History Ans Type of Insurance

8/6/2019 History Ans Type of Insurance

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H ISTORY OF I NSURANCE

The story so far

Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bearrisk of the caravan trade by giving loans that had to be repaid with interestwhen the goods arrived safely. In 2100 BC the code of Hammurabi grantedlegal status to the practice.

That perhaps, was how insurance made it's beginning.

Life insurance, on the other hand, had its origin in ancient Rome, wherecitizens formed burial clubs that would meet the funeral expenses of itsmembers as well as help supervisors by making some payment.

As European civilization progressed, its social institutions and welfarepractices also got more and more refined. With the discovery of new lands, searoutes and the consequent growth in trade, medieval guilds took it uponthemselves to protect their member traders from loss on account of fire,shipwrecks and the like.


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T HE FIRST STEP

Insurance as we know it today owes its existence to 17th centuryEngland, In fact, it began taking shape in 1688 at a ratherinteresting place called Lloyd's Coffee House in London, where

merchants, ship owners and underwriters met to discuss andtransact business to become one of the first modem insurancecompanies


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E NTRY OF COMPANIES

The first stock companies to get into the business of insurancewere chartered in England in 1720. The year 1735 saw the birthof the first insurance company in the American colonies inCharleston, SC.

In 1759, the Presbyterian Synod of Philadelphia sponsored thefirst life insurance corporation in America for the benefits of ministers and their dependents. This was followed by theformation of Fire Insurance Corporations, first in New York City(l787) and then in Philadelphia (1794).

However, it was after 1840 that life insurance really took off in abig way.

The trigger: reducing opposition from religious groups.


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T HE GROWING YEARS

The 18th century shows huge developments in field of Insurance, withnewer products being devised to meet the growing need of urbanizationand industrialization.

In 1835, the infamous New York fire drew people's attention to theneed to provide for sudden and large losses. Two years later,Massachusetts became the first state to require companies by law tomaintain such reserves. The great Chicago fire of 1871 furtheremphasized how fires can cause huge losses in densely populated modemcities. The practice of reinsurance, wherein the risks are spread amongseveral companies, was devised specifically for such situations.

There were more offshoots of the process of industrialization. In 1897,the British government passed the Workmen's Compensation Act, Whichmade it mandatory for a company to insure; its employees againstindustrial accidents.

With the advent of the automobile, public liability insurance, this firstmade its appearance in the 1880s, gained importance and acceptance.


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I N I NDIA

Insurance in India can be traced back to the Vedas. For instance,yogakshema, the name of Life Corporation of India's corporateheadquarters, is derived from Rig Veda. The term suggests that a form of "community insurance" was prevalent around 1000 BC and practiced by

Aryans.

Bombay Mutual Assurance society, the first Indian Life Assurancesociety, was formed in 1870. Others companies like Oriental, Bharat andEmpire of India were also set up in the 1870-90s.

As these companies grew, the government began to exercise control onthem. The Insurance Act was passed in 1912, followed by a detailed and

amended Insurance Act of 1938 that looked into investments,expenditure and management of these companies.

As a result, the government nationalized the life assurance business inIndia. The Life Insurance Corporation of India was set up in 1956 to takeover around 250 life companies.


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S OME OF THE IMPORTANTMILESTONES IN THE LIFE

INSURANCE IN INDIA ARE :1912: The Indian Life Assurance Companies Act enacted as

the First statue to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enablethe Government to collect statistical information about bothLives and Non life insurance business.

1938: Earlier legislation consolidated and amended to by theInsurance Act with the objective of protecting the interest of the insuring people.

1956: 245 Indian and foreign insurers and provident societiestaken Over by the central government and nationalized. LICFormed by an Act of Parliament, viz. LIC Act, 1956, with aCapital contribution of Rs. 5crore from the government.


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T HE I NDIA

The insurance sector in India has come a full circle from being anopen competitive market to nationalization and back to aliberalized market again. Tracing the developments in the Indianinsurance sector reveals the 360 turn witnessed over a period of almost two centuries.


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I NSURANCE SECTOR REFORMS

In 1993, Malhotra committee, headed by former Finance Secretaryand RBI Governor R.N. Malhotra, was formed to evaluate the Indianinsurance industry and recommended its future direction.

The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. .

The reforms were aimed at "creating a more efficient andcompetitive financial system suitable for the requirements of theeconomy keeping in mind the structural changes currently Underwayand recognizing that insurance is an important part of the overallfinancial system when it was necessary to address the need forsimilar reforms

The committee emphasized that in order to improve the customerservices and increase the coverage of the insurance industry shouldbe opened up to competition. However, at the same time, thecommittee felt the need to exercise caution as any failure on the partof new players could ruin public confidence in the industry.


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Hence, it was decided to allow competition in a limited way bystipulating the minimum capital requirement of Rs. 100crores. The committee felt the need to provide greaterautonomy to insurance companies in order to improve their

performance and enable them to act independent companieswith economic motives. For this purpose, it had proposedsetting up an independent regulatory body.


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THE INSURANCE REGULATORY A NDDEVELOPMENT A UTHORITY (IRDA)

Reforms in the insurance sector were initiated with the passageof the IRDA Bill in Parliament in December 1999. The IRDA sinceits incorporation as a statutory body in April 2000 has struck toits schedule of framing regulations and registering the privatesector insurance companies.

The other decisions taken simultaneously to provide thesupporting to the insurance sector and in particular the lifeinsurance companies were the launch of the IRDA's online servicefor issue and renewal of licenses to agents.

The approval of institutions for imparting training to agents has

also ensured that the insurance companies would have a trainedwork force of insurance agents in place to sell their products.Since being set up as an independent statutory body the

IRDA has put in a framework of globally compatibleregulations. In the private sector, 12 life insurance and 6general insurance companies have been registered.


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THE IMPORTANT FUNCTIONS OF IRDA ARE ASFOLLOWS :

TO

exercise all powers & functions of controller of Insurance.

Protect the interest of the policyholders.

issue, renew, modify, withdrawn or suspend certificate of registration.

specify requisite - qualification & training for insurance intermediaries &agents.

promote & regulate professional organization connected with Insurance.


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conduct inspection investigations etc.

prescribe methods of Insurance Accounting.

regulate investment of funds & margins of solvency.

adjudication upon disputes.

conduct inspection & audit of insurers, intermediaries & otherorganizations concerned with Insurance.


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T YPE OF I NSURANCE P OLICIES

Term Insurance policy

Whole life policy.

Money back policy.

Endowment policy.

Pension plans or Annuities.


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TERM INSURANCE POLICY Term insurance provides life insurance coverage for a specific period of time. Presently one year, five year, ten year, and fifteen year, are theperiods one can buy term life insurance policy. If the insured person diesduring the period the insurance is in force, the insurance company paysoff the face value of the policy. If the insured lives longer than the term of the policy, the policy is no longer in effect and nothing is paid.

Term insurance is the least expensive form of life insurance. It iscommonly used when the insured needs temporary protection or can tafford the premiums for the other forms of life insurance.

Term insurance comes in several forms. There is renewable & non-renewable . Non-renewable means that on the expiry of your policy youmust go under another physical test and filling out anotherquestionnaire. On the other hand, with renewable policy you do not needto undergo these formalities again and you automatically re-qualify tocontinue your policy.


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Then there is convertible & non-convertible policy .C onvertible policy is the one which can be converted into apermanent policy, whereas non-convertible is the one which can

not be converted into a permanent policy or in other words thepolicy can not be converted to any form of life insurance policy.


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WHOLE LIFE POLICY

The whole life policy provides insurance coverage for the entire lifeof the insured regardless of how many years the insurance premiumis paid. Premium may be paid throughout the insured life-or for aportion of his life. Additionally the premium can be paid in one lumpsum when the policy is taken out. This is referred to as singlepremium whole life policy.

When the premium is paid throughout the life it is known ass traight life policy, but when the premium is paid for a specifiedperiod of time it is known as limited life policy.

The premiums are higher for whole life insurance as opposed toterm insurance. The reason for this is that the policy helps

investment features as well as death benefits. The cash value portionof the whole life insurance belongs to the insured. One can take it outin the form of policy loans or cash the policy in. Another advantage of whole life insurance is that the premium are fixed, i.e. the sameamount for the coverage each year.


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U NIVERSAL LIFE INSURANCE POLICY

Universal life insurance is a variation of whole life. Thedifference is that with universal life insurance part isseparated from the investment portion of the policy. Thecash value portion of the policy is treated, as an

accumulation fund and. Investment income is credit to theaccumulation fund.


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M ONEY BACK POLICY

Money back policies provide the periodic payments of partialsurvival benefits. during the term of the policy, as long 'as thepolicy holder is alive.

An important feature of this type of policies is that in the eventof the death at any time within the policy term, the death claimcomprises the full sum assured, without deduction of any of any of the survival benefit' amount, which may have already been paidas money back components. Similarly the bonus is also calculatedon the entire sum assured.


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E NDOWMENT POLICY An Endowment policy covers the risk for a specified period, at

the end of which the Sum assured is paid back to the policyholder, along with the bonus accumulated during the term of the policy. This feature of payment of endowment to the policyholder when the policies term is complete is responsible for thepopularity of endowment policies.

The amount received on maturity can either be utilized eitherto buy an annuity policy to generate a monthly pension for therest of the life, or put it into any other suitable investment of our choice. This is one important benefit, which the endowmentpolicy offers over a whole life insurance policy.

Overall, endowment policies are the most suitable of allinsurance plans for covering the risk to a family breadwinnerslife not only do these policies provide financial risk cover for thefamily, were the policy holder, to die prematurely but theinsurance amount is also repaid once this risk is over. The

endowment amount can then be used for meeting majorexpenditures such as children, education and marriage etc.


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P ENSION PLAN OR A NNUITY

An annuity is an investment that we make, either in a single lumpsum or through installments paid over a certain number of years, inreturn for which we receive a specific sum every year, every half-yearof every month, either for whole life or a fixed number of year.

After the death of an annuitant or after the fixed annuity periodexpires for annuity payments, the invested annuity fund is refunded,perhaps along with a small addition, calculated at that time.

Annuities differ from all the other form of life insurance in onefundamental way-an annuity does provide any life insurance coverbut instead offers a guaranteed income either for life or a certainperiod.

Typically annuities bought to generate income during one's retiredlife, which is why they are also called pension plan. Annuitypremiums are payments are fixed with reference to the duration of human life.


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S ettlement O ption s

When the life insurance policy becomes payable, the insuredor the beneficiaries may elect to take payment in one lumpsum. However, when the insured or the beneficiaries, elect notto take a lump sum payment, there are several other optionsavailable to him for receiving his payment which are asfollows:

I ntere s t O ption

According to this option, the entire proceeds are left with theinsurance company and it pays a guaranteed interest rate onyour amount, if is similar to leaving our IT100CY in a savingsaccount. At any time in the future, the beneficiary canwithdraw the money.


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F ixed A mount O ption

In this option the beneficiary receives a fixed amount of money eachmonth until the proceeds are exhausted.

F ixed Period O ption

The fixed period option will pay the beneficiary equal payments over afixed period of time, which may be 10 years, 20 years or even just 5years. Excess interest earned will increase the amount of thesepayments.

Life I ncome O ption

This option provides the beneficiary with the proceeds paid over therest of his life. However when the beneficiary dies the balance of thepolicy is considered used up.

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History Ans Type of Insurance