TOPIC:- A STUDY ON ROLE OF LIC IN INDIAN MARKET WITH REFERENCE

ULHASNAGAR

CHAPTER-1
INTRODUCTION TO INSURANCE

Insurance is a form of risk management in which the insured transfers the cost of
potential loss to another entity in exchange for monetary compensation known as
the premium. Insurance allows individuals, businesses and other entities to
protect themselves against significant potential losses and financial hardship at a
reasonably affordable rate. We say "significant" because if the potential loss is
small, then it doesn't make sense to pay a premium to protect against the loss.

After all, you would not pay a monthly premium to protect against a loss because
this would not be considered a financial hardship for most.

Insurance is appropriate when you want to protect against a significant monetary

loss. Take life insurance as an example. If you are the primary breadwinner in
your home, the loss of income that your family would experience as a result of
our premature death is considered a significant loss and hardship that you should
protect them against.

It would be very difficult for your family to replace your income, so the monthly
premiums ensure that if you die, your income will be replaced by the insured
amount. The same principle applies to many other forms of insurance. If the
potential loss will have a detrimental effect on the person or entity, insurance
makes sense. Everyone that wants to protect themselves or someone else against
financial hardship should consider insurance. This may include:

 Protecting family after one's death from loss of income

 Ensuring debt repayment after death
 Covering contingent liabilities
 Protecting against the death of a key employee or person in your business
buying out a partner or co-shareholder after his or her death
 Protecting your business from business interruption and loss of income
  Protecting yourself against unforeseeable health expenses
 Protecting your home against theft, fire, flood and other hazards
 Protecting yourself against lawsuits
 Protecting yourself in the event of disability
 Protecting your car against theft or losses incurred because of accidents
 And many more.

INSURANCE-MEANING AND DEFINITION

Insurance is a contract between two parties. One party is the insured and the
other party is the insurer. Insured is the person whose life or property is insured
with the insurer. That is, the person whose risks are insured is called insured.
Insurer is the insurance company to whom risk is transferred by the insured. That
is, the person who insures the risk of insured is called insurer. Thus insurance is a
contract between insurer and insured. It is a contract in which the insurance
company undertakes to indemnify the insured on the happening of certain event
for a payment of consideration. It is a contract between the insurer and insured
under which the insurer undertakes to compensate the insured for the loss arising
from the risk insured against.

Some definitions of insurance are given below: According to Gosh and Agarwal,
“insurance may be defined as a co-operative form of distributing a certain risk
over a group of persons who are exposed to it According to Mc Gill, “Insurance is
a process in which uncertainties are made certain.

Insurance involves pooling funds from many insured entities (known as

exposures) to pay for the losses that some may incur. The insured entities are
therefore protected from risk for a fee, with the fee being dependent upon the
frequency and severity of the event occurring. In order to be an insurable risk, the
risk insured against must meet certain characteristics. Insurance as a financial
intermediary is a commercial enterprise and a major part of the financial services
industry, but individual entities can also self-insure through saving money for
possible future losses.
 HISTORY OF INSURANCE IN INDIA

In India, insurance has a deep-rooted history. Insurance in various forms has been
mentioned in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmashastra)
and Kautilya (Arthashastra). The fundamental basis of the historical reference to
insurance in these ancient Indian texts is the same i.e. pooling of resources that
could be re-distributed in times of calamities such as fire, floods, epidemics and
famine. The early references to Insurance in these texts have reference to marine
trade loans and carriers' contracts.

Insurance in its current form has its history dating back until 1818, when Oriental
Life Insurance Company was started by Anita Bhavsar in Kolkata to cater to the
needs of European community. The preindependence era in India saw
discrimination between the lives of foreigners (English) and Indians with higher
premiums being charged for the latter.

In 1870, Bombay Mutual Life Assurance Society became the first Indian insurer.
At the dawn of the twentieth century, many insurance companies were founded.
In the year 1912, the Life Insurance Companies Act and the Provident Fund Act
were passed to regulate the insurance business. The Life Insurance Companies
Act, 1912 made it necessary that the premium-rate tables and periodical
valuations of companies should be certified by an actuary. However, the disparity
still existed as discrimination between Indian and foreign companies.

The oldest existing insurance company in India is the National Insurance

Company, which was founded in 1906, and is still in business. The Government of
India issued an Ordinance on 19 January 1956 nationalising the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The
Life Insurance Corporation (LIC) absorbed 154 Indian, 16 non-Indian insurers as
also 75 provident societies—245 Indian and foreign insurers in all. In 1972 with
the General Insurance Business (Nationalizations) Act was passed by the Indian
Parliament, and consequently, General Insurance business was nationalized with
effect from 1 January 1973.
107 insurers were amalgamated and grouped into four companies, namely
National Insurance Company Ltd., the New India Assurance Company Ltd., the
Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The
General Insurance Corporation of India was incorporated as a company in 1971
and it commence business on 1 January 1973. The LIC had monopoly till the late
90s when the Insurance sector was reopened to the private sector. Before that,
the industry consisted of only two state insurers: Life Insurers (Life Insurance
Corporation of India, LIC) and General Insurers (General Insurance Corporation of
India, GIC). GIC had four subsidiary companies. With effect from December2000,
these subsidiaries have been de-linked from the parent company and were set up
as independent insurance companies: Oriental Insurance Company Limited, New
India Assurance Company Limited, National Insurance Company Limited and
United India Insurance Company Limited. Insurance in India refers to the market
for insurance in India which covers both the public and private sector
organisations. It is listed in the Constitution of India in the Seventh Schedule as a
Union List subject, meaning it can only be legislated by the Central government.

The insurance sector has gone through a number of phases by allowing private
companies to solicit insurance and also allowing foreign direct investment. India
allowed private companies in insurance sector in 2000, setting a limit on FDI to
26%, which was increased to 49% in 2014. However, the largest life insurance
company in India, Life Insurance Corporation of India is still owned by the
government and carries a sovereign guarantee for all insurance policies issued by
it.
TERMS USED IN INSURANCE

Insured

The party or the individual who seeks protection against a specified task and
entitled to receive payment from the insurer in the event of happening of stated
event is known as insured. An insured is normally in insurance policy holder.

Insurer

The party who promises to pay indemnity the insured on the happening of
contingency is known as insurer. The insurer is an insurance company.

Beneficiaries

The person or the party to whom the policy proceeds will be paid in the event of
the death or happening of any contingency is called beneficiary.

Contract

An agreement binding at law between two or more parties is called contract.

Premium

The amount which is paid to the insurer by the insured in consideration to

insurance contract is known as premium. It may be paid on monthly, quarterly,
half yearly, yearly or as agreed upon it is the price for an insurance policy.

Insured sum

The sum for which the risk is insured is called the insured sum, or the policy
money or the face value of the policy. This is the maximum liability of the insurer
towards the insured.

Peril

A peril is an event that causes a personal or property loss by fire, windstorm,

explosion, collision premature death, sickness, floods, dishonesty etc.
Hazard

Hazard is a condition that may create, increase or decrease the chances of loss
from a given peril.

Exposure

An exposure is a measure of physical extent of the risk. An individual who owns a

business house may be subjected to economic loss and individual loss because of
his business and personal exposure. Cover note An unstamped document issued
by or on behalf of insurers as evidence of insurance pending issue of policy.
Damages Monetary compensation award at law for a civil wrong or breach of
contract. Indemnity Compensation for actual loss suffered is call indemnity.
Reinsurance Reinsurance is a method where by the original insurer transfer all or
part of risk he has assumed to another company or companies with the object of
reducing his own commitment to an reducing his own commitment to an amount
that he can bear for his own account commensurate with his financial resources
in the event of loss. It was originally confined to offers and acceptances on
individual risk known as facultative reinsurance transactions. Double Insurance
Double insurance implies that subject matter is insured in two or more insurance
companies (insurers) and the total sum insured exceeds the actual value of
subject matter. In other words, the same subject matter is insured in more than
one insurer. No claim bonus The bonus is getting under the policy, if the claim is
not reported during the policy period and after that the time renewal (in time)
then as per the policy term no claim bonus is avail for the vehicle insurance policy
and the rate of bonus is different in different general insurance companies, and
the maximum rate should be up to 50% as per the norms. CHARACTERISTICS OF
INSURANCE Insurance follows important characteristics – These are follows 1.
Sharing of risk Insurance is a co-operative device to share the burden of risk,
which may fall on happening of some unforeseen events, such as the death of
head of family or on happening of marine perils or loss of by fire. 2. Co-operative
device Insurance is a co-operative form of distributing a certain risk over a group
of persons who are exposed to it. A large number of persons share the losses
arising from a particular risk 3. Large number of insured persons The success of
insurance business depends on the large number of persons Insured against
similar risk. This will enable the insurer to spread the losses of risk among large
number of persons, thus keeping the premium rate at the minimum. 4. Evaluation
of risk For the purpose of ascertaining the insurance premium, the volume of risk
is evaluated, which forms the basis of insurance contract. 5. Payment of
happening of specified event On happening of specified event, the insurance
company is bound to make payment to the insured. Happening of specified event
is certain in life insurance, but in the case of fire, marine of accidental insurance,
it is not necessary. In such cases, the insurer is not liable for payment of
indemnity. 6. Transfer of risk Insurance is a plan in which the insured transfers his
risk on the insurer. This may be the reason that may person observes, that
insurance is a device to transfer some economic losses would have been borne by
the insured themselves. 7. Spreading of risk Insurance is a plan which spread the
risk & losses of few people among a large number of people. John Magee writes,
“Insurance is a plan by which large number of people associates themselves and
transfers to the shoulders of all, risk attached to Individuals”. 8. Protection against
risks Insurance provides protection against risk involved in life, materials and
property. It is a device to avoid or reduce risks. 9. Insurance is not charity Charity
pays without consideration but in the case of insurance, premium is paid by the
insured to the insurer in consideration of future payment. 10. Insurance is not a
gambling Insurance is not a gambling. Gambling is illegal, which gives gain to one
party and loss to other. Insurance is a valid contact to indemnity against losses.
Moreover, Insurable interest is present in insurance contracts it has the element
of investment also. 11. A contract Insurance is a legal contract between the
insurer and insured under which the Insurer promises to compensate the insured
financially within the scope of insurance Policy, the insured promises to pay a
fixed rate of premium to the insurer. 12. Social device Insurance is a plan of social
welfare and protection of interest of the people. Rieged and miller observe
“insurance is of social nature”. 13. Based upon certain principle Insurance is a
contract based upon certain fundamental principles of insurance, which includes
utmost good faith, insurable interest, contribution, indemnity, causa Proxima,
subrogation etc, which are operating in the various fields of insurance. 14.
Regulation under the law The government of every country enacts the law
governing insurance business So as to regulate, and control its activities for the
interest of the people. In India General insurance act 1972 and the life insurance
act 1956 are the major enactment in this direction. 15. Insurance is for pure risk
only Pure risks give only losses to the insured, and no profits. Examples of pure
Risks are accident, misfortune, death, fire, injury, etc., which are all the sided risks
and the ultimate results in loss. Insurance companies issue policies against pure
risk only, not against speculative risks. 16. Based on mutual goodwill Insurance is
a contract based on good faith between the parties. Therefore, both the parties
are bound to disclose the important facts affecting to the contract before each
other. Utmost good faith is one of the important principles of insurance.
FUNCTIONS OF INSURANCE Insurance is defined as a co-operative device to
spread the loss caused by a particular risk over a number of persons who are
exposed to it and who agree to ensure themselves against that risk. Risk is
uncertainty of a financial loss. It should not be confused with the chance of loss
which is the probable number of losses out of a given number of exposures. It
should not be confused with peril which is defined as the cause of loss or with
hazard which is a condition that may increase the chance of loss. Finally, risk must
not be confused with loss itself which is the unintentional decline in or
disappearance of value arising from a contingency. Wherever there is uncertainty
with respect to a probable loss there is risk. Every risk involves the loss of one or
other kind. The function of insurance is to spread the loss over a large number of
persons who are agreed to co-operate each other at the time of loss. The risk
cannot be averted but loss occurring due to a certain risk can be distributed
amongst the agreed persons. They are agreed to share the loss because the
chances of loss, i.e., the time, amount, to a person are not known. Anybody of
them may suffer loss to a given risk, so, the rest of the persons who are agreed
will share the loss. The larger the number of such persons the easier the process
of distribution of loss, In fact; the loss is shared by them by payment of premium
which is calculated on the probability of loss. In olden time, the contribution by
the persons was madeat the time of loss. The insurance is also defined as a social
device to accumulate funds to meet the uncertain losses arising through a certain
risk to a person insured against the risk. The functions of insurance can be studied
into two parts:  Primary Functions, and  Secondary Functions. Primary
Functions: (i) Insurance provides certainty: Insurance provides certainty of
payment at the uncertainty of loss. The uncertainty of loss can be reduced by
better planning and administration. But, the insurance relieves the person from
such difficult task. Moreover, if the subject matters are not adequate, the
selfprovision may prove costlier. There are different types of uncertainty in a risk.
The risk will occur or not, when will occur, how much loss will be there? In other
words, there are uncertainty of happening of time and amount of loss. Insurance
removes all these uncertaintyand the assured is given certainty of payment of
loss. The insurer charges premium for providing the said certainty. (ii) Insurance
provides protection: The main function of the insurance is to provide protection
against the probable chances of loss. The time and amount of loss are uncertain
and at the happening of risk, the person will suffer loss in absence of insurance.
The insurance guarantees the payment of loss and thus protects the assured from
sufferings. The insurance cannot check the happening of risk but can provide for
losses at the happening of the risk. (iii) Risk-Sharing: The risk is uncertain, and
therefore, the loss arising from the risk is also uncertain. When risk takes place,
the loss is shared by all the persons who are exposed to the risk. The risk-sharing
in ancient time was done only at time of damage or death; but today, on the basis
of probability of risk, the share is obtained from each and every insured in the
shape of premium without which protection is not guaranteed by the insurer.
Secondary functions: Besides the above primary functions, the insurance works
for the following functions: (i) Prevention of Loss: The insurance joins hands with
those institutions which are engaged in preventing the losses of the society
because the reduction in loss causes lesser payment to the assured and so more
saving is possible which will assist in reducing the premium. Lesser premium
invites more business and more business cause lesser share to the assured. So
again premium is reduced to, which will stimulate more business and more
protection to the masses. Therefore, the insurance assist financially to the health
organisation, fire brigade, educational institutions and other organisations which
are engaged in preventing the losses of the masses from death or damage. (ii) It
Provides Capital: The insurance provides capital to the society. The accumulated
funds are invested in productive channel. The dearth of capital of the society is
minimised to a greater extent with the help of investment of insurance. The
industry, the business and the individual are benefited by the investment and
loans of the insurers. (iii) It Improves Efficiency: The insurance eliminates worries
and miseries of losses at death and destruction of property. The carefree person
can devote his body and soul together for better achievement. It improves not
only his efficiency, but the efficiencies of the masses are also advanced. (iv) It
helps Economic Progress: The insurance by protecting the society from huge
losses of damage, destruction and death, provides an initiative to work hard for
the betterment of the masses. The next factor of economic progress, the capital,
is also immensely provided by the masses. The property, the valuable assets, the
man, the machine and the society cannot lose much at the disaster. ADVANTAGES
OF INSURANCE 1. Assures for financial compensation 2. Reduction of risks 3.
Encouragement to saving and investment 4. Basis of credit 5. Maintains economic
stability 6. Promotes business activities 7. Provides employment opportunities
DISADVANTAGES OF INSURANCE Besides a number of benefits, insurance has also
some limitations.  Insurance leads to negligence as the insured feels that he/she
can be compensated for any loss or damage.  Insurance companies do not make
the compensation promptly on maturity of the policy or for the financial losses as
the expectation of the insured.  It may lead to the crimes in the society as the
beneficiaries of the policy may be tempted to commit crimes to receive the
insured amount.  Although insurance encourages savings, it does not provide
the facilities that are provided by bank.