Insurance business is divided into four classes :
1) Life Insurance business
4) Miscellaneous Insurance.
Life Insurers transact life insurance business; the rest is transacted by General Insurers.
The business of Insurance essentially means defraying risks attached to any activity over time (including life) and sharing the risks between various entities, both persons and organisations. Insurance companies are important players in financial markets as they collect and invest large amounts of premium. Insurance products are multi purpose and offer the following benefits :
1. Protection to the investors
2. Accumulate savings
3. Channelise savings into sectors needing huge long term investments.
CONTRIBUTION TO INDIAN ECONOMY
Insurance is the only sector which garners long term savings
Insurers are increasingly introducing innovative products to meet the specific needs of the prospective policyholders. An evolving insurance sector is of vital importance for economic growth. While encouraging savings habit it also provides a safety net to both enterprises and
Insurance Companies receive, without much default, a steady cash stream of premium or contributions to pension plans. Various actuary studies and models enable them to predict, relatively accurately, their expected cash outflows.
Liabilities of Insurance companies being long-term or contingent in nature, liquidity is excellent and their investments are also long-term in nature. Since they offer more than the return on savings in the shape of life-cover to the investors, the rate of return guaranteed in their insurance policies is relatively low. Consequently, the need to seek high rates of returns on their investments is also low. The risk-return trade off is heavily tilted in favour of risk.
As a combined result of all this, investments of insurance companies have been largely in bonds floated by GOI, PSUs, state governments, local bodies, corporate bodies and mortgages of long term nature.
Generates Long term funds for infrastructure and strong positive correlation between development of capital markets and insurance/pension sector
For GDP to grow at 8 to 10%, qualitative improvement in infrastructure is essential. Estimates of funds required for development of infrastructure vary widely. An investment of 6,19,600 crore is anticipated in the next 5 years. Tenure of funding required for infrastructure normally ranges from 10 to 20 years. The insurance industry also provides crucial financial intermediary services, transferring funds from the insured to capital investment, critical for continued economic expansion and growth, simultaneously generating long-term funds for infrastructure development.
In fact infrastructure investments are ideal for asset-liability matching for life insurance companies given their long term liability profile. According to preliminary estimates published by the Reserve Bank of India, contribution of insurance funds to financial savings was 14.2 per cent in 2005-06, viz., 2.4 per cent of the GDP at current market prices. Development of the insurance sector is thus necessary to support continued economic transformation. Social security and pension reforms too benefit from a mature insurance industry.
The insurance sector in India, which was opened up to private participation in the year 1999, has completed over seven years in a liberalized environment. With an average annual growth of 37 per cent in the first year premium in the life segment and 15.72 per cent growth in the nonlife segment, together with the largest number of life insurance policies in force, the potential of the Indian insurance industry is still large.
Life insurance penetration in India was less than 1 per cent till 1990-91. During the 1990s, it was between 1 and 2 per cent and from 2001 it was over 2 per cent. In 2005 it had increased to 2.53 per cent.
Spread of financial services in rural areas and amongst socially less privileged
IRDA Regulations provide certain minimum business to be done
- in rural areas
- in the socially weaker sections
Life Insurance offices are spread over nearly 1400 centres. Presence of representative in every tehsil – deeper penetration in rural areas.
Insurance agents numbering over 6.24 lakhs in rural areas.
Policies sold in rural areas (2004-05) - No. of policies - 55 lakhs, Sum assured 46,000 crores. Social security - No. of lives covered 2003-04 17.4 lakhs 2004-05 42.1 lakhs
Life insurance industry provides increased employment opportunities. Employees in insurance sector as on 31st March, 2005 is around 2 lakhs. Many agents depend on insurance for their livelihood. No. of agents on 31st March 2004 – 15.59 lakhs. Brokers, corporate agents, training establishments provide extra employment opportunities. Many of these openings are in rural sectors.
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