Management of

Insurance
companies
MODULE 6
Insurance Market
 Insurers/insurance carriers – companies who
insure
 Insurance brokers – other insurance related
service providers like surveyors etc.
 Insurance agencies – sell on behalf of
insurers, may be exclusive of non-exclusive
Types of Insurance organisations
 Can be classified on the basis of
 - risk coverage (life, health fire etc)
 - agency system (independent, exclusive, direct selling
 - formation (stock or mutual)
STOCK INSURERS:
Companies that are owned and controlled by stockholders through
board of directors and officers. Shareholders get profits as dividends
and policyholders get bonus. Therefore they have to balance the
interests of both. They raise money by issuing more stock or selling
more policies. In case of life insurance the policy holders take loans
and pay interest.
 MUTUAL INSURERS:
 Mutual companies owned by policy holders for non-profit. Initial capital
may be arranged by an intermediary which is repaid later. As it is
owned by policy holders company interests are aligned to their interests
alone. Their only way to make money is by selling more policies. Life
insurers can give loan and earn interest.
 A mutual insurer may de-mutualise and become a stock company and
vice versa.
 Mutual insurance companies can be motivated to make and sell
certain kinds of policies which a stock company cannot make.
 LLOYD’S OF LONDON:
 Lloyd’s is not a single insurer but a leading insurance market providing
services and physical facilities for members to write specialised
insurance products
 RECIPROCAL EXCHANGE:
 Also called inter insurance exchange, it is
an unincorporated organisation where
insurance is exchanged among members.
It is managed by an attorney–in-fact. It is a
corporation authorised by members to get
new members, pay losses, collect
premiums, invest and perform admin jobs.
It is only a representative and is personally
not liable to pay.
Organisation structure of insurance
companies
 Ownersof shareholders of the company are at the
top who elect a board of directors for the
company.
 Boardof directors is the primary governing body for
the company . It sets goals and policies of the
company.
 Board controls the CEO and other employees of
the companies who work towards implementation
of the targets set by the board.
Functions of Insurers
 Production/sales

 Underwriting

 Rate making

 Claim settlement

 Investment and financing

 Accounting and record keeping

Underwriting
 Underwriting is the process by which an
insurer takes decision to accept risk and
charge a premium . Underwriting helps
insurance company to take calculated risk
and earn money by way of sales
 Each company has its own set of rules to
decide on underwriting and it is also
related to the type of policy taken.
 Risk categories in underwriting
 Underwriting involves classification of risk into various classes. A risk class is a
group of insured that involves similar level of risk to the company. The
following are the 4 such risk classes:
 1. preferred risks: here the anticipated mortality is significantly lower than
the average. It represents least risk for the insurer and maximum profit
potential.
 2. standard lives: Here the anticipated mortality is same as what is assumed
in the mortality as average. Here the risk is on par with average and profits
at expected levels.
 3. sub-standard lives: here the anticipatory mortality is higher that the
average but they are still considered insurable
 4. declined lives: here the expected mortality is far higher than the average
and the insurer cannot accept the proposals even at higher premiums.
Such proposals are declined by the insurer.
 Principles of underwriting:
1. to accept proposals in line with
company’s risk norms:
2. balance rate classes (above and
below normal ) to arrive at a good
average
3. to fix equitable rates for each risk
class without cross subsidising
Factors in underwriting in Life insurance

 Age
 Health condition – cholesterol, BP, build etc
 Income levels
 Family history- cancer , heart, diabetes, etc
 Occupation – hazardous like aviation, military
 Habits – tobacco, alcohol
Underwriting process in life insurance
 Getting information of risk through
- application containing (part A is general and Part-2 is medical info),
agent’s statement or report, signature of all parties including the
agent, mode term of payment etc
-Medical examination for life and health insurance
-Independent agency providing financial and social information about
the party.
-underwriting in field by the agent/producer
 Risk assessment
 Decision: Accept at standard rates/charge extra premium/special
conditions/reject risk
Underwriting in non-life insurance
 Escalating costs, awards and increasing incidents has made
business unprofitable. More care is required in underwriting
 Source of information is application, local inspector, broker’s
inspection report, prior experience and company inspection
 Underwriting done by NB dept at branch/division level under
guidelines set by HO as under:
Types of vehicles:
Type of vehicles underwritten is as per classification given in the Motor
Vehicle Act 1988
Private car: vehicles used for social, domestic, and pleasure purposes
excluding use of horse, racing,, reliability trial, speed testing, etc
Two wheelers: motorised two wheelers … same as above…
 Commercial vehicles: motor vehicles other than
1 and 2 above like
- goods carrying vehicle
- trailers
- carrying passengers
-agricultural and forestry vehicles/special
purpose vehicles
Claims settlement
 Claim refers to demand made by the insured on the
insurer to pay the compensation upon happening of the
event.
 OBJECTIVES/STEPS:
 1. Verification of covered loss
 2. Fair and prompt payment of claims – pay properly.
Not more, not less. Unfair claim practices include
refusing to pay claims without proper investigation. Not
attempting to pay in good faith once liability has
become clear. Compelling insureds to go for lawsuits
 3. provide personal assistence after covered loss occurs
Types of claim adjustors
Insurance agent
Company adjustor
Independent adjustor
Adjustment bureau
Public adjustor
Claim settlement in life insurance

 Filea claim and provide necessary

documents
 Adjustor assesses the situation and
gives an estimate
 Claim settlement
Claim settlement in health
insurance
 Cashless method:

 Reimbursement method:
 Claims settlement in motor insurance
 Two types
 3P insurance – compulsory, std tariff
 Own insurance – voluntary, variable tariff
 Claim settlement involves the following document:
 Claim form
 Survey report
 D/L
 Registration certificate
 FC for commercial vehicles
 Permit for commercial vehicles
 Police report for TP claims
 Repair bills
Claims procedure for repairs
 Verification of claim upon receipt of notice of loss
 Entered in claims register and claims form issued
 Insured submits an estimate
 Insurer accepts or asks for alternative quotes
 Independent surveyor /company personnel verifies cost and
claim and submits report.
 Survey report is scrutinised and accepted. Letter issued to the
repairer. They are advised about money to be collected from
the insured
 Discharge voucher or receipt is obtained
 Claim register and policy records are marked with claim
settlement details
 Claim settlement in case of total loss
 When vehicle is beyond repairs or uneconomical
in nature surveyor negotiates with the insured for
a total loss settlement. Settlement is done on the
basis of market value or insured value whichever
is lower.
 Insured is paid money and the salvage is taken
by the insurer and auctioned later
 Insured hands over all documents like RC book
etc to the insurer
 Claim settlement in case of theft

 Theft case is also settlement similar to total loss case

 FIRcopy with SDE no or CR no is required to be quoted
in the application.
 Police may trace the vehicle or issue non-traceable
certificate in 1-2 months
 RCbook/duplicate RC book and non-user form with
RTO is also required.
 Discharge form and indemnity bond are also required.
Insurance pricing
Insurance cost or premium

MEANING:
 Consideration paid to the
insurance company for
insurance protection for a given
time period is called premium.
This is the selling price and is the
cost of insurance to the insured.
 Insurance pricing - Objectives
 1. RATE ADEQUACY
 Rates adequate to fulfil promises made in the
policy
 2. RATE EQUITY
 Charging premiums commensurate with
expected costs and losses insureds bring to the
business.
 3. RATES NOT EXCESSIVE
 Rates should not be excesive in relation to
benefits promised by the policy
Factors affecting costs/Fair premium
Expected liability/claim:
 Claim cost would equal magnitude of claim and the probability of its occurrence.
Time value of money:
 Premium is paid in advance and therefore can be discounted from the claim costs to
accommodate for the interest earned during that period. Present value of claim cost is
taken to calculate premiums
 PV = 1/(1+r)n
Cost of holding capital:
 companies hold idle capital to take care of investment in the business and emergency
pay-outs. Cost of such capital needs to be built-in while calculating cost or premium
Admin costs:
 Admin costs like marketing, administration, etc
Riders chosen:
 Riders like DAB, critical illness etc will increase the premia
FAIR PREMIUM IS THAT REMIUM WHICH COVERS ALL THESE COSTS
Profit loading
 Amount added by the insurance company
to pure insurance premium and other costs
to take care of required profits for the
organisation.
 Premium = cost of claims + other expenses +
Required profit
 (Use explanations from the previous slide)
 Usually expressed as a percentage of claims
cost and other expenses.
Investment income
 Life Insurance companies sell two types of policies viz with profits and without
profits. General insurance involves no profits (but they will still invest their funds)
 A without profits policy caters to pure insurance where no investment is done.
 In a with profits policy investment and returns are involved.
 Fund created for investment in life insurance business is called life fund
 Life fund is invested in Government bonds, safe securities and share market.
 Returns are variable and not fixed
 Returns are distributed to policy holders as bonus, declared as Rs per thousand
of sum assured. Its not payable on a premiums paid basis.
 Bonus is reversionary and is payable at the end upon death or maturity.
 LIC pays the highest bonus while private insurers generally pay lower.
 Investment income from insurers are generally lower as compared to other
forms of fixed investments like PPF, FD etc
Timing of claim settlement
 Involves 2 types, viz death claim and maturity claim settlement.
 Death claim settlement is payment of dues to the nominee of the
policy holder upon happening of an event as mentioned in the
policy contract. A maturity claim settlement is payment to be
made to the policy holder upon maturity of the contarct.
 IRDA Policy holders’ interest Regulations 2002, Regulation 8,
stipulates that the insurer has to settle claims within 30 days of
receiving all document including clarifications to queries sought.
 If settlement involves investigation, it has to be completed within
6 months from receiving claim request
 In money back policies survival benefits are paid as per time
frame mentioned in the contract
Capital Shocks
 Insurance capital is a matter of demand and
supply.
 Supply gets affected due to catastrophe or sudden
spurt in claims. Supply curve shifts to the left
indicating an increase in price and decrease in
quantity. This is a HARD market.
 When profits increase with lower claims the supply
curve shifts to the right indicating an increase in
supply and reduction in price.
 Insolvencyrisk depends upon capital shock of
varying supply owing to uncertainty in claims.
Underwriting cycle
 The process of Underwriting undergoes a cycle of
hard and soft stance.
 When underwriting makes profits many players
come in
 Increases supply and reduces premium
 Profits come down and capital erodes, some quit
 Price increases to protect capital and profitability
improves, many players start coming in.

 DRAW A CIRCULAR PICTURE AND EXPLAIN EACH

STEP WITH DETAILS
Price Regulation
 Several regulations governing registration, agency, brokers,
solvency, capital standards, rates, claim settlement etc.
 In the US certain stages have rate regulation and ertain states do
not have
 Objective is to be fair, not excessive, uniform
 In India, rates regulation is done by IRDA in the interest of general
public
 3P insurance under motor vehicle insurance is covered under price
regulation. Premium is fixed by the government.
 All other premiums are fixed y the companies on a market basis.
Distribution channels
1. Insurance agents:
 Agents who represent the company; not employees
 Includes individual/companies
 They represent a single company
 Categorised as life, general.
 Requires to pass IRDA exam and obtain a licence
 An agent must provide correct information both ways
 Provides a “confidential Report” to the company on
matters affecting underwriting
 Assists policy related services to the policy holder like
premium, nomination, claim settlement etc
DISTRIBUTION CHANNELS:

 Traditionally,
the life insurers have been solely
depend on the agency distribution force.
 Onthe contrary the general insurance business
has depended totally on the development offers.
 The scenario has been different for the general
insurers a no agency commission was payable for
writing business more than 10 lakh, thus prohibiting
brokers.
TRADITIONAL CHANNEL OF DISTRIBUTION
AGENTS :

 Most of the life insurance companies in India follow the traditional route of
marketing through agents.
 In case of private players they are nomed as Insurance advisors/ planners.
 The agent are trained to be sensitive to the dominant issues in any family’s life like
education and marriage of children.
 Insurance Agents
A person licenced by a state and generally employed
by an insurance company to sell insurance policies on
company’s behalf.
 The agent generally receives a commission for this
service.
 He or she attempts to extract the maximum value for
the insurance company in all his or her dealings.
 An insurance agent should not be confused with an
insurance broker or insurance underwriter”.
Type of insurance includes
 Property
 Life
 Health
 Disability
 Long term care
 Every state (USA) requires insurance agent to be licensed.
 They are required to obtain separate licenses to sell life and health
insurance or property.
 In most states, sales agents in order to become licensed, must
complete pre licensing course and pass state examination.
EVERY INSURANCE AGENT SHALL:

 Identify himself and the insurance company of whom he is an insurance agent

 Disclose his license to the prospect on demand.
 Disclose the scale of commission in respect of the insurance product offered for
sale, if asked by prospect.
 Indicate the premium to be charged by the insurer for the insurance product
offered for sale.
 The insurance agent should provide all the information required in the insurance
proposal.
 Inform promptly the prospect about the acceptance or rejection of the proposal
by the insurer.
 The insurance agent should provide the information regarding the documents
required for the completion of insurance proposal.
 The insurance agent in the time of settlement of claims they should assist the
policy holder.
 The agent should provide all the information regarding nomination and also
regarding the change of address.
Channels – corporate agents
 It’s a company representing an insurance company
as an agent
 Usually a bank. Bank acting as an agent for selling
insurance products is termed “Bancassurance”
 Only one life and one general company can be
represented by a bank
 Bancassurance are generally cheaper than direct
purchase from an insurance company particularly
with health insurance
 Service experience with Bancassurance is quite poor
 There are other corporate agents who sell insurance
like financial services companies
Meaning of Corporate agent

Corporate Agents are the entities that are

empowered to function as agents for various types
businesses or for government agency.
Every Licenced Corporate Agent shall abide by the code of conduct
specified below

 Be responsible for all the act of its corporate executive and every
specified person.
 The corporate agents must ensure that the corporate executives and
specified person are well trained, skilled, and knowledgeable in the
insurance product they market
 Ensure that the corporate insurance executive and specified person
do not make any misrepresentation on the policy benefits as well as
returns available under the policy to his customers
 Ensure that the customer or prospect are not forced to buy any
insurance product
 Give adequate advice to the insured before they buy the insurance
product as well as after they buy the insurance product
 Extending help as well as cooperation to the insured in completion of
all the formalities and documentation in the event of claim
 Give due publicity that the corporate agents do not under write the
risk or act as an insurer. He acts as an agent between the insurer and
insured
 enter into an agreement with the insurer in which the duties as well as
responsibilities of both insurer and corporate agent is defined or
mentioned.
Every corporate agent shall or a corporate insurance executive or specified person
shall also follow code of conduct specified below

 Identify himself and insurance company of whom he is a

representative
 Disclose his license/certificate when demanded
 Give proper information about the insurance product offered by the
insurer and also take care the needs of the customer while
recommending a specified insurance plan
 He must disclose the scale of commission in respect of insurance
product offered for sale if asked by the insured or or customer
 Indicate the premium to be charged by the insurer for the insurance
product offered for sale
 He must explain the prospect or customer about the nature of
information that has to be given by the customer or prospect
 He must also explain the importance of submitting all the information
in the purchase of an insurance contract
 He must inform promptly to the customer about the acceptance or
rejection of proposal by the insurer
 He must obtain the required document at the time of filing the
proposal with the insurer
 He must also obtain documents from the customer which is asked by
the insurer for the completion of proposal
 He must give assistance to the policy holder or beneficiaries during the
settlement of claim by the insurer
 Provide advice to every individual policy holder when there is change
in the address or excise of options as the case may where ever
necessary
No corporate agent/corporate insurance executive/ specified person shall:
 Shall run the business without holding a valid license/ certificate
 He should not induce the customer to omit (leave) any material
information in the proposal form
 He should induce (not make) the customer to submit wrong
information in the proposal form or documents submitted to the insurer
for acceptance of proposal
 Behave equally with the customer or prospect without taking any
personal benefit
 He should not interfere with the proposal made by any other specified
person
 He should not offer different rates, advantages, terms and conditions
other than those offered by the insurer
 He must not demand any benefits or share of proceeds from the
beneficiary under insurance contract
 He should not force the policy holder to terminate the existing policy
and buy the new policy within 3 years from the date of such
termination
 He must apply for the fresh licence to act as an insurance business if
the licence is cancelled earlier
 He should make sure that the policy holder pays the premiums within
the stipulated time by giving notice to the policyholder orally and
writing
Source: www.policyholder.gov.in/corporate _agents
www.irda.gov.in
Channels of Insurance – Brokers
Brokers :
 IRDA’s Annual Report 2001-02 describes brokers “
Insurance brokers ,as professionals ,are expected to fill
the void in terms of providing for specific insurance needs
of the client ,by assessing the risk on behalf of the client
,advise on the mitigation of the specified risk , identifying
the optimal insurance policy structure ,bring together the
insured and insurers ,carry out work preparatory to
insurance contracts and , where necessary ,assist in the
administration and performance of such contracts ,in
particular when claims arise ”.
 They are the professionals who assess the specific
insurance needs of the client
 Then they evaluate the risk and suggest a suitable
insurance cover for clients
 IRDA has issued guidelines for the issue of licence
and regulation of affairs to insurance brokers and
insurance consultants in 2002 .
 As per the guidelines ,the brokers sre divided into:
1. Category - Direct General Insurance Broker
2. Category - Direct Life Insurance broker
3. Category - Reinsurance broker
4. Category - Composite broker
5. Category - Insurance Consultant
Provisions
 Guidelines provide the qualification norms and their
functions for various classes
 Networth requirement for brokers is Rs. 2.50 crores,
direct and reinsurance brokers is Rs. 50 lakh and Rs.
2.00 crores, Insurance Consultant Rs 5.00 lakhs
 Brokerage is determined by IRDA, its cannot exceed
30% of the premium
 Solvancymargin has to be maintained – Rs 25 lakh or
10% of the gross brokerage and fees received in the
PY .
 Books of accounts has to be maintained
by brokers , has to submit audited
financial statement and report within 60
days from the year end of accounting.
 The
records should be kept atleast for 5
years
Benefits :

 Improvement in customer service

 Transfer of technology and
managerial know-how
 Benefits to insurance Companies
 Foreign exchange considerations
Channels of Insurance-Others
Other channels
An increasing number of insurers are using
multiple distribution channels as they
continue to balance the needs of
different groups of customers against the
cost of distributing their products and
services. When it comes to insurance
distribution channels, one size does not
necessarily fit all.
The other distribution channels of insurance are:
Banks:
 Banks in india are all pervasive, especially the public sector banks.
Many insurance companies are selling the products through banks.
Companies which are bank owned, they are selling their products
through their parent bank.
 The public sector bank with their vast branch networks, are helpful
to the insurance companies. This channel of selling insurance is
known as bank assurance.
Internet marketing:
 In this technological world internet is also a channels of selling
insurance. This can be as a direct marketing. Insurers are using the
internet to provide general information of financial services products
and planning involving the use of these products, to provide
specific information about the company and its product lines to
provide administrative support to its policy holdres and to serve as a
prospecting and communication tool for its agent led channel.
 Internet helps to collect information for consumers. It is a two stage
process. The consumers first use the internet to collect information
on product or services. They, then return to the agent to complete
the purchase. This behavior highlights the current role that the
internet plays in providing support to the agent led channel.
 Now a days, the advantage of technology allows insurers to
increase their reach in to the market. All insurers have websites
which they provide information about the products and services.
Work site marketing:
It is the distribution method providing the voluntary insurance products
to employees at their work place with the sponsorship of their
employer, which is done on a deduction from their payroll. The contact
for insurance is directly made with employee rather than the employer.
 In this channel life insurers send team to a target group and explain
the products either individual or group products suitable to them.
The target group may be employees of a particular company or an
educational institute.
 One possible reason for insufficient development of this channel in
india is that employers generally expect some kind of incentives to
provide the facilities to the life insurers for making presentations and
making arrangements for deduction of premium from salaries.
Invisible insurer:
In this model, the insurance company or its representative is not the
entity marketing the products. The insurance cover is sold by an
automobile/ credit card company as an add on product leveraging
the brand of the retailer. This risk is carried by the insurance company,
which underwrites it.
Product like creditor insurance, automobile insurance, and credit card
related insurance could be distributed using this channel. This model
can be adopted in all market segments for the lines of business
mentioned. It is already prevalent in some areas like credit card
insurance and crop insurance for agricultural loans.
Source:
www.generalinsuranceassociation.org.
sg
Critical success factors for Insurance players

Change in the attitude of population

 Usually think as Tax benefit
 Lustre should wipe out once they implement
 Need to educate people

Open and Transparent Environment created under the IRDA

 Objective should be clearly communicate with customer
 Customer should feel safe
 Otherwise there will be an air of uncertainty
Trained professionals to Build and sell the product
 Insurance agents are trained
 Excellent sales team is required to compete

Rationale Approach to the Investment criteria

 IRDA provides guidelines for investment patterns
 For the interest of public

 Stringent Accounting practice to prevent Failures amongst the

Insurers
 Insurers deal with masses hard-earned money
 Prevent from going burst
Well established Distribution network
 Distribution is the key area
 Public sector banks are one of the leaders

Level playing field at all stages of Development in

the sector for all the players
 Providing an unbiased environment
 Responsibility of government

Financial literacy
STRATEGIES &
TECHNIQUES
Marketing strategy serves as the foundation of a marketing plan.
Marketing plan contains a list of specific actions required to
successfully implement a specific marketing strategy.
Marketing strategy techniques

 Segmentation

 Positioning

 targeting
Segmentation:

Market segmentation is the process in

marketing of grouping a market (customers)
into smaller sub-groups. It is not arbitrarily
imposed on society but it is derived from the
recognition that the total market is often made
up of sub-markets is called as segment.
Market segmentation consists two main phases:

 Identification of broad, large markets.

 Segmentation of these markets in order to

select the most appropriate target markets
and develop marketing mixes accordingly.
Positioning:

Positioning is how the target market

defines the insurer in relation to their
competitors. A good position is:

 What makes you unique?

 This
is considered a benefit by your target
market
Targeting:
 Targeting means breaking the market into segments and
then concentrating your marketing efforts on one or a few
key segments.
 Target marketing can be the key to a small business’s
success.
 Target market makes the promotion, pricing & distribution
of products and services easier & more cost-effective
 Target marketing provides a focus to all marketing
activities.