primarily regulated by the IRDA, previously allowed Indian cedants to reinsure their risks with: 1. an Indian reinsurance company registered with the IRDA and approved by the central government (currently, General Insurance Corporation (GIC Re), India's national re-insurer, is the only registered Indian reinsurance company); and 2. unregistered foreign reinsurance companies (currently, General Insurance Corporation (GIC Re), India's national re It's worth noting that the Indian reinsurance industry hasn't seen much regulatory action, as shown by the fact that the Regulations, which were first notified in 2000, have remained largely unchanged. As a result, reinsurance in India has remained largely market-driven, despite the fact that the Regulations' guiding principle has always been to maintain and maximise risk retention within India. The IRDA also stipulated that insurers who place reinsurance with foreign reinsurers must only cede to companies that meet the Regulations' requirements. According to the Regulations, each Indian insurer is free to structure its annual reinsurance programme in accordance with the Regulations, but it must be submitted to the IRDA. Although many foreign reinsurers operate in India, they are not allowed to open branches, though this could change if the Insurance Laws (Amendment) Bill 2008, which is currently before India's parliament, is passed in its current form. According to the Cross-Border Guidelines, a non-domestic reinsurance firm without a physical presence in India can only conduct reinsurance business in India if it is domiciled in a country that has signed a double taxation avoidance agreement with India or a country/jurisdiction that has entered into tax information sharing agreements with India, as listed by the Income Tax Department. The international reinsurer must register with the IRDA after passing the domicile examination. All registration applications must go through the direct insurer in question or GIC Re. The reinsurer must also file an information sheet with any one direct insurer, along with any required documentation and enclosures, which the direct insurer must then send to the IRDA with its forwarding address. 152 CU IDOL SELF LEARNING MATERIAL (SLM)
It's worth noting that Indian insurers and reinsurers have been given the responsibility of putting reinsurance company with registered cross-border reinsurers. Both insurers and reinsurance intermediaries must ensure that cross-border reinsurers accepting reinsurance business from India are legal entities in their home countries, controlled and supervised by their home supervisors. The cross-border reinsurer's financial power, management efficiency, and technical reserving methodologies should all be monitored by the reinsurer's home supervisory authority. To put the cherry on top, the IRDA mandates that the solvency of cross-border reinsurers and their parent companies, where applicable, be at least equal to the IRDA's requirements for Indian insurers. To put it another way, even if a reinsurer meets the solvency criteria in its home country, it might be unable to write reinsurance business in India if it cannot demonstrate to the IRDA that its solvency requirements meet the Regulations. Several leading reinsurers have expressed concern that the conditions for maintaining a solvency margin (similar to those applicable to Indian insurers) could be difficult for international reinsurers to meet, as they would be subject to their own solvency requirements in their respective jurisdictions. Furthermore, if the Indian solvency margin is to be used, it should be extended to the reinsurer that is actually writing Indian corporation, not the parent company. Any cross-border reinsurer that has not registered with the IRDA by March 31 of that year will only consider reinsurance business in India if it is part of a facultative placement. Before accepting insurance, reinsurance, or retrocession business in India, all cross-border reinsurers (whether or not they have a representative/liaison office or services company in India) must file an information sheet with the IRDA, along with a copy of their audited annual report, by March 31 of each year. Given that the Cross-Border Guidelines were only announced in January 2012, the new guidelines have yet to receive widespread coverage in the local media. However, according to industry reports, there continues to be dissatisfaction within the insurance sector and local brokers. Previously, Indian insurers were only expected to file details about their reinsurance policy with the IRDA on a quarterly basis, but cross-border reinsurers now have much stringent reporting standards to adhere to, all of which must be completed within a specific time frame. Reinsurance firms are wrestling with concerns around the disclosure of sensitive business details and the degree of confidentiality with which local cedants and the IRDA can handle such information, rather than the actual filing. 153 CU IDOL SELF LEARNING MATERIAL (SLM)
Foreign reinsurers often have no clear influence about whether the local cedant submits such information in a timely manner. Some of the IRDA's requests for information, such as \"details of current relationships with Indian insurance firms,\" seem to walk a fine line between disclosing confidential contractual agreements and following the rule. Various international organisations, including the American Council of Life Insurers, the Association of Bermuda Insurers and Reinsurers, Insurance Europe (formerly the CEA), and the Reinsurance Association of America, have expressed their concerns to the IRDA in a joint written representation dated March 12, 2012, urging the IRDA to reconsider the registration requirements given the current economic climate. These organisations have petitioned the IRDA to authorise cross-border reinsurers from well-regulated jurisdictions to carry our reinsurance without having to register. The current situation is further complicated by the IRDA's failure to clarify its intentions or provide context for the Cross-Border Guidelines. Some of the demands for information, for example, such as the names of people who own more than 1% of the issued capital of cross- border reinsurers, seem to be excessive and need to be rationalised and clarified. We can only speculate about the IRDA's intentions at this point, but it appears that these provisions were enacted to give the IRDA more leverage and information over foreign reinsurers operating in India, especially given the global financial market volatility. It is obvious that the reinsurance industry will face significant challenges in the coming years. Transparency, financial stability, oversight, and supervision are all hot topics these days, and it's arguable that a financial regulator needs complete and comprehensive details on all companies operating in its market. However, it may be necessary for the IRDA and the reinsurance companies to have a healthy dialogue about the manner in which the Cross- Border Guidelines may be restructured to ensure that the objectives of each of the stakeholders are met Ultimately, the presence of foreign reinsurers is critical in the Indian market as they make additional capacity available, relieve Indian insurers of partial and/or entire risks that are too large for their own capital base, provide Indian insurers with proven international expertise in assessing complex risks and handling large, complex claims and transfer international insurance and reinsurance-specific know-how to the local market. 154 CU IDOL SELF LEARNING MATERIAL (SLM)
Given the same, it is imperative that the IRDA and the reinsurance industry debate these guidelines to ensure that the Cross-Border Guidelines do not result in or create a trade barrier in the free provision of reinsurance services in India. In fact, the Cross-Border Guidelines may well be considered as a good starting point or basis for more regulated and streamlined regulations in the reinsurance sector in India. 8.6 SUMMARY • Reinsurance is a form of insurance. A reinsurance contract is legally an insurance contract. • The reinsurer agrees to indemnify the cedant insurer for a specified share of specified types of insurance claims paid by the cedant for a single insurance policy or for a specified set of policies. • The terminology used is that the reinsurer assumes the liability ceded on the subject policies. The cession, or share of claims to be paid by the reinsurer, may be defined on a proportional share basis (a specified percentage of each claim) or on an excess basis (the part of each claim, or aggregation of claims, above some specified dollar amount). • The nature and purpose of reinsurance is to reduce the financial cost to insurance companies arising from the potential occurrence of specified insurance claims, thus further enhancing innovation, competition, and efficiency in the marketplace. • Reinsurance companies are of two basic types: direct writers, which have their own employed account executives who produce business, and broker companies or brokers, which receive business through reinsurance intermediaries. • Double insurance refers to a situation in which the same risk and subject matter, is insured more than once. Reinsurance implies an arrangement, wherein the insurer transfer a part of risk, by insuring it with another insurance company. • Primary companies are said to “cede” business to a reinsurer. Types of Reinsurance: Reinsurance can be divided into two basic categories: treaty and facultative. Treaties are agreements that cover broad groups of policies such as all of a primary insurer's auto business. 8.7 KEYWORDS • GIC Re - is the Indian reinsurer (General Insurance Corporation of India). • Reinsurance - is a process in which one direct insurance firm (also known as a 155 CU IDOL SELF LEARNING MATERIAL (SLM)
Ceding company) passes (cedes) a portion of the liability to another insurance company (called Reinsurer) • Double Insurance - A form of insurance in which a person or company insures a specific property with multiple insurers or multiple policies from the same insurer • Ceding company- is an insurance company that transfers the insurance portfolio to a reinsurer. • Reinsurer - Reinsurance companies, also known as reinsurers, are companies that provide insurance to insurance companies • Cedes - refers to the portion of risk that a primary insurer passes to a reinsurer 8.8 LEARNING ACTIVITY 1. List out the Reinsurance companies in India doing business. ___________________________________________________________________________ ____________________________________________________________________ 8.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. Define Reinsurance? 2. List out the reinsurance companies in India? 3. Define Double Insurance ? 4.What are the objectives of Reinsurance? 5. What are two types of reinsurance and define. Long Questions 1. What are the key difference between Double insurance and Reinsurance? 2. Explain the essentials of Reinsurance? 3. Describe how reinsurance works in detail with examples? 4. Explain the need for Reinsurance? 156 CU IDOL SELF LEARNING MATERIAL (SLM)
5. What is the difference between Reinsurance and Double Insurance? B. Multiple Choice Questions 1. ………………..is also known as insurance for insurers or stop-loss insurance a. Reinsurance. b. Life Insurance c. Group Insurance d. All of these. 2. The Indian Reinsurer is a. GIC Re b. LIC Re c. MIC Re d. None of these. 3. Double insurance is not exactly same as a. Reinsurance b. Life insurance c. Group Insurance d. None of these. 4………………………… is a product offered by insurance companies to other insurance companies to cover large losses. a. Reinsurance b. Group Insurance c. Motor Insurance d. Liability Insurance 157 CU IDOL SELF LEARNING MATERIAL (SLM)
5. -------------was notified as a reinsurance company. a. GIC Re b. LIC Re c. Life insurance corporation of India d. None of these. Answers 1-d 2-a 3-a 4-a 5-a 8.10 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 158 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 9: IRDAI Structure 9.0. Learning Objectives 9.1. Introduction 9.2. IRDAI Act 1999 9.3. Features and Importance of IRDAI 9.4. Role Played by IRDAI 9.5. Summary 9.6. Keywords 9.7. Learning Activity 9.8. Unit End Questions 9.9. References 9.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Explain the Meaning of IRDAI • Outlined the features of IRDAI • State the Importance of IRDAI • Describe the Role played by IRDAI 9.1 INTRODUCTION You studied the sense of insurance, its value, and how it plays a critical role in the country's economic growth in other modules of this course. You may already be aware that in the insurance industry, there is a deal between people, groups, or businessmen and insurance firms. These contracts will last anywhere from a year to thirty years or more, and the volume of these contracts is enormous. As you might be aware, an insurance policy consists of guarantees or commitments from insurance providers to reimburse the insured in the event of a mishap, but nothing is concrete. When a commodity is intangible (i.e., something that cannot be seen or touched) and the number of contracts is large, conflicts can occur in any 159 CU IDOL SELF LEARNING MATERIAL (SLM)
industry. The government of every country appoints a regulator and also enforces the legislation that regulates the industry to resolve these disputes. In India, the government began to regulate the insurance industry in 1912 by enacting two laws: a. the Provident Insurance Societies Act V of 1912 and b. the Indian Life Insurance Companies Act VI of 1912. These acts were later comprehensively amended and a new Act namely Insurance Act 1938 came into existence for controlling • Investment of funds, • Expenditure and • Management of the insurance companies This act was implemented by the creation of the Office of Controller. This Act was revised once more in 1950 to meet the needs of the time. However, due to rising malpractices in the life insurance industry, as well as high illiteracy and a lack of desire to expand the business, it was nationalized by the Indian government. The LIC Act was passed in June 1956, and it went into effect on September 1, 1956. Similarly, the General Insurance Company Nationalization Act 1972 was enacted on April 1, 1973, which went into effect on April 1, 1973. (GIBNAct 1972). The Government made several small amendments to the Insurance Act of 1938 to enact these acts. With the world market forces at full force, rising literacy levels, improved regulatory systems, and the need for rapid growth in this sector in the early 1990s, the need of the hour was to go with the world and reopen the Life and General Insurance Sector to private entrepreneurs so that there is no monopoly and the customer/consumer/buyer has more choices than one type of Insurance. The Malhotra Committee was formed under the chairmanship of Late Shri R.N. Malhotra to research the liberalisation process in India's insurance sector. In 1994, the Malhotra committee issued a report recommending that private companies be permitted to operate in India. The Government agreed with the Committee's recommendations, and the Insurance Regulatory Authority (IRA) was established in 1996 to pave the way for the insurance 160 CU IDOL SELF LEARNING MATERIAL (SLM)
industry's privatization. The main aim was the development of Insurance covering all strata of society (to not only rich but poor, folks from rural, tribal, unorganized sector, social sector, disabled community, daily wagers, women at large, etc.) gained importance through concerns put forth by political leaders, trade unionists, social organizations, cooperatives and policy makers; which amended the name IRA to IRDA (Insurance Regulatory & Development Authority). The Insurance Act of 1938 was amended once more to ensure the smooth operation of the IRDA. 9.2 INSURANCE REGULATORY DEVELOPMENT AUTHOURITY ACT OF INDIA (IRDAI) 1999 This Act was passed by Parliament in Dec.1999 & it received presidential assent in Jan.2000. The aim of the Authority is “to protect the interest of holders of Insurance policies to regulate, promote and ensure orderly growth of Insurance industry & for matters connected therewith or incidental thereto.” Under this Act, an authority called IRDA is established which replaces Controller of Insurance under Insurance Act 1938. Definitions : Like any other Act, various terms have been defined as follows under section 2: - a) “Appointed Day” means the date on which the Authority is established. b) “Authority” means the Insurance Regulatory and Development Authority. c) “Chairperson” means the chairperson of the Authority. d) “Fund” means the Insurance Regulatory and Development Authority Fund. e) “Interim Insurance Regulatory Authority” means the Insurance Regulatory Authority set up by the Central Government. f) “Intermediary or Insurance intermediary” includes Insurance brokers, reinsurance brokers, insurance consultants, surveyors and loss assessors. g) “Member” means a whole time or a part time member of the Authority and includes the Chairperson. h) “Notification” means a notification published in the Official Gazette. i) “Prescribed” means prescribed by rules made under this Act. j) “Regulations” means the regulations made by the Authority. 9.3 FEATURES AND IMPORTANCE OF IRDAI 161 CU IDOL SELF LEARNING MATERIAL (SLM)
• By the above name, a corporate entity means that it will function as a group of people, known as representatives, who will operate together rather than as a single person, such as the Controller of Insurance. • Permanent succession ensures that even if a member resigns or dies, the Authority will continue to function. • A traditional seal with the authority to enter into a contract by stamping papers. • Suing or being sued refers to the Authority's ability to bring a lawsuit against someone or any entity, and vice versa. The Authority shall consist of nine persons as per details given below: • Chairperson. • Not more than 5 whole time members. • Not more than 4 part time members. The Central Government will select these individuals from among persons of competence, honesty, and standing who have expertise or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration, or any other discipline that the Central Government believes will be beneficial to the Authority. Tenure (Section 5) : • The Chairman tenure will be for 5 years and eligible for reappointment till he attains the age of 65 years. • The appointment of members will be for 5 years and eligible for reappointment but not exceeding the age 62 years. Removal of Members (Section 6) : The Central Government can remove any member of the Authority if he :- a) Is declared bankrupt b) Has become physically or mentally incapable of acting as a member c) Has been awarded punishment by any Court. d) Has acquired such financial or other interest which affect his function as a member. 162 CU IDOL SELF LEARNING MATERIAL (SLM)
e) Has so abused his position as to render his continuation in office detrimental to the public interest. But no member can be removed from the office unless & until the reasonable opportunity of being heard is given to such member in the matter. Salary & Allowances (Section 7) : The Chairperson and full time members’ shall receive the salary & allowance as prescribed by the Government. Bar on future employment (Section 8) : The Chairperson and the whole time members cannot accept any appointment without Govt. approval within 2 years from the date on which he ceases or retires from the office. Superintendence & Direction (Section 9) : The Chairperson shall have overall control & provide direction in respect of all administrative matters of the Authority. He will chair the meeting as and when he is present in the meeting. Meeting of Authority (Section 10) : The meeting of the Authority will be held at the time and place as decided by the Chairperson as per regulation made under this act. If the Chairperson is unable to attend the meeting then the members will choose the Chairperson from amongst the present members. All the issues to be discussed in the meeting shall be decided by a majority of votes by the present and voting. In case of equal voting the decision of Chairperson of that meeting will be final. Invalidation of proceedings of Authority (Section 11) : The proceedings of Authority will not become invalidate ( not valid in the eyes of law) due to following reasons:- • Defects in the formation of the Authority. • Defect in appointment of any Member. 9.4 ROLE PLAYED BY IRDAI Duties, Powers & Functions of Authority (Section 14): 163 CU IDOL SELF LEARNING MATERIAL (SLM)
Duties: The Authority shall have the duty to regulate, promote and ensure orderly growth of the Insurance business and reinsurance business subject to the provisions of any other provisions of the act. Powers & Functions to: - (a) Issue to the applicant (Insurance company or Insurance Agent or Surveyors or Insurance Brokers or Third-Party Administrators) a certificate of registration, renew, modify, withdraw, suspend or cancel such registration. (b) Protection of the interests of the policyholders in matters concerning assigning of policy, nomination by policyholders, 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 insurance brokers , agents, surveyors, Third Party Administrator. (d) Specifying the code of conduct for surveyors and loss assessors (Who assess the loss of policyholder in case of General Insurance); (e) Promoting efficiency in the conduct of insurance business; (f) Promoting and regulating professional organization’s connected with the insurance and re-insurance business; (g) Levying fees and other charges on insurance companies, Agents, Insurance Brokers, Surveyors and Third party Administrator; (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 (w.e.f., 1/1/2007 TAC has ceased to function). (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; 164 CU IDOL SELF LEARNING MATERIAL (SLM)
(l) Regulating maintenance of margin of solvency i.e., having sufficient funds to pay insurance claim amount; (m) To settle the disputes between insurers and intermediaries or insurance intermediaries; (n) Supervising the functioning of the Tariff Advisory Committee; (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. Role of IRDAI : 1. To protect the interest of and ensure just treatment to insurance policy holders. 2. To encourage and ensure the systematic growth of the insurance industry so as to benefit the common man and help in bringing economic growth. 3. To set, promote, monitor and apply high standards of integrity, fair dealing, financial viability and capability of those it regulates. 4. To ensure clarity, preciseness, transparency while dealing with the insurance policy holder. The Authority ensure that correct information about the products and services is passed on to the policy holders along with making them aware of their responsibilities. 5. To provide dispute resolution mechanism and ensure speedy settlement of genuine claims. The Authority must check insurance scams and other misconducts. 6. To take suitable steps against circumstances where set standards do not prevail or inappropriately enforced. 7. To bring about the optimal amount of self-regulation in day-to-day activities of the industry reliable with the requirements of the prudential regulation. 9.5 SUMMARY • The key goal of forming IRDA is to establish a regulator that will oversee and regulate the country's insurance industry, as well as all individuals and organizations that are directly or indirectly involved in it. 165 CU IDOL SELF LEARNING MATERIAL (SLM)
• The Authority has the authority to issue regulations for the registration, renewal, and examination of insurers, insurance intermediaries, surveyors, and third-party administrators in order to ensure the smooth operation of the insurance industry. The Authority also safeguards the interests of policyholders for whom insurers are responsible. Since it is accountable to the Central Government, the Authority does not become supreme. • IRDAI was founded in 1999. • IRDA has a total of nine members. • The member's retirement age is 62. • Acts as an insurance sector regulator. • Serves to safeguard the policyholder's interests. • The apex body establishes rules and regulations under Section 114A of the Insurance Act of 1938. • The Insurance Act entrusts it with issuing certificates of registration to new insurance firms seeking to operate in India. • Oversees the operations of the insurance industry to ensure that insurers and policyholders continue to grow. 9.6 KEYWORDS • IRDAI - Insurance Regulatory and Development Authority Of India • Insurance Advisory Committee - Shall consist of not more than twenty-five members excluding ex officio members • Authority - means the Insurance Regulatory and Development Authority • Appointed Day - means the date on which the Authority is established • Chairperson - means the chairperson of the Authority • Fund - means the Insurance Regulatory and Development Authority Fund • Member - means a whole time or a part time member of the Authority and includes the Chairperson 9.7 LEARNING ACTIVITY 1. List out the powers and functions of IRDA Authority. 166 CU IDOL SELF LEARNING MATERIAL (SLM)
___________________________________________________________________________ ____________________________________________________________________ 9.8 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. List the Composition of Authority. 2. Mention the maximum age of the Chairperson of IRDA. 3. How many members are in the Insurance advisory committee? 4. Which year IRDAI act passed ? Define 5. Define Appointed day, Authority and Chairperson? Long Questions 1. Explain the power & functions of the Authority. 2. What is the composition of the Authority and its tenure? 3. Define who is Insurance intermediary, appointed day and member in detail. 4. Explain in detail about IRDA Act 1999 and its terms? 5. Explain the features and importance of IRDAI? B. Multiple Choice Questions 1. IRDA was formed in a. 1999 b.2001 c.2002 d. 1956 2. Total members of IRDA are 167 a. 9 b.10 CU IDOL SELF LEARNING MATERIAL (SLM)
c.8 d.11 3. The retirement age of member is a. 62 b.65 c.60 d. None of these. 4. Choose the correct option IRDA does not specify requisite qualifications, code of conduct and practical training for a. Insurance brokers. b. Agents & surveyors. c. Third Party Administrator. d. Insurer. 5. ______can supersede the IRDA a. Central Government b. Supreme Court c. High court d. State Government Answers 168 1-a 2-a 3-a 4-c 5-b 9.9 REFERENCES Text Books: CU IDOL SELF LEARNING MATERIAL (SLM)
• IC – 38 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 169 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 10: DISTRIBUTION CHANNELS IN INSURANCE Structure Learning Objectives 10.0. Introduction 10.1. Distribution Channels in Insurance 10.2. Role and Code of Conduct for Agents 10.3. Direct Marketing Channels 10.4. Summary 10.5. Keywords 10.6. Learning Activity 10.7. Unit End Questions 10.8. References 10.9. 10.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Explain the Roles of Agents • Describe the distribution Channels in Insurance • State the Code of conduct for Insurance Agents • Describe the Direct Marketing Channels of Insurance 10.1 INTRODUCTION Life insurance was once sold primarily by career life agents, captive agents that represent a single insurance company, and by independent agents, who represent several insurers. Now, life insurance is also sold directly to the public by mail, telephone and through the Internet. In addition, in the 1980s insurers began to market annuities and term life insurance through banks and financial advisors, professional groups and the workplace. A large portion of variable annuities, and a small portion of fixed annuities, are sold by stockbrokers. Independent insurance agents have held over half of the individual life insurance market over the 10 years from 2010 to 2019, but have lost some ground to 170 CU IDOL SELF LEARNING MATERIAL (SLM)
affiliated agents and direct response companies. Distribution is the process of delivering your products or services into your target markets. Distribution channels are key to success for all insurance companies. They ensure that products and services provided by insurers reach target customers in the most linear and cost- efficient manner. A variety of distribution channels with various strategies and positions are available in the market. Fig 10.1 Distribution is the process In the insurance sector, different outlets conduct business in the form of policy issuance and premium collection. To begin, an independent agent is a licensed professional who sells insurance on behalf of a single insurance company. Insurance marketing firms, or IMFs, are a new distribution platform that the insurance industry is ready for. The channel will be able to sell policies from two different insurance companies in the same line of business, as well as other financial products that the Insurance Regulatory and Development Authority of India allows (IRDA). Two life, two non-life, and two health insurers' products can be sold by an IMF. Apart from that, the company will be able to offer mutual funds, NPS, banking and financial products of banks and non-banking financial companies controlled by the Reserve Bank of India (RBI), post office savings schemes, and other financial products sold by investment advisors licenced by the capital markets regulator. To become an IMF, you must have a net worth of ten lakh rupees. There will be two types of 171 CU IDOL SELF LEARNING MATERIAL (SLM)
licensees: an insurance salesperson (ISP), who will be in charge of soliciting customers, and a financial service executive (FSE), who will be in charge of distributing other financial items. To become an ISP, a person must have completed Class 12, passed the IMF exam (under the auspices of IRDA), and be a resident of the region where the IMF is registered. A minimum educational qualification of Class 10 was recommended in a draught circular issued last year in March. It also designated the insurance broker test as a prerequisite for ISPs. “The insurance broker inspection is the most difficult; the agency examination is the easiest. The IMF examination would most likely be somewhere in the centre. The qualifying examination should be comparable to that of insurance brokers, according to P. Nandagopal, chief mentor of OpenWorld Finance, a digital financial planning platform for money solutions, and former chief executive officer and managing director of India First Life Insurance Co. Ltd. Insurance agents can enter IMFs and become ISPs, but they must pass the IMF exam and surrender their agency license in order to do so. The regulatory bodies of the respective goods must certify FSEs. IMFs would have a fiduciary duty to policyholders even though they are able to sell policies from two different insurers. They would still need to indemnify themselves for this. ISPs will be required to perform proper need analyses of their clients, compare products from the insurers they work with, and recommend products based on the needs of their clients, according to the IRDAI code of conduct. They must also ensure that policyholders complete the proposal form honestly and bring any relevant material details to the insurer's attention. 10.2 DISTRIBUTION CHANNELS IN INSURANCE Insurance distribution: Marketing of insurance products is done through two channels: Fig 10.2 Insurance distribution: 172 CU IDOL SELF LEARNING MATERIAL (SLM)
Direct marketing channels: A direct marketing channel can include the activities of the insurer's full-time staff working in the office, as well as a sales force hired by the insurer. Whether by television, email marketing, newspapers, hoardings, or online advertisements, the emphasis would be on the target audience. There is no middleman in the deal between the insurance provider and the insured. E-sales: E-sales is the term used to describe the selling of insurance policies over the internet. In India, this method of selling insurance products is still relatively new, but it is quickly catching up to more conventional methods. Insurance firms have been using online payment gateways to collect renewal premiums and their websites to solicit sales inquiries for their insurance policies for some time, but it wasn't until late 2009 that insurance companies in India began offering products that are only sold online. Since these online products are offered directly to the end user, without the use of intermediaries, insurance firms may market them at a lower price since the fees paid to intermediaries are removed. Indirect marketing channels: Despite the fact that online insurance transactions are rapidly growing, intermediaries continue to play a significant role in the selling of insurance company products. The following are examples of intermediaries: 173 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 10.3 Indirect marketing channels: Table 10.1 Indirect marketing channels 10.3 ROLES AND CODE OF CONDUCT FOR AGENTS Agent: An individual who sells insurance policies is known as an agent. Agents are typically used to sell insurance. The insurance firm is represented by an insurance agent. In India, these account for the majority of insurance sales. The agent's primary duty is to consult with potential clients, consider their needs, and make appropriate product recommendations. Insurance firms recruit these people and provide them with the necessary training. These agents search and obtain insurance business for the insurer after passing the necessary test and receiving their licence. Agents are paid a fee depending on the profits they make rather than being on the insurance company's payroll. In India, current laws limit an individual's ability to work as an insurance agent for more than one life insurance firm at a time. To become a life insurance agent, you must follow a set of steps and meet certain qualifications. An insurance agent is required by law to have a licence, and the IRDA is in 174 CU IDOL SELF LEARNING MATERIAL (SLM)
charge of all licence issues and other agent-related matters. There are rules that must be followed at all times during the operation. The study text will go through these regulations and conditions in depth later. We'll just go through the basics of how to become an agent and what an agent does in this first chapter. Becoming an agent : There are a number of steps that you as an individual need to take and a number of criteria that you will need to fulfil if you wish to become a life insurance agent. The insurance Act requires that an insurance agent must have a license, and the IRDA deals with all issues of licenses and other matters relating to agents. There are regulations which must be complied with at all stages in the process. Full details of these regulations and requirements will be covered later in the study text. In this introductory chapter we shall just outline the process of becoming an agent and explain what an agent does. Role of an agent : Agents are hired by insurance companies and they act as the main link between the insurance company and the insured. Their role is to recommend to clients the right products that address the clients’ needs. At the same time they must act in the interests of the insurance company by using their unique position of knowing their clients well enough to protect the insurance company from any undue adverse product selection. This makes the role of the agent in the entire insurance business very crucial. Agents facilitate the smooth sale of insurance products by assisting their clients with completing the paperwork involved, and after the policy is sold the agent should ensure it is serviced properly until maturity or in the event of a claim. At the time of a claim, the agent should also assist the client to complete the required formalities to ensure quick settlement. In India, life insurance agents deal with a range of insurances which are generally considered under the following headings: • basic life insurance products, such as term insurance and whole life plans; • savings products; and • other financial products, such as health insurances and accidental death plans. All these products will be looked at in later chapters. Once licensed and appointed, the agent is an independent professional. At the heart of this is the need for agents to put the interests of their clients above all else. 175 CU IDOL SELF LEARNING MATERIAL (SLM)
Becoming an agent : There are a number of steps that you as an individual need to take and a number of criteria that you will need to fulfil if you wish to become a life insurance agent. The insurance Act requires that an insurance agent must have a license, and the IRDA deals with all issues of licenses and other matters relating to agents. There are regulations which must be complied with at all stages in the process. Full details of these regulations and requirements will be covered later in the study text. In this introductory chapter we shall just outline the process of becoming an agent and explain what an agent does. Role of an agent : Agents are hired by insurance companies and they act as the main link between the insurance company and the insured. Their role is to recommend to clients the right products that address the clients’ needs. At the same time they must act in the interests of the insurance company by using their unique position of knowing their clients well enough to protect the insurance company from any undue adverse product selection. This makes the role of the agent in the entire insurance business very crucial. Agents facilitate the smooth sale of insurance products by assisting their clients with completing the paperwork involved, and after the policy is sold the agent should ensure it is serviced properly until maturity or in the event of a claim. At the time of a claim, the agent should also assist the client to complete the required formalities to ensure quick settlement. In India, life insurance agents deal with a range of insurances which are generally considered under the following headings: • basic life insurance products, such as term insurance and whole life plans; • savings products; and • other financial products, such as health insurances and accidental death plans. Code of Conduct for agents : In supporting agents to carry out their role in a professional manner, every licensed agent must adhere to the Code of Conduct specified by the IRDA in the Insurance Regulatory and Development Authority (Licensing of Insurance Agents) Regulations 2000 as per Regulation 8. In the Code of Conduct the IRDA gives details as to what an agent shall and shall not do. For instance, the agent should disclose all information relating to the insurance company that they represent and the products they are recommending. They should act in the best interests 176 CU IDOL SELF LEARNING MATERIAL (SLM)
of the client while at the same time making sure that there is no adverse selection against the insurance company (we will discuss adverse selection further in chapter 4). In addition, the insurance agent needs to take steps to keep the business they have secured for their company. To do this they need to make every attempt – both orally and in writing – to ensure that the policyholder pays the premium within the required time. The role of insurance agents in insurance contracts : In the eyes of the law, anyone who acts on behalf of another person is an ‘agent’. If we allow someone to act for us, we probably have to accept responsibility for whatever is done by them on our behalf within the terms of the arrangement. This is true in insurance, and whenever there is the involvement of an intermediary, legal relationships are set up. We saw in chapter 1 that there are different types of intermediaries involved in the insurance industry and that the term ‘agent’ is applied to a licensed intermediary hired by an insurance company to sell that company’s products on its behalf. In doing so the intermediary becomes the legal ‘agent’ and is deemed to be acting on behalf of the ‘principal’ (in this case, the insurance company). They are authorized by the principal to bring the principal into a contractual relationship with a third party (in this case the proposer/ person wanting to take out insurance). Insurance agents are some of the most important intermediaries for selling life insurance products. Agents have a duty to provide the best available product solutions to their clients based on the clients’ needs and requirements. They also have a duty towards the insurance company to protect it from adverse selection, as they are in the best position to judge the risk profile of their own clients. There is an increasing awareness that insurance agents must behave in a professional way towards their clients at all times. High standards of professional conduct are in the best interests of the insurance industry itself as well as in the interest of the public it serves. Agent remuneration and upfront disclosure methods : The remuneration of life insurance agents is governed by IRDA regulations. A life insurance agent receives his remuneration by way of commission. This commission is a certain percentage of the premium that is collected by the insurance company. The Insurance Act 1938 stipulates the maximum amount that can be paid to an insurance agent by way of commission or any other form, the details of which are as follows: • An insurance agent can receive a maximum of 35% of the first year’s premium, 7.5% of the second and third year’s 177 CU IDOL SELF LEARNING MATERIAL (SLM)
renewal premium, and 5% of the subsequent years’ renewal premium. (This does not apply to immediate or deferred annuities.) • During the first ten years of the insurer’s business, an insurance agent can be paid a maximum of 40% of the first year’s premium, instead of the stipulated 35%. • Commission on renewal premiums due to the agent must not exceed 4% in any case. The Insurance Act, section 44, states the following conditions on agents (whose agency has been terminated) for receiving commission on the renewal premium: – the agent should have been working with the insurer for more than five years and policies of not less than Rs. 50,000 sum insured are in force at least one year before the termination of the agency; or – the agent should have been working with the insurer for at least ten years and, after ceasing to act as an agent, are not directly or indirectly soliciting or procuring insurance business for any other person. In the case of an agent’s death, the commission is payable to his legal heirs. An insurance company can make payments to its agents within the prescribed limits. Generally, commission rates for term plans are lower than those for other plans such as whole life plans. Also, polices with shorter term periods provide less commission compared to policies with longer term periods. Under single premium plans, annuity and pension plans the commission rates are lower. 10.4 DIRECT MARKETING CHANNELS IN INSURANCE Direct Marketing (DM) of personal insurance can be defined as selling protection products directly to consumers through a variety of sales media. Yet this is only one possible interpretation, since DM of insurance business is continually evolving to fit changes to distribution channels and technical developments in IT. In general terms we can distinguish between Outbound and Inbound DM : 178 CU IDOL SELF LEARNING MATERIAL (SLM)
Table10.2 Direct Marketing (DM) Optimising Direct Marketing for Lead Generation Insurance direct mail marketing can be tricky as it deals with high-value customers that need hyper-personalization of services. The best thing about insurance direct marketing is that it has a very high response and conversion rate compared to alternative methods. The latest technological advancements have revamped the traditional mail tool. For instance, it is faster than ever. 10.5 SUMMARY • An insurance cover is an intangible product evidenced by a written contract known as the 'policy'. Insurers market various insurance covers either directly or through various distribution channels—individual agents, corporate agents (including Bancassurance) and Brokers. • A survey has been conducted from Life insurance policyholders which is selected on the basis of judgmental sampling based on the criteria that they have purchased at 179 CU IDOL SELF LEARNING MATERIAL (SLM)
least one life insurance product/policy from distribution channels (individual agent, corporate agent, bank, broker, direct marketing). • Agent: A person who sells insurance policies. Insurance is generally sold through agents. An insurance agent represents the insurance company • As per the Insurance Act, an agent is one who is licensed under Section 42 of the Act, authorized to be a salesman for insurance, and is paid commissions for soliciting, procuring and continuance of the business. • Eligibility for becoming an Agent : • The applicant must have attended at least 18 years of age at the time of applying. • Qualification : Minimum 10th • IRDA regulations stipulate that every person holding a license as an insurance agent shall adhere to the specified code of conduct. The code of conduct clearly specifies what an agent will do and not do, the act also prohibits an agent from offering a rebate as inducement to anyone to take an insurance policy • Four major areas of unethical behavior have been identified in the insurance sector: Misrepresentation: stating one thing as another • Illustrations : presenting only one scenario and suggest that the illustrated one will be correct • Replacement : or modification in an old policy in whole or part with a new policy • Advice: giving any legal or tax advice if one is not an attorney or a CA. 10.6 KEYWORDS Distribution - is the process of delivering your products or services into your target markets Direct Marketing - can include the activities of the insurer's full-time staff working in the office, as well as a sales force hired by the insurer E- Sales - is the term used to describe the selling of insurance policies over the internet Misrepresentation - stating one thing as another Replacement - or modification in an old policy in whole or part with a new policy Illustrations - presenting only one scenario and suggest that the illustrated one will be correct 180 CU IDOL SELF LEARNING MATERIAL (SLM)
10.7 LEARNING ACTIVITY 1. Which is better – selling insurance by direct marketing or indirect marketing? Why do you think this? ___________________________________________________________________________ ____________________________________________________________________ 10.8 UNIT END QUESTIONS A. Descriptive Types Questions Short Questions 1. Define Distribution? 2. Explain the role of Agents in Insurance Sector? 3. Explain the eligibility criteria to become an agent. 4. What are the various opportunities available to sell insurance products? 5. How many companies were merged to nationalize the general insurance business? Long Questions 1. Describe the code of conduct of Agents? 2. Describe the advantages and disadvantages of Direct marketing channels in insurance? 3. Explain the various career opportunities available in insurance sector. 4. What are the distribution channels in Insurance and Explain? 5.Explain the roles and code of conduct for agents? B. Multiple Choice Questions 1. An insurance cover is an a. Tangible Product b. Intangible Product c. Best Product d. None of these. 181 CU IDOL SELF LEARNING MATERIAL (SLM)
2. The direct marketing channels are a. television b. email marketing c. newspapers d. All of these. 3. ------------ refer to sales of insurance products through the internet a. E – Sales b. Internet Marketing c. Direct Marketing d. All of these. 4. The Indirect marketing channels are a. Individual agents b. Bancassurance c. Insurance Brokers d. All of these. 5. A person who sells insurance policies ------- a. Agent b. Insured c. Insurer d. None of these. 6. ------------- can be defined as selling protection products directly to consumers through a variety of sales media. 182 CU IDOL SELF LEARNING MATERIAL (SLM)
a. Direct Marketing (DM) b. Indirect Marketing c. Internet Marketing d. Paper Marketing. Answers 1-b 2-d 3-d 4-d 5-a 6-b 10.9 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 183 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 11: BANC ASSURANCE AND BROKERS Structure Learning Objectives 11.0. Introduction 11.1. Concept of Bancassurance 11.2. Relationship between Bank and Insurance. 11.3. Features of Bancassurance 11.4. Concept of Brokers in Insurance Industry. 11.5. Summary 11.6. Keywords 11.7. Learning Activity 11.8. Unit End Questions 11.9. References 11.10. 11.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • Explain the Concept of Bancassurance • Describe the Features of Bancassurance • State the concept of Brokers in Insurance • Evaluate the relationship between Bank and Insurance companies. 11.1 INTRODUCTION Bancassurance is the insurance distribution model where insurance carriers and banks join forces to sell insurance products to consumers 184 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 11.1 Bancassurance Many businesses will take out an overdraft, a line of credit, or a loan from a bank as part of their expansion strategy. The bank will take Insurance Cover for the customer as part of their credit due diligence to protect their interests or to meet their internal cross-sell insurance goals. The Reserve Bank of India (RBI) has issued a circular (DBOD.No.FSD.BC.60/24.01.001/2009-10) prohibiting banks from requiring their customers to use only one insurance agent for assets financed by the bank. The bank's customers should be able to make their own decisions, and their involvement in insurance products offered by the bank should be entirely voluntary. a. There should be no direct or indirect connection between the bank's provision of banking services to its customers and their use of insurance products. Since the bank is a corporate agent of the insurance business, in addition to all of the previously mentioned disadvantages of Agents versus Insurance Brokers, the following bank- specific disadvantages should be considered. Bank deals with money management and not risk management, hence they would not have in house insurance expertise required to do your Risk Management. b. Usually, bank covers only to the extent of their exposure (i.e., Overdraft, Loan etc) irrespective of the value of your assets. This leads to underinsurance at the time of the 185 CU IDOL SELF LEARNING MATERIAL (SLM)
claim settlement. E.g. your property is worth 10cr & you’ve 5cr OD; Bank would take fire insurance policy for 5cr which is its exposure. So, you end up insuring 10cr property for 5cr (50% of its value). In the event of fire accident where you claim a loss of 20Lacs (on policy of 5cr), the insurance company would pay you 50% of the claimed amount as the property is underinsured. c. There is absolutely no room for negotiation with the bank on premium, hence they would be far more expensive than what the broker would do. d. Usually the insurance cover is taken during the process of the loan. Client’s needs to take extra care during take-over of the loan from one bank to another in between the policy period where the last bank wouldn’t renew the policy and the new bank may or may not remember to renew it later. 11.2 CONCEPT OF BANCASSURANCE • Bancassurance is a French concept that refers to a partnership between a bank and an insurance provider with the goal of providing insurance products or services to the bank's customers. • Bancassurance, according to the IRDA, refers to banks serving as corporate agents for insurers in the distribution of insurance products. • It's a deal between a bank and an insurance company that allows the insurance company to market its goods to the bank's customers, resulting in a profit for both companies. • Banks sell insurance plans to consumers who believe they are investing in a fixed deposit (FD) or an exchange-traded fund (ETF) (equity linked saving scheme). When bank customers believe they are purchasing a single-premium policy with no further requirement to pay every year, regular premium policies are still being offered. • Bancassurance refers to the practice of banks offering insurance policies from insurance companies. Under section 6(1)(o) of the Banking Regulation Act, 1949, the bank serves as an agent and promotes Banca (bancassurance) products. It began in Europe in the 1980s and was a huge success. • Bancassurance is a business arrangement between a bank and an insurance provider 186 CU IDOL SELF LEARNING MATERIAL (SLM)
with the aim of providing insurance products or services to the bank's customers. • In a variety of European, Latin American, Asian, and Australian nations, bancassurance has proven to be an important distribution channel. 11.3 RELATIONSHIP BETWEEN BANK AND INSURANCE. The different ways to approach risk-Exclusion, Management, Self-insurance and Risk Transfer-all play key roles in encouraging effective development. Insurance in particular plays a remarkable role as a development tool in many contexts of personal, commercial, and industrial activity. The different business classes of insurance—Life, Health, Property, Motor, Casualty, Marine, and Aviation—cover the widest ranges of human activities. One very natural way to encourage the use of insurance is to introduce its use as part of a wider transaction. The consumer who is keen to purchase a house or apartment might not be well disposed toward buying insurance against damage property, but a bank that is lending money to facilitate the purchase would be well placed to explain the importance of having insurance to stabilize the risk. From the bank’s perspective, both the life and the health of the borrower are key to the ability to service the loan, and the Property insurance would be key to preserve the security that supports the loan. On the other hand, the bank that is lending money can quickly be in a position of inappropriate power over the borrower. The linking of a continuing insurance purchase to the continued availability of a loan can lead to an imbalanced situation in which the consumer is not in a position to understand whether the insurance offered through the bank is an attractive purchase. It is therefore crucial that Bancassurance is used as a development tool in a context in which there is careful regulation of the activities of the lender. This paper explores the strategic aspects of the positive value opportunities, while at the same time examining methods to avoid the pitfalls, of using Bancassurance as a development tool. A customer finds he or she is going to a bank for a solution to a problem, commonly the need for finance to help with a purchase or a development. The bank’s customer adviser is face to face with the consumer. The customer’s request is for a loan or other form of financial review. It is an obvious and convenient thing for the bank’s customer adviser to be able to offer a range of insurance products to assist with the loan transaction or otherwise enhance the consumer’s financial position. 187 CU IDOL SELF LEARNING MATERIAL (SLM)
The distinctive advantage here is that the customer in many cases does not know or realize how much an insurance product is going to improve his or her situation. In the typical non- Bancassurance sales model, the stimulus to look at an insurance product as a solution comes from a mixed range of drivers—the need to have a motor certificate to drive a car, the encouragement to buy travel insurance from a travel agent or an airline, the at-point-of-sale transaction in a shop to buy Warranty and Breakdown insurance with a physical product such as a car or electronic goods. Most consumers have only a very limited grasp of what insurance can do, and they often feel it as a kind of taxation, especially with Motor insurance. The situation in which the consumer is talking with the bank’s customer adviser about a financial need is a powerful moment of sales opportunity. From the bank’s viewpoint, the insurance sale is only one of four main lines of sales possibilities, so the client meeting has multiple possibilities for sales. This undoubtedly makes the Bancassurance attractive because the marginal costs of making the insurance sale are far lower than would be the case for the pure insurance adviser. Thus, we can define Bancassurance as the process of using a bank’s branches, sales network, and customer relationships to develop sales of insurance products. 11.4 FEATURES OF BANCASSURANCE 1. Bank cannot pay a premium on behalf of the customer. 2. It can use only two insurance companies in one bank. 3. All commissions are disclosed in the annual accounts report. 4. A bank always focuses on its banking business. 5. For an insurance company, the network of a bank is useful for the sale. 6. It improves profitability. 7. It increases customer lifetime value. 8. It can offer all the financial facilities under one roof. Types of Bancassurance : 188 CU IDOL SELF LEARNING MATERIAL (SLM)
Fig 10.2 Type of Bancassurance Models of Bancassurance : Full Integration Model: This model entails a full integration of banking and insurance services. The bank sells the insurance products under its brand acting as a provider of financial solutions matching customer needs. Bank controls sales and insurer service levels including approach to claims. Under such an arrangement the Bank has an additional core activity almost similar to that of an insurance company. Joint Venture Model: In this model, the bank participates in product and distribution design. There are joint decision making and high system integration for infrastructure utilization. a) Joint decision making; bank participation in product and distribution design. b) High system integration, infrastructure utilization; low-cost model. c) Insurer loses control on distribution. d) Bank may be able to realize higher profitability as an insurance distributor rather than a producer. Strategic Alliance Model: Under this Model, there is a tie-up between a bank and an insurance company. The bank only markets the products of the insurance company. Except for marketing the products, no other insurance functions are carried out by the bank. a) Insurer able to leverage the bank’s infrastructure; source of fee income for banks. b) Integration in product development and channel management. c) Sharing of customer database. d) Reluctance of bank staff to sell insurance; insurer has little control over distribution. 189 CU IDOL SELF LEARNING MATERIAL (SLM)
Financial Service Group: In this, all the facilities of financial activities are under one roof. a) Full integration of system; low-cost model. b) Potential for fully integrated products and developing a one stop shop for financial services. c) Insurer is ill-equipped to exercise control over distribution. d) Bank may be able to realize higher profitability as an insurance distributor rather than a producer. Advantages of Bancassurance : The advantage of bancassurance is just that: a) Right Product: It provides the end users a customized insurance solution. b) Right Time: At a location, they already are for their financial needs – their banks. This improves the overall experience of the customers. They are more likely to opt for a complete financial solution from their banks, thus making bancassurance a success. BANCASSURANCE IN INDIA : • Bancassurance started in India in the year 2000. The Indian Registration and Development Authority (IRDA) has issued regulations for the registration of Indian businesses. Under Section 6(1)(o) of the Banking Regulation Act, 1949, the Government of India also issued a Notification designating \"insurance\" as a legal type of business for banks to engage in. It was explained, however, that any bank wishing to enter the company must first obtain RBI approval. • To improve the channels through which insurance policies are sold/marketed so as to make them reach the hands of common man • To widen the area of working of banking sector having a network that is spread widely in every part of the nation • To improve the services of insurance by creating a competitive atmosphere among private insurance companies in the market Bancassurance companies in India: 1. SBI life insurance Company 2. LIC is tied up with Vijaya bank, Oriental bank of commerce, Corporation bank 3. ICICI Lombard 4. Barclays – MetLife India 190 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Axis bank – MetLife India 6. Aviva Life 7. Kotak Mahindra 8. ICICI Peru - ICICI Pru Life Insurance has tied up with 18 banks 9. HDFC Standard Life - HDFC Bank, Indian Bank and Bank of Baroda and many co-operative banks 10. Birla Sun Life - The first bancassurance policy in India was sold by Birla Sun 11.5 CONCEPT OF BROKERS IN INSURANCE INDUSTRY Insurance brokers act as an intermediary between clients and insurance companies. Clients may be either individuals or commercial businesses and organizations. They use their in- depth knowledge of risks and the insurance market to find and arrange suitable insurance policies and arrange cover. They act in the interest of their clients and offer products from more than one insurer to ensure that their clients get the best deal. Retail insurance brokers usually arrange insurance policies for individuals or companies and deal directly with them. Policies range from motor, house, travel or pet cover for individuals or property to employer's liability and public and product liability insurance. Commercial insurance brokers deal with high value and more complex insurance cover in areas such as marine, aviation, oil and gas and financial risks. Typical work activities: Activities depend largely on the size and nature of the employer and the scale of the business. In a large company, a broker may specialize in a core area; in a small firm, a broker could be involved in most functions, including new business development and acting as placing broker and claims broker. Tasks often involve: • Gathering information from clients, assessing their insurance needs and risk profile; • Building and maintaining on-going relationships with clients including scheduling and attending meetings and understanding the nature of clients' businesses or lives; • Foreseeing clients' insurance needs, such as policy renewals; • Researching insurance companies' policies and negotiating with underwriters to find the most suitable insurance for clients at the best price; 191 CU IDOL SELF LEARNING MATERIAL (SLM)
• Arranging specialized types of insurance cover in complex cases; this may involve preparing reports for insurance underwriters and surveyors and negotiating with insurers; • Advising clients on risk management and helping to devise new ways to mitigate risks, for example, by adding security measures such as fencing, surveillance cameras or lighting to commercial properties to reduce the likelihood of break-ins; • Renewing or amending existing policies; • Advising clients whether and when they need to make a claim on their policies; • Marketing and acquiring new clients; • Developing relationships with underwriters, surveyors, photographers, structural engineers and other professionals; • Administrative tasks such as dealing with paperwork, correspondence, keeping detailed records; • Winning accounts against competitors; • Keeping up with changes in the insurance market and in the clients' industries; • Collecting insurance premiums and processing accounts. 11.6 SUMMARY • Bancassurance is the insurance distribution model where insurance carriers and banks join forces to sell insurance products to consumers • Bancassurance is a relationship between a bank and an insurance company that is aimed at offering insurance products or insurance benefits to the bank's customers. • In India, the process of Bancassurance began in 2000. IRDA came up with regulation on registration of Indian companies. • According to IRDA, ‘bancassurance’ refers to banks acting as corporate agents for insurers to distribute insurance products. • It is an arrangement between a bank and an insurance company allowing the insurance company to sell its products to the bank's client base and by doing this both companies earn a profit. • Insurance brokers act as an intermediary between clients and insurance companies. 192 CU IDOL SELF LEARNING MATERIAL (SLM)
• Retail insurance brokers usually arrange insurance policies for individuals or companies and deal directly with them. 11.7 KEYWORDS • Bancassurance - is the insurance distribution model where insurance carriers and banks join forces to sell insurance products to consumers • Strategic Alliance Model - Under this Model, there is a tie-up between a bank and an insurance company • Joint Venture Model - In this model, the bank participates in product and distribution design • Full Integration Model - This model entails a full integration of banking and insurance services • Retail insurance brokers - usually arrange insurance policies for individuals or companies and deal directly with them • Financial Service Group - In this, all the facilities of financial activities are under one roof 11.8 LEARNING ACTIVITY 1. List out the names of Bancassurance companies operating in India. ___________________________________________________________________________ ____________________________________________________________________ 11.9 UNIT END QUESTIONS A. Descriptive Questions Short Questions 1. What is bancassurance? Explain 2. Explain the Concept of Bancassurance? 3. What are the features of Bancassurance? 4. Define Full integration model and Joint venture model? 193 CU IDOL SELF LEARNING MATERIAL (SLM)
5. Define Strategic Alliance Model? Long Questions 1. What are the models of Bancassurance and explain? 2. What are the advantages of Bancassurance? 3. Define Brokers and their role in insurance? 4. Explain the relationship between bank and insurance company? 5. Describe the types of Bancassurance? B. Multiple Choice Questions 1……………. is the insurance distribution model where insurance carriers and banks join forces to sell insurance products to consumers. a. Bancassurance b. Life insurance c. Term Insurance d. Group insurance 2. -------------- is a Corporate Agent of the insurance company a. Bank b. Government c. LIC d. SBI 3. Bank deals with money management and not the ------------- 194 a. Risk management b. Insurance c. Auditing statement d. None of these. CU IDOL SELF LEARNING MATERIAL (SLM)
4. Bancassurance is a ----------- term a. French b. Italic c. English d. None of these. 5. ------------------- is the concept of selling insurance products of insurance companies by banks. a. Bancassurance b. Life insurance c. Group Insurance d. All of these. Answers 1-a 2-a 3-b 4-a 5-a 11.10 REFERENCES Text Books: • IC – 38 – Insurance Institute of India. Reference Books: • Sethi, Jyotsna and Bhatia, Nishwan, “Elements of Banking and Insurance” • Emmett J.Vaughan and Therese Vaughan “Fundamentals of Risk and Insurance” • Agarwal, O.P “Banking and Insurance” • Periasamy,P; Veeraselvam,M., “Risk and Insurance Management”, Tata Mc Graw Hill 195 CU IDOL SELF LEARNING MATERIAL (SLM)
UNIT - 12: INSURANCE SPECIALISTS Structure 12.0. Learning Objectives 12.1. Introduction 12.2. Definition: Underwriters 12.3. Definition: Surveyors and Loss Assessors 12.4. Definition: Actuaries 12.5. Definition: Third Party Administrators. 12.6. Summary 12.7. Keywords 12.8. Learning Activity 12.9. Unit End Questions 12.10. References 12.0 LEARNING OBJECTIVES After studying this unit, students will be able to: • State the concept of underwriting • Explain the role of Underwriters in insurance • Describe the Actuaries role in underwriting • Outline the process of TPAs in Health insurance • Describe the role of Surveyors and loss assessors in General insurance domain. 12.1 INTRODUCTION • In the case of life insurance, underwriters are in charge of determining which persons the insurance provider may insure from among those who send applications, as well as the price at which they can be insured, depending on their risk profile. • In the commercial, insurance, and investment banking sectors, underwriting is a standard procedure. An underwriter works with a mortgage company, a lending company, an insurance company, or an investment company. They consider everything from your wellbeing to your financial situation during the underwriting process. Underwriters use their 196 CU IDOL SELF LEARNING MATERIAL (SLM)
results to help businesses decide whether or not to take on a contract from an applicant based on the risk involved. • Surveyors and Loss Assessors work for a general insurance corporation, typically in the event of a fire or a motor vehicle accident. They conduct claim surveys and calculate the amount of damage. •Surveyors are experts who evaluate the loss or injury and act as a liaison between the insurer and the insured. They normally only work in non-life situations. Their duty is to determine the true extent of the loss and to avoid making false statements. • An actuary is a specialist who specialises in using statistical, financial, and mathematical theories to analyse financial risks. Actuaries assist insurance firms in evaluating risks and calculating premiums on their plans. • An actuary is a business specialist who studies risk's financial implications. Actuaries research unpredictable future events, especially those that affect insurance and pension plans, using mathematics, statistics, and financial theory. • TPAs act as middlemen between the insurance company and the policyholder, and their primary role is to process and resolve claims. 12.2 DEFINITION: UNDERWRITERS • For life insurance, underwriters are responsible for selecting the individuals the insurance company can insure from among those submitting proposals, and also the price it can insure them for, based on their risk profile. • Underwriting is a common practice used in the commercial, insurance and investment banking industries. An underwriter works for mortgage, loan, insurance or investment companies. During the underwriting process, they do everything from evaluate your health to assess your financial status. Based on their findings, underwriters help companies determine if they should take on an applicant’s contract or not based on their associated level of risk. • Surveyors and Loss Assessors are service providers to a general insurance company, usually at the time of a fire or motor insurance claim. They carry out claim surveys and estimate the quantum of loss. • Surveyors are professionals who assess the loss or damage and serve as a link 197 CU IDOL SELF LEARNING MATERIAL (SLM)
between the insurer and the insured. They usually function only in non-life business. Their job is to assess the actual loss and avoid false claims. • An actuary is a professional who specializes in the field of analyzing financial risks by implementing statistical, financial and mathematical theories. In insurance, actuaries aid in assessing risks which help companies in the estimation of premiums for their policies. • An actuary is a business professional who analyzes the financial consequences of risk. Actuaries use mathematics, statistics, and financial theory to study uncertain future events, especially those of concern to insurance and pension programs. • TPAs function as intermediaries between the insurance provider and the policyholder and its key function is processing of claims and settlement. 12.3 DEFINITION: SURVEYORS AND LOSS ASSESSORS • Surveyors and Loss Assessors work for a general insurance corporation, typically in the event of a fire or a motor vehicle accident. They conduct claim surveys and calculate the amount of damage. • Surveyors are experts who evaluate the loss or injury and act as a liaison between the insurer and the insured. They normally only work in non-life situations. Their duty is to determine the true extent of the loss and to avoid making false statements. • Insurance plans come in a variety of shapes and sizes, depending on the degree of cover you need at different points of your life. Many people purchase insurance to cover their house, business equipment, and freight, among other things, in addition to life and health insurance. • When a claim is filed, however, there could be discrepancies in what an insurer and the insured assume is the real loss in a given circumstance. As a result, if a claim is expected to exceed a predetermined cap under a general insurance policy, the insurer dispatches a surveyor or loss assessor to assess the injury. • In an ideal world, the surveyor and loss assessors will observe the damage and report on it without the involvement of the insurer or the insured. • They are extremely important in general insurance claims. Let's take a closer look at them. • A surveyor serves as a competent intermediary between the insured and the insurance company. A person or a corporate entity interested in being a surveyor or loss assessor must 198 CU IDOL SELF LEARNING MATERIAL (SLM)
apply through the Insurance Regulatory and Development Authority of India (IRDAI). IRDAI has defined basic eligibility requirements for various types of surveyors. • For example, skills in mechanical or automotive engineering are required to work as a surveyor and loss assessor for motor insurance. A surveyor for maritime insurance must have a degree in marine engineering or naval architecture, while a crop insurer's surveyor must have a degree in agricultural sciences. • On its website, IRDAI keeps a list of all surveyors in the region. • When estimated damages exceed Rs50,000 for a motor insurance claim and Rs1 lakh for other insurance claims, such as fire or marine insurance, surveyors are called in. • The IRDAI reviews these limits every three years. Either the insurer or the insured may select the surveyor. The insurer, on the other hand, is not bound by the surveyor's report. If an insured is dissatisfied with an insurer's final settlement offer, she will file a complaint with the insurance ombudsman. • Even an insured person may nominate a surveyor in theory. However, you can find it difficult to appoint one. Many insurance schemes make it impossible for an insured to nominate a surveyor due to terms relating to surveyors and damage assessors. • Furthermore, insurers have an administrative structure in place to appoint and pay these specialists. You would have to pay for your own surveyor if you wanted to hire one. • A surveyor and loss assessor, whether hired by the insurer or the insured, is required to send a report to the insurer within 30 days of being hired, as well as a copy of the report to the insured with opinions on the loss assessment. If necessary, the surveyor may request an extension while also informing the insured. A surveyor must apply the report within 6 months of the date of appointment, regardless of any extensions. • If an insurance provider considers a survey report to be incomplete, it may request an additional report from the surveyor, which must be submitted within three weeks. During a single claim period, an additional report may only be requested once. • If you think a claim, you're about to file would cost more than Rs50,000 for an auto insurance policy or Rs1 lakh for other general insurance plans, keep all details of the accident or insured case. Make every effort not to interrupt the accident or incident scene. Cooperation with the surveyor is also your duty. 199 CU IDOL SELF LEARNING MATERIAL (SLM)
12.4 DEFINITION: ACTUARIES • An actuary is a specialist who specializes in using statistical, financial, and mathematical theories to analyses financial risks. Actuaries assist insurance firms in evaluating risks and calculating premiums on their plans. Role of an Actuary in an Insurance Company: • It is desirable for insurance firms to develop plans with low risk and predictable returns. Estimating cost and return for each proposal often helps policyholders feel more confident that their claims will be resolved. • Actuarial techniques in insurance include analyzing variables related to a customer's life expectancy, constructing mortality tables that aid in the calculation of predictability, and providing insight to brokers. • Actuarial science is most often used in life insurance death analysis. They can, however, be used in other types of general insurance, such as property and liability insurance. • Actuarial guidelines for determining premiums for insurance plans may often have a positive effect on policyholder behavior. Nonsmokers, for example, pay considerably lower premiums for life insurance plans than smokers. This will encourage people to stop smoking in order to save money on their life insurance policies. Who can be Appointed as Actuaries for Insurance Companies? As per the Appointed Actuary regulations put forth by the Insurance Regulatory and Development Authority of India, any insurer or insurance company should mandatorily appoint an actuary to manage financial risks and uncertainty of the insurance business. To be appointed as an actuary with any insurance company, an individual has to fulfil the following criteria, as put forth under regulations: • He/she should be a resident of India. • Should be a fellow member as per the Actuaries Act, 2006. In the case of life insurance: 200 CU IDOL SELF LEARNING MATERIAL (SLM)
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