Insurance industry has always been a growth-oriented industry globally. On the Indian scene too, the insurance industry has always recorded noticeable growth vis-à-vis other Indian industries.
Triton Insurance Co. Ltd. was the first general insurance company to be established in India in 1850, whose shares were mainly held by the British. The first general insurance company to be set up by an Indian was Indian Mercantile Insurance Co. Ltd., which was established in 1907. There emerged many a player on the Indian scene thereafter.
The general insurance business was nationalised after the promulgation of General Insurance Business (Nationalisation) Act, 1972. The post-nationalisation general insurance business was undertaken by the General Insurance Corporation of India (GIC) and its 4 subsidiaries:
Oriental Insurance Company Limited;
New India Assurance Company Limited;
National Insurance Company Limited; and
United India Insurance Company Limited.
Towards the end of 2000, the relation ceased to exist and the four companies are, at present, operating as independent companies.
The Life Insurance Corporation (LIC) was established on 01.09.1956 and had been the sole corporation to write the life insurance business in India.
The Indian insurance industry saw a new sun when the Insurance Regulatory & Development Authority (IRDA) invited the applications for registration as insurers in August, 2000. With the liberalisation and opening up of the sector to private players, the industry has presented promising prospects for the coming future. The transition has also resulted into introduction of ample opportunities for the professionals including Chartered Accountants.
The Indian Insurance industry is featured by the attributes:
Low market penetration;
Ever-growing middle class component in population.
Growth of consumer movement with an increasing demand for better insurance products;
Inadequate application of information technology for business.
Adequate fillip from the Government in the form of tax incentives to the insured, etc.
The industry formations need to keep vigil on these characteristics of the Indian market and formulate their strategies to entail maximum contribution to the output of the sector.
The Indian life and non-life insurance business accounted for merely 0.42 percent of the world's life and non-life business in 1997. The figures of the basic parameters of the industry's performance viz. Insurance Density and Insurance Penetration also are evident of the hitherto existing low-yield Indian market conditions.
The term "Insurance Penetration" broadly measures the contribution of the insurance industry in relation to a nation's entire economic productivity. The figure of premium vis-à-vis the GDP of 1999 stood at 0.54 percent for non-life insurance business and 1.39 percent for the life insurance business. The term "Insurance Density" reflects the Insurance purchasing power. The premium per capita in India amounted to US $ 2.40 for non-life insurance and US $ 6.10 for life insurance in 1999 but with the deregulation of the sector, a sea-change in the scene is most likely.
Role for Chartered Accountants
The Chartered Accountants have engaged themselves in the audit of Insurance Companies since long. With the transition in the insurance sector, the horizons for their contribution have broadened. There has, emerged a king-size pool of opportunities that the Chartered Accountants can explore and apply their professional wisdom and experience to.
The structure of an insurance company, generally, comprises the Operating Department, Administrative Department and the Finance Department. The Operating Department generally performs the basic functions pertaining to the designing of products, marketing thereof, servicing the insured, management of portfolio, etc. The Administrative Department looks after the day to day affairs of the company. The Finance Department backs the operations and administration of the company by accounting for the transactions, streamlining the flow of funds, materializing the management decisions, etc.
The Administration Department as well as the Finance Department, usually, functions through in-house setup. The Finance Department functions in the areas of accounting, financial and management reporting, budgeting and controlling, etc. and thus renders enormous scope for finance professionals. The new entrants in the insurance sector are likely to call for the services of the Chartered Accountants for their financial setup requirements.
The Operating Department performs the following basic functions:
Risk Perception and Evaluation
The fundamental function of an insurer is to provide a cover against the detriment caused to the insured due to the happening of certain specified and agreed events. Thus, prior to providing such umbrella through a product, the insurer has to assess the risk involved in the transaction.
The insurer has to identify the element of risk prevalent in the concerned industry or a particular unit. The perception of risk requires the study of variables through various methods including the application of scientific and statistical techniques and correlation thereof with the industry or unit under study in light of their basic environmental and infra-structural characteristics. After the identification and categorisation of the risks perceived, the probability of happening of the loss-causing events and the severity of the loss has to be assessed.
The risk-evaluation, segment-wise or client-wise needs the industry-specific knowledge. The Chartered Accountants possess the knowledge about the operations of the industries or the units with which they deal in their normal course of profession. If the insurers intend to avail of the out-sourced services for such risk perception and evaluation, the Chartered Accountants may render their services. The Chartered Accountants can avail of the services of the Technical Faculty for the purpose, if required.
Designing of the Insurance Product
On the basis of the risks perceived, the insurer develops a product to cover the stipulated risks. While designing an insurance product, an insurer decides its cost to be charged from the insured in the form of premium, reduction thereof in certain cases like not lodging any claim during the previous covered period(s), suggesting the implementation of risk-mitigating measures, etc. The features of a product should be flexible enough to provide for the determination of premiums, rebates, additional premiums, etc. depending upon the risk benchmarks as determined.
The Chartered Accountants can play a valuable role in developing the features of an insurance product. They possess adequate knowledge of the financial and technical aspects pertaining to the industry and can apply their skills to yield well-tailored products incorporating the desired features. They can exploit their financial intuition to quantify the risk element and correlate it with the earnings of the company to develop a well-defined premium structure. The Chartered Accountant firms can formulate a model insurance product grounded on the study of an industry and apprise the insurance companies about the development of the same to make them aware of the quality of services, which can be rendered by them to the insurers.
Marketing of the Products
The core function of the marketing force of an insurance company is to generate awareness about the insurance products among the target market. But in the Indian scenario, where the insurance penetration is too low as compared to the other nations, the marketing force needs to perform the pro-active role in developing an insurance culture. It is through the efficiency of the sales force of an insurance company that the desirability and the success of a product are determined.
In Indian insurance market, the function is, basically performed by the agents. The persons desiring to function as insurance agents have to obtain licence to act as such from the IRDA or an officer authorised by the Authority in this behalf. The agents approach the prospective buyers and apprise them of the basic features of the products. In order to dispense with the functions, the agents need to possess adequate knowledge of the insurance industry, products and the modalities attached therewith. Further, the marketing personnels should be adequately backed by the back-office setup.
A Chartered Acccountants as an Insurance Agent
Selling of the Products
The term selling in the context of insurance industry connotes the issuance of policies to the applicant proposer. The non-life insurance policy basically embodies the covenant between the insurer and the insured wherein the former agrees to indemnify the latter for the loss caused to him on the happening of the certain agreed events up to a specified limit. The life insurance policy generally contains the agreement whereby the insurer agrees to pay to the insured or the beneficiary of the policy an agreed amount on the expiry of the term of the policy or in the event of the death of the insured respectively. The additional benefits in the shape of Riders viz. Accidental Death Benefit, Double Sum Assured, Critical Illness benefits, Waiver of Premiums, etc. can also be appended with the policy on the payment of an additional premium.
In Indian industry, the function is, generally performed by the insurer. In addition, the insurance companies depute their Direct Selling Representatives to look after the function. They receive the proposal documents, vet them and issue policies to the proposers.
The Chartered Accountants can engage themselves in the process by entering into agreement with the insurance companies to function as the Direct Sellers of their products and charge commission in lieu of the services so rendered from them. The area promises attractive scope for the constituents of the profession.
The functions of an insurer include the provision of the Post-sales services to the insured. Among the services rendered by the insurer is the service of processing and release of claims. The insurers need to verify the accuracy of the facts presented in relation to the insurance claim and the documents produced in support thereof.
The Chartered Accountants have a significant role to play in this area. The services, which can be provided by the Chartered Accountants include the services as Surveyors and Loss Assessors, Claim Assurers, Claim Negotiators, etc.
The Chartered Accountants have already been engaged in the surveys and loss assessments. The Chartered Accountants engaged in the field visit the place of loss and assess the quantum of loss incurred by the insured.
The section 64UM(2) of the Insurance Act provides that no claim in respect of a loss which has occurred in India and requiring to be paid or settled in India for an amount of Rs. 20000/- or more in value on any policy of general insurance, unless otherwise directed by the Authority, be admitted for payment or settled by an insurer unless he has obtained a report, on the loss that has occurred from an approved Surveyor and Loss Assessor.
A Chartered Accountant as a Surveyor and Loss Assessor
Some general insurance companies allow the authorised third parties to process the claims and release the payments up to a specified amount on the basis of their assessment. The third party in turn may forward the case with the insurer and get the amount paid to the insured reimbursed. The practice allows the insurers to salvage the time involved in the processing of small claim cases.
The Chartered Accountants may pursue the practice of receiving the claim documents, verification thereof in light of the facts recorded, releasing the payment as assessed and receive the amount in-turn from the insurance company. For the service, the insurance company will allow the service charges as stipulated.
Apart from the above-mentioned services, the Chartered Accountants can engage themselves as negotiators between the insurer and the insured.
Management of Portfolio
The management of the portfolio includes the assessment of requirement of funds, identification of various sources of finance, the evaluation of the sources in the light of their cost, availability, timing, etc., reconciling the features of various sources with the needs of the company and the selection of appropriate conjunction of sources. The Chartered Accountants are well equipped with the techniques required to weigh the various sources and thus can provide efficient services to the insurance companies as an outside advisory agency. There is invariably a large scope for the disposal of the services of Chartered Accountants in this field.
The insurer possesses huge amount of funds, which need proper management. The management of the portfolio of an insurance company requires the identification of investment avenues, evaluation thereof and the selection of the most appropriate mix of alternatives where the funds of the company can be invested. The selection requires the knowledge of finance-related functions and techniques apart from the in-depth knowledge of the patterns of requirement of funds in the company as well as in the industry as a whole and the regulations of the IRDA in this behalf. The Chartered Accountants are well versed with the methods and techniques pertaining to the finance related decision-making including the application of scientific and statistical techniques for the same.
The decision with regard to the reinsurance of risks also falls in the domain of the activity of management of portfolio. The insurer has to assess the risk involved in a single or multiple insured units and reach at the retention or transfer of the excess risks. In case the insurer reckons the degree of risk involved to be too high, it passes the risk on through reinsurance or shares the same in consortium with the other insurers. The decision requires the deep knowledge of the intricacies of the risk assessment and proper and timely application thereof. The Chartered Accountants can deliver the goods in their capacity as specialist agencies to the insurers as they have the sound intellectual knowledge of assessment techniques that are required to perform the job effectively.
30th August 2006 From India , Pune
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