EXTERNAL ENVIRONMENT

Group membersBhumika Sabharwal Vibhuti Sinha

External Environment
Business has to act and react to what happens outside the factory and office walls. These factors that happen outside the business are known as External Factors or influences. These will affect the main internal functions of the business and possibly the objectives of the business and its strategies.

Changing External Environment Some of the main reasons why markets change rapidly: Customers develop new needs and wants. New competitors enter a market. New technologies mean that new products can be made. A world or countrywide event happens Government introduces new legislation

Classification of External Environment

Legal Economic Financial Commercial

Legal Environment
There are various Laws and Acts which have direct or indirect application in the insurance sector, the knowledge of which is a pre-requisite for all those who are concerned with the business of insurance in any capacity. Some of the important Acts which are applicable in insurance are as under: Insurance Act, 1938; Life Insurance Act, 1956; General Insurance Business (Nationalisation) Act, 1972; The IRDA Act,1999 General Insurance Business (Nationalisation) Amendment Act, 2001; Main provisions of Indian Contract Act, 1872; Main provisions of Indian Companies Act, 1956; and Service Tax

Economic environment
The economic conditions prevailing in a country are related to the following that again have a direct bearing to the insurance sector: The State of Insurance Business; Industry Policy of the Country; System of economic planning; Liberalisation, Privatisation and Globalisation; and Comparative World-Wide Insurance Environment.

Legal & Economic Environment

After nationalisation of the insurance business most of the regulatory business were taken away from the controller of insurance and vested in the insurers themselves.

IRDA ACT,1999
The preamble of IRDA ACT,1999 reads: an act, to provide for the establishment of an authority to protect the interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of the insurance industry and for the matters connected therewith or incidental thereto. section 3 of the act provides for the establishment and incorporation of authority. Section 4 lays composition of the authority. Section 14 lays the duties, powers and functions of the authority.

Financial environment
The Indian financial sector is dominated by public sector whether it is in the segment of insurance, banking or development finance. With the passing of IRDA act 2000, the insurance industry has opened the way for participation by private sector entities. The insurance companies perform additional function over and above being financial intermediaries. They provide a service such as risk coverage. The risk to be insured must result in a loss which is measurable in financial terms. Pure risks are those which have an element of losses break even but not gain. For managing such risks the insurance sector has to be careful in Insurance and integrated risk management New risk insurance issuesOn September 11, 2001, four planes went on a suicide mission and changed the world, when twin towers in New York (U.S.A) were destroyed by the terrorists. Immediate reaction form the insurance Industry was that Insurance providers may try to involve an Act of war exclusion and thereby escape liability. This speculation was short lived.

Financial Environment (Contd.)

Action by insurers and AirlinersThe insurers and Airliners all over the world took immediate steps to meet with the situations like above. From 1st October 2001, a surcharge of 1.25$ per passenger to cover war risk perils were imposed, topped up by a 0.05 per cent levied by war risk underwriters. Who should bear the additional costsIt is a very pertinent question as to who should bear the additional costs arising out of such abnormal situations. When war breaks out, companies find themselves in a situation that is not of their own and is beyond their control. Thus, why should business or consumers be asked to foot the bill the bill for a situation which is the direct result of the political situation of their government. Action by Indian governmentThe two state owned airlines were offered a letter of support by the govt. and the private carriers, i.e. Jet airways and Sahara airlines have to manage themselves. The Indian ships are however, covered by a govt. war risk fund, which was used in part during gulf war. Capital adequacy RequirementThe IRDA has prescribed the following shape of paid up equity capital for the entities during Insurance business: Co. engaged in the business of life insurance-Rs.100 Crore. Co. engaged in the business of General insurance-Rs.100 Crore Co. doing the business of Reinsurance-Rs.200 Crore.

Financial Environment (Contd.) Investment of assets-New norms

The following percentages have been prescribed by the IRDA for making investments by the Insurance Companies: 50% of funds in Govt. securities. 20% of funds in Corporate debts 15% of funds in Market Investments. 15% of funds in Social sector. Consortium Financing by Insurance companiesDue to increasing non performing assets, the four major general insurance companies (Oriental insurance Co. Ltd., New India assurance Co. Ltd., National Insurance Co. Ltd. And United Insurance Co. Ltd.) have now decided to withdraw from all consortium financial arrangements with financial institutions and banks. The reason for this reason is that consortium financing is no longer viable due to the reasons as interest rates have dropped to record low. Methods of measuring underwriting lossesThe normal method of measuring such underwriting losses in through assessment of claim ratios. Claim ratios of insurance Co. have historically been above 100 per cent by high asset yields and consequently high income from investments which will cease to exist. Foreign equity in insurance sectorThe IRDA Act,1938 allows only Indian Insurance Co. reg. under the Companies Act,1956 to transact Insurance business in India. Due to several representations this act is being amended. The Govt. has decided to put foreign equity in the Insurance sector but will not be increasing the investment cap beyond 26 per cent level.

Commercial Environment
Product development and innovations With the entry of private sector players and the demand of the prospective customers in view of mounting competition, more and more products are likely to be developed. The competition will ensure innovation and constant improvement of service. Customer service Customer service is an organisational approach to delight a customer and not merely satisfy him by simply fulfilling all his expectations. Customer expectations Beyond issuing traditional insurance policies, they act as a consultant , advisor and advocate to meet with the requirements of the prospective customers. At different stages, an insured expects: Development of new products. Financial security Technological development After sales services Customer satisfaction

Commercial Environment (Contd.)

Marketing insurance In the process of marketing of various insurance products we cannot ignore two vital constituents of it, i.e. demand and supply. Technology is one which will revolutionise the marketing of insurance products. Customer relationship management and culture of insurance players as a quality service provider will have its own role to play in marketing various types of innovative insurance products. Pricing of the product , i.e. tariff

The tariff system for certain risk is bound to continue .This is due to the reason that here would be more presence on the market for flexibility and the players, both the providers and receivers will have to interact closely to secure a fair deal on the pricing of the product.

QUIZ WHIZ

 ______ risks are those which have an element of losses break even but not gain. ______ is an organisational approach to delight a customer and not merely satisfy him by simply fulfilling all his expectations. In the process of marketing of various insurance products we cannot ignore two vital constituents of it, i.e. _______ and ______. Section 4 of IRDA ACT,1999 lays _________ of the Authority. ________ and ______ are the economic factors which affect the insurance business.