Analysis of Risk and Return Trade Off by Life Insurance Companies with Special Reference to Major Life Insurance Companies

y ANALYSIS OF RISK AND RETURN TRADE OFF BY LIFE INSURANCE COMPANIES WITH SPECIAL REFERENCE TO MAJOR LIFE INSURANCE COMPANIES

SYNOPSIS
SUBMITTED FOR REGISTRATIO N OF Ph.D RESEARCH WORK R.T.M. NAGPUR UNIVERSITY 2011

OBJECTIVES:

To examine the challenges faced by insurance companies today.
To study the contribution & specialty of insurance companies.
Analysis of various risks faced by insurance companies today.
To study why do these companies manage these risks and how.
To examine where and how do they make their investments
To study how do insurance companies strike a risk-return trade off

HYPOTHESIS:
Insurance plays a crucial role in common man’s life.
Insurance companies deals with uncertainty and hence deals with various types of risks.
Risk management is necessary for all organisations.
Analysis of risk and its proper management is very necessary to strike a proper risk-return trade off in present scenario.
What is Life Insurance?

Human life is subject to risks of death and disability due to natural and accidental causes. When human life is lost or a person is disabled permanently or temporarily, there is a loss of income to the household. The family is put to hardship. Sometimes, survival itself is at stake for the dependants. Risks are unpredictable. Death/disability may occur when one least expects it. An individual can protect himself or herself against such contingencies through life insurance.

Life insurance is insurance on human beings. Though Human life cannot be valued, a monetary sum could be determined which is based on loss of income in future years. Hence in life insurance, the Sum Assured (or the amount guaranteed to be paid in the event of a loss) is by way of a ‘benefit’ in the case of life insurance. Life insurance products provide a definite amount of money to the dependants of the insured in case the life insured dies during his active income earning period or becomes disabled on account of an accident causing reduction/complete loss in his income earnings.

An individual can also protect his old age when he ceases to earn and has no other means of income – by purchasing an annuity product
In addition, you should also make a list of what you feel needs to be protected in your family's way of life. With a life insurance policy in place, you can:

• provide security for your family • protect your home mortgage • take care of your estate planning needs • look at other retirement savings/income vehicles

HISTORY OF INSURANCE
Life insurance has its origin way back in Babylonian times, around 2100 B.C., the Code of Hammurabi was the first basic insurance policy. This policy was paid by the traders in the form of a loan to guarantee the safe arrival of their goods by caravan. Of course, caravans faced the same kind of perils our transportation industry faces today – like robbery, bad weather and breakdowns.
As history progressed, the needs for insurance increased. The Phoenicians and the Greeks wanted the same type of insurance with their seaborne commerce. The Romans were the first to have burial insurance – people joined burial clubs which paid funeral expenses to surviving family members. In medieval times, the guilds protected their members from loss by fire and shipwreck, paid ransoms to pirates, and provided respectable burials as well as support in times of sickness and poverty.
Then came the very first actual insurance contract, signed in Genoa in 1347. Policies were signed by individuals, either alone or in a group. They each wrote their name and the amount of risk they were willing to assume under the insurance proposal. That’s where the term underwriter came from.
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers. The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies—245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector.

In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance companies operating in the country. The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

SCOPE AND LIMITATION:
Insurance companies may be classified into two groups: • Life insurance companies, which sell life insurance, annuities and pensions products. • Non-life, general, or property/casualty insurance companies, which sell other types of insurance.

The present study is confined to major insurance companies of Nagpur zone.
The study of risk and return trade-off is confined to life insurance sector and not to the general insurance sector.

RESEARCH METHODOLOGY:

Methodology refers to a body of methods of technique used in conducting study. Different types of methods are used in social research. In selecting a method a researcher should taken into account not only the suitability of the method but also adequate knowledge of the method.

Methods Of Data Collection:
Primary Method
Secondary Method

Data Collection:

Primary Data: Primary source of data for the study have been collected by the direct contact with officials of the life insurance companies. Appointment with the officers was taken for collecting the required information.

Secondary Data: Printed booklets, annual reports, documents published at regular interval were also obtained for study purpose.