ABSTACT

Insurance sector in INDIA is booming up but not to level comparative with the developed economies
such as Japan, Singapore etc. The leading reinsurance company, Swiss Re & Munich Re, has
projected that there would be 20-25% growth in life and health insurance market by 2015,
particularly in countries like India and China. The IRDA is the major body, which is providing better
opportunities for the private player in India. GIC & LIC's monopoly market approach is no more
prevalent in India. The new market scenario for insurance is growing; no doubt it is a flying bird. Also
with the opening of the insurance sector to theprivate players have provided stiff competition
resulting into qualityproducts. Also there is a need to restructure the Indian Government owned
Life insurance Corporation of India so as to maximize revenue and in turn profits. IRDA regulations
and norms for theallocation of funds need to have a comprehensive look. In the phaseof declining
interest rates and rising inflation the funds need to beapplied in productive areas so as to generate
high returns. Also interms of clients servicing areas such as premium payments, after sales service,
policy dispatch, redressal of grievances has to beamended. In the current scenario, LIC has to
provide flexible productssuited to the customers requirements. Also a proper and systematicrisk
management strategy needs to be adopted. After the increase interrorism and destructive events
around the global world such asSeptember 11 attack on World Trade Centre, US Taliban war, US
Iraq war etc.. an alternative to reinsurance such as asset backedsecurities is emerging out in the
developed economies. Catastrophebonds is one of the alternatives for reinsurance. Finally some
policiessuch as pure term and pension schemes needs to be addresseD high premium income
which will help in the development and growthof the economy.
INTRODUCTION
a. INSURANCE
Insurance is the equitable transfer of the risk of a loss, from one entity to another in exchange for
payment. It is a form of risk management primarily used to hedge against the risk of a contingent,
uncertain loss.

According to study texts of The Chartered Insurance Institute, there are the following categories of
risk:
1. Financial risks which means that the risk must have financial measurement.
2. Pure risks which means that the risk must be real and not related to gambling
3. Particular risks which means that these risks are not widespread in their effect, for example
such as earthquake risk for the region prone to it.
It is commonly accepted that only financial, pure and particular risks are insurable.
An insurer, or insurance carrier, is a company selling the insurance; the insured, or policyholder, is
the person or entity buying the insurance policy. The amount of money to be charged for a certain
amount of insurance coverage is called the premium. Risk management, the practice of appraising
and controlling risk, has evolved as a discrete field of study and practice.
The transaction involves the insured assuming a guaranteed and known relatively small loss in the
form of payment to the insurer in exchange for the insurer's promise to compensate (indemnify) the
insured in the case of a financial (personal) loss. The insured receives a contract, called the
insurance policy, which details the conditions and circumstances under which the insured will be
financially compensated.

POST 1991
INSURANCE SECTOR A PREVIEW
The insurance sector in India dates back to 1818, when Oriental Life Insurance Company was
incorporated at Calcutta. Thereafter, few other companies like Bombay Life Assurance
Company, in 1823 and Triton Insurance Company, for General Insurance, in 1850 were
incorporated. Insurance Act was passed in1928 but it was subsequently reviewed and
comprehensive legislation was enacted in 1938. The nationalisation of life insurance business
took place in 1956 when 245 Indian and Foreign Insurance provident societies were first merged
and then nationalized. It paved the way towards the establishment of Life Insurance
Corporation(LIC) and since then it has enjoyed a monopoly over the life insurance business in
India. General Insurance followed suit and in1968, the insurance act was amended to allow for
social control over the general insurance business. Subsequently in 1973, non-life insurance
business was nationalised and the General Insurance Business (Nationalisation) Act, 1972 was
promulgated.
Cause-Effect on Insurance Industry
Unlike banks that were dumbstruck by the end of third quarter in 2008 due to the unfolding
saga of financial crisis, insurers have shown rather remarkable resilience and in all probability
would be declaring year-end results on a positive note. First nine months of performance may
see them through despite massive investment losses in the last quarter of 2008. This situation
however is short-lived and Insurers are bound to feel the heat sooner than later .New
construction and infrastructure projects have dried up and ongoing projects have been stalled
due to inadequate cash injection in the market. Banks are not releasing installments to firms
even on limits which were agreed prior to this crisis. This has impacted the engineering class of
business in the insurance sector. Inquiries for CAR (Contractors All Risks), EAR (Erection All
Risks), Machinery Breakdown and Equipment Insurance have almost dried up in the last few
months. Construction, infrastructure projects by governments and energy projects by private as
well as governments have either been shelved or being delayed and insurance industry will have
to live without large premiums from the project insurance for some time.
Continued recession shall have impact on property class of business too. Cost-cutting in the
corporate sector may lead to reduced expenditure on insurance. Falling market prices of
property shall further bring down the premium volume on property insurance. Business
Interruption or Loss of Profit premiums also shall go down due to reduced profit forecasts for
most corporate.
Life insurance sector is likely to see even bigger erosion in volumes and profits. Employee
benefit schemes, Workmens Compensation, Medical Insurance, Group Life and Personal
Accident Insurance, etc. are likely to take maximum hit. With the investment portfolio almost
gone, most unit-linked policies, Pension Funds and other investment backed insurance products
shall show negative NAV (Net Asset Value) and consumer confidence shall further nosedive.
Policy holders are already requesting cancellation of their policies in order to preserve cash in
this moment of crisis. All this doesnt bode well for the insurance sector.
Retail insurance sector has similar problems. Low consumer confidence and stringent lending
norms for retail customers by banks have led to reduced demand for products and services.
Automobile companies are struggling to keep afloat due to negative sales growth. This directly
affects motor insurance premium. Travel industry including airline companies are witnessing
lower traffic resulting into reduced travel insurance premium. Reduced sale of property is
resulting in reduced premium income on mortgage insurance and householders insurance.
Declining international trade and consequent reduction in export and imports have resulted in
inflated inventories and consequent redundancy of work force has increased job loss claims.
Reduced international trade has also impacted marine cargo and marine hull insurance
businesses and premium incomes have dropped substantially.
There are other issues too to ponder. Insurance industry is likely to see multiple bad moral
hazard cases as depressed market conditions may lead to payment defaults and corporate
frauds. Such situation stimulates claims on fire losses, business interruption losses and losses
arising out of Directors and Officers liability litigation. Madoff and Satyam Computers are two
recent examples to prove the point.
Shareholders and Regulators role
Continued depressed market and resultant decline in premium volumes (and consequently
reduced profits) is likely to put pressure on the management of insurance companies. As they
struggle to satisfy their shareholders by providing similar returns as in the past, this could lead
to rate cutting, imbalanced portfolio and compromised underwriting. A prudent board and
shareholders of the insurance companies would do well to advise the management to
concentrate on quality rather than volume business so that bottom lines are at least
maintained. Regulators too, have a big role to play under such extraordinary circumstances.
Supervision needs to be thorough rather than routine. Emphasis should be on ratios and
reserves rather than procedural issues. Solvency ratio and liquidity ratio must remain healthy
and technical and other statutory reserves must be robust. An eye on reinsurance market and
regular advisory would supplement the supervisory efforts. Countries where regulation is
non-existent or weak, respective governments have to step in before it is too late. World has
understood the significance of solvent insurance industry by witnessing the way US treasury
handled the AIG crisis. Failing banks followed by failed insurance companies can spell doom for
the entire economy.
Impact on Gulf Markets
Gulf was considered to be immune to global meltdown until the recession actually hit it. Falling
oil prices have taken the shine off the GCCs booming economy. There is a big question mark
over the sustainability of petro based economies as new energy projects have become
non-viable, thanks to rock bottom oil prices. Traffic suddenly looks normal on Dubai roads, real
estate prices have halved across GCC states, new projects and tenders are delayed in Qatar and
OPEC countries are making one production cut after another. Several announced projects have
been cancelled and that has resulted in termination of various insurance policies. The ripple
effect has just begun and is set to further crystallize in 2009. Middle East insurance market
growth of 12% in 2007 (Swiss Re Sigma 5/2008) may be sustained in 2008 in terms of volume
growth, though profitability is bound to decline due to depletion of capital and investment
income, thanks to raging recession.