PROJECT REPORT

ON

INSURANCE BROKING BUSINESS

N.L.DALMIA INSTITUTE OF MANAGEMENT STUDIES AND RESEARCH

MUMBAI

I EXECUTIVE SUMMARY

The insurance business is complex whether one is a Life Insurer,

a General Insurer, a Re-insurer or an Insurance Brokerage house.
Taking the complexity of the industry into account one has to
invest a great deal in understanding such business. In insurance
and risk management, the specialist helps in identifying,
evaluating, reducing and managing risk in all the countries that
one does business. Globally Insurance Brokers play this very vital
role.
The Indian insurance market is in transitory phase; the sector has
been opened up to competition with the entry of private
insurance companies in late 1999 with majority of the companies
starting operations in 2000. In the last 2 years significant
changes have come about in the Insurance market, the
independent regulator namely Insurance Regulatory and
Development Authority (IRDA) has tried to evolve a level playing
field. Quite a few innovations have been introduced such as Third
party Administrators, Brokers, Corporate Agents and Bank
assurance etc.

The global practice of using Brokers to act as the principal

distribution arm of the insurance companies is evolving in fits and
starts. Based on the amendment to the Insurance Act, 1938,
which was passed by the Parliament after a lot of deliberations,
over 100 brokers have been granted licence. The brokers play a
very vital role in the Insurance industry.

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II DEFINITION AND EXPLAINATION ON WHO AN
INSURANCE BROKER IS:

WHO IS AN INSURANCE BROKER?

With the recent developments a new insurance intermediary -

The INSURANCE BROKER is now visible on the insurance horizon
and is likely to play a very important role in the future of the
insurance business. So let us understand an insurance broker.
The insurance brokers are such individuals who contribute
maximum share of insurance business. A high standard of
professional skills and conduct is expected of the broker. The
insurance broker can be issued license under section 42-D of the
Insurance Act, 1938.

DEFINITION:

The insurance broker acts as an intermediary between the

insurance customer and the insurance company.
BROKER

INSURA
BUYER NCE
MARKET

Intense

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In the past, most insurance business was conducted directly
between customers and insurance companies. Today, however,
insurance buyers’ requirements have become more complex,
demanding and varied and this has led to more important role in
the market for the insurance broker. The most important feature
is that the broker acts on behalf of the insured both at the time of
placing the risk and also during settlement of the claim whereas
an agent acts on behalf of insurer. The broker works with a
number of Insurance Companies and is much well positioned to
obtain a good deal for insured on favorable terms. The broker’s
task is to help & identify the risks to which an insured’s business
may be exposed. He analyses the

risk and advices which risks should be insured and explores the
insurance market by canvassing to obtain the best insurance
protection at a most competitive price. The brokers are to
arrange for all the policies and to complete all documentation for
or on behalf of the insured. Insurance brokers are specialists in
insurance protection. They are independent, have a deep
knowledge of the market and can provide professional objective
advice on identification and exposures and recommend cost
effective solution.

WHO CAN BECOME AN INSURANCE BROKER?

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Any person may be an individual, a partnership firm or a
company formed and registered under the Companies Act, 1956
can apply for grant of license to be a broker. (In case of a
company the aggregate holding of equity shares by a foreign
company either by itself or through its subsidiaries or nominees
or persons should be within the prescribed limits laid down by the
Reserve Bank of India)

FUNCTIONS OF AN INSURANCE BROKER:

Acts as a Link: This is one of the most important function of an

Insurance broker. They are the only link between the insurance
company and the client or the insured.

Understands Client’s requirements Insurance brokers are

trained to understand and be able to match available policies in
the market to their Client’s requirements as well as to advise
them on such policies. Their independence and detailed
insurance knowledge, ensures that they provide complete and in
depth advice on a whole range of options, from different
insurance suppliers to meet the client’s insurance requirements.

Carrying out risk inspection and suggesting risk

improvement/ loss minimization measures: An insurance
broker will have to provide his expertise in evaluating and
analyzing what are the possible risk that the insured could face.

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Based on which he should give professional advice to minimize
the same.

Preserve their destiny: All brokers are required to retain their

independence from insurance suppliers in order to be in a position
to act in their client’s best interests.

Free service to Clients: Unlike many other intermediaries, who

receive commission both from the buyer and the seller, insurance
broker only receive commission from seller. When a client uses
the services of a broker, the insurance cover purchased is no
different in price to that purchased by a buyer directly from the
insurer. What happens is that costs for distributing the policy,
which are fixed, are shared between the insurer and the broker.

Offers after sales service: Another client function of insurance

broker is that of claims handling, which in many cases is also
offered without charge. The professional relationship between
broker and insurers ensures that client’s claims are processed
efficiently and expeditiously.

Matching customer’s needs: An insurance broker’s office is a

center offering a variety of insurance policies from different
insurance companies for the client’s varied needs. Having one
point of advice on insurance facilities insurance purchases for the
buyer and ensures that covers are arranged to fit the buyer’s

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requirements. Thus the principal aim of a Broker is to foster a
better understanding between the insured and the insurer. This
aim, coupled with the observance of a professional code of ethics,
will maintain and enhance the public’s image of insurance brokers
as the agents of insurance buyers and their advisers, a true
Friend, Guide and Philosopher.

Thus functions of both Life and General insurance brokers will

inter alia consist of:

a. Relationship with clients

b. Sales practices

c. Duty to disclose information

d. Explanation of the contract

e. Renewal procedures

f. Claims

g. Complaints

h. Documentation

i. Handling clients/insurer’s money

TYPES OF BROKERS

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 The application under sub-regulation (1) shall be made for any
one of the following categories, namely:

(a) Category - I

A. Direct General Insurance Broker means a person who is

for the time being registered in respect of general insurance

business but not reinsurance business.

B. Direct Life Insurance Broker means a person who is for

the time being registered in respect of life insurance

business but not reinsurance business.

The functions of both general insurance broker and life insurance

broker will inter alia consist of:

(i) obtaining a detail knowledge of the clients business

and philosophy; maintaining clear records of the clients
business so that this can be explained to an insurer and
other parties;
(ii) provision to the client of technical advice and advice
on developments in the insurance market and the law;
(iii) maintaining a detailed knowledge of available markets;
(iv) selection and recommendation of an insurer or group
of insurers;
(v) negotiating with insurers on the clients behalf;

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 (vi) acting promptly on instructions from a client and
providing written acknowledgements and progress
reports;
(vii) collecting and remitting premiums and claims;
(viii) where appropriate and dependent on the size of both
the client and broker, providing additional services, such
as insurance consultancy services, risk management
services and uninsured loss recoveries;
(ix) assisting in the negotiation of claims;
(x) maintaining precise records of past claims.

Category – II

Reinsurance Broker, whose functions will inter alia consist

of:

(i) obtaining a detailed knowledge of the Insurer’s business

and philosophy;
(ii) maintaining clear records of the Insurers business so that
this can be explained to a reinsurer and other parties
(iii) provision to the Insurer of technical advice and advice on
developments in the International insurance and
reinsurance market;
(iv) maintaining a detailed knowledge of available markets;

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 (v) selection and recommendation of a reinsurer or group of
reinsurers;
(vi) negotiating with reinsurer on the insurer’s behalf;
(vii) acting promptly on instructions from a client and
providing
written acknowledgements and progress reports;
(viii) collecting and remitting premiums and claims;
(ix) assisting in the negotiation of claims;
(x) maintaining precise records of past claims.

(c) Category - III

Composite Broker, whose functions consists of both that of a

Direct Insurance Broker and Reinsurance Broker as stated in (a)
and (b) above.

(d) Category - IV

Others – Insurance consultant, Risk management consultant or

any other nomenclature description as may be approved by the
Authority.

QUALIFICATION & CONSIDERATION OF APPLICATION

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IRDA shall take into account, for consideration of grant of
the license, for all the matters which are relevant to the
activities relating to Insurance Broker and in particular
that applicant has to satisfy the following requirements,
namely:

(1) the applicant has the necessary infrastructure like including

adequate office
space, equipment and manpower to effectively discharge his
activities;

(2) the applicant has in his employment a minimum of two

persons who have the experience to conduct the business of
the Insurance Broker.

(3) A person directly or indirectly connected with the applicant

has not been rejected granted license by the Authority in
granting license in the past.
Explanation:- For the purposes of this clause the expression “
directly or indirectly connected” means any person being an
associate, subsidiary, interconnected or group company of the
applicant in case of the applicant being a body corporate.

(4) the applicant fulfils the capital adequacy requirements

specifies in
regulation 7;

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(5) the applicant, his every partner of the firm, director or
principal
officer

(i) is not a minor;

(ii) has not been found to be of unsound mind by a court of
competent jurisdiction;
(iii) has not been found guilty of criminal misappropriation
or criminal breach of trust or cheating or forgery or an
abatement of or attempt to commit any such offence
by a court of competent jurisdiction provided that
where at least five years have elapsed since the
completion of the sentence imposed on applicant, his
partner, director or principal officer in respect of any
such offence, the authority shall ordinarily declare in
respect of such person that his conviction shall cease to
operate as a qualification under this clause;
(iv) that in the course of any policy of insurance of the
winding up of an Indian Insurance Company or in the
course of an investigation of the affairs of an insurer it
has not been found that he has been guilty of or has
knowingly participated in or connived at any fraud,
dishonestly or misrepresentation against an insurer or
an insured;

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(6) The applicant, a minimum of two partners/directors in a
firm and the principal officer possesses

(i) a minimum qualification as an Associate of

Insurance Institute of India or its equivalent or any
other professional qualification from an institution
recognized by the government in finance, law,
engineering or business management; and
(ii) theoretical and practical training for a specified
period to be conducted by National Academy, Pune on
the basis of a syllabus approved by the Authority.
Provided that in the case of a person carrying on
reinsurance broking and/or insurance consultancy for a
continuous period of ten years or who has sufficient
experience of running insurance business with any
insurer for ten years or more before these regulations
come into force and who is required to be licensed
under this regulation, the Authority on consideration of
the qualifications and experience of such a person may
exempt the person from the provisions of minimum
qualification of this section. Such persons however will
have to undergo training as required under sub-
regulation 6(ii) above

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 (7) The applicant, a partner, a director or the principal officer
does not violate the Code of Conduct as specified in
Schedule III.

(8) Grant of license to the applicant is in the interest of

policyholders.

These are very clear guidelines, which clearly spell out the
requirements for an insurance broker. Failing on which, a person
may not be given broker ship.

CAPITAL ADEQUACY REQUIREMENT

(1) The capital adequacy requirement referred to in

sub-regulation (4) of Regulation 6 shall not be less than the
net worth of the person making the application for grant of
license.

(2) For the purpose of sub-regulation (1), the net

worth shall be as follows, namely:

CATEGORY MINIMUM AMOUNT

Category I A Rs.25 lakhs

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 Category I B Rs.25 lakhs

Category II Rs.100 lakhs

Category III Rs.125 lakhs

Category IV Rs. 10 lakhs

Explanation:- For the purposes of this regulation “net worth”

means in the case of an applicant which is a partnership firm or a
body corporate, the value of the capital contributed to the
business of such firm or the paid up capital of such body
corporate plus free reserves as the case may be at the time of
making application.

SOLVENCY REQUIREMENTS

(1) Every Insurance Broker shall, throughout the license

period, maintain an excess of the value of his assets over
the amount of his liabilities of not less than the amount
specified (hereinafter referred to as the ‘required solvency
margin’), in accordance with each category of license,
namely;

Category I A – Direct General Insurance Broker/

Category I B – Direct Life Insurance Broker

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The greater of Rs.50,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of Rs.
50,000.

Category II – Reinsurance Broker

The greater of Rs.200,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of Rs.
200,000.

Category III – Composite Broker

The greater of Rs.250,000 and 10% of Net retained
brokerage and fees in a year subject to minimum of Rs.
250,000.

Explanation: - For the purpose of this regulation “asset”

means those assets which are either in the form of cash or
can reasonably be expected to be turned into cash within
one year from the date of the balance sheet. ‘Liability’
means those liabilities, which are expected to have been
paid within one year from the date of the balance sheet.

(2) If, at any time an Insurance Broker does not maintain

the required solvency margin in accordance with sub-
regulation (1), he shall, in accordance with the directions
issued by the Authority, submit a financial plan, indicating a

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 plan of action to correct the deficiency to the Authority
within a specified period not exceeding three months.

(3) An insurance broker who has submitted a plan under

sub-regulation (2) to the Authority shall propose
modifications to the plan if the Authority considers it
inadequate, and shall give effect to any plan accepted by the
Authority as adequate.

(4) An Insurance broker who does not comply with the

provisions of sub-regulation (3) shall be deemed to be
insolvent and may be wound up by the court on the
application of the Authority.

(5) Every Insurance broker shall furnish to the Authority

under sub-regulation (3) of regulation 19, a statement
certified by an auditor, of the required solvency margin
maintained by the Insurance Broker in the manner required
by sub regulation (1).

PROCEDURE FOR LICENSING

(1) The Authority on being satisfied that the applicant is eligible

shall

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 grant a license in Form B and send an imitation to the
applicant
mentioning the category for which the Authority has granted
the
license.

(2) (i) Notwithstanding anything contained in sub-regulation (1),

where a license has been granted for a category other
than for
what has been applied for, the applicant, may make an
application to the Authority at any time after the expiry of
one
year from the date of grant of such license.

(ii) The Authority may consider an application made under

clause
(i) and grant a license for other category.

(3) An application made under clause (i) of sub-regulation (2)

shall
be considered in the same manner as an application made
under
regulation 3.

(4) On the grant of a license the applicant shall be liable to pay

the

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 fees for the category for which the license is granted in
accordance with schedule II:

Provided the amount of fees payable shall be

proportionately
reduced by the amount of fees already paid by the
Insurance
broker for the year in which the licensing is granted in the
higher
category.

(5) A license granted to an insurance broker, in terms of these

regulations, shall remain valid for a period of three years
from
the date of issue thereof in the manner prescribed therein.

DIFFERENCE BETWEEN BROKER AND AGENT

The distinction between insurance agents and brokers is that an

agent represents one or more insurers for the purpose of writing
policies, while a broker represents consumers to assist them in
obtaining coverage from one of the companies with which that
broker deals

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To begin with the most fundamental difference between broker
and an agent is that, an agent works for the Insurance Company
and the broker works on behalf of the Insured.

The broker works with a number of Insurance companies as a

result is much well positioned to obtain a good deal for the
insured on favorable terms. As against this an agent works with
only one company and promotes products of one company.

Insurance broking is essentially a full time work where, a broker

not only acts as an insurance broker but also risk management
and financial planning for the insured. An agent as compare is
nothing but an insurance intermediary.

III DUTIES AND RESPONSIBILITIES OF BROKER

CODE OF CONDUCT:

There is a code of conduct that has been chartered which outlines

what are the duties and responsibilities of an insurance broker.
The objective of the code of conduct is to establish a recognized
standard of professional conduct to which all insurance brokers
should, in the interest of the public and in the performance of
their duties, conform and in doing so they should bear in mind
this objective and the underlying spirit of this code in this matter
of regulation of their professional standards.

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The code is not exhaustive or all embracing and while it shall
serve as a guide to insurance brokers and other persons
concerned with their conduct nevertheless the mention or the
lack of mention in it of a particular act or omission shall not be
taken as conclusive of any question of professional conduct.
Claims against insurance brokers for compensation arising from
acts or omissions amounting to negligence are matters for
determination by the courts. Nevertheless, acts of gross
negligence or repeated acts of negligence may amount to
unprofessional conduct and notwithstanding that the matter be
the subject of legal proceedings, the Authority may still
investigate the conduct of the Insurance brokers.

The ethical requirements of any Insurance Brokers should

be based upon the following fundamentals principles by
which an Insurance broker should be governed in the conduct of
his professional relations with others:-

 conduct his dealing with clients with the utmost good faith
and integrity at all times;
 act with care and diligence;
 inform his clients about the extend of the choice of products
they that are being offered;

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  inform his clients about the product they are buying and its
price;
 ensure that all products or services he is offering are
suitable to the needs of his clients;
 deal prudently with assets held on behalf of others;
 maintain adequate financial resources to meet his
commitments;
 avoid conflicts of interest;
 correct errors and handle complaints fairly and speedily;
 preserve and enhance the reputation of the profession;
comply with rules and regulations in an open, transparent
and co-operative manner

a. RELATIONSHIP WITH CLIENTS

An insurance broker must:

 Conduct their dealings with clients with utmost good faith

and integrity at all times;
 act with care and diligence;
 ensure that the client understands his relationship with the
broker and on whose behalf the broker is acting;
 treat all information supplied by the prospective clients as
completely confidential to themselves and to the Insurer(s)
to which the business is being offered;

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  take appropriate steps to maintain the security of
confidential documents in their possession;
 understand the type of client that they are dealing with and
the extent of the client’s awareness of risk and insurance.
This knowledge should be taken into account in their
dealings with their client, and
 avoid conflicts of interest.

b. SALES PRACTICES
Insurance Broker must:

 Confirm that they are members of the Insurance Broker

Association of India (IBAI); as approved by the Authority.
 Identify who they are and explain as soon as possible the
degree of choice in the products that they are able to offer;
 Ensure that the client understands the type of service they
can offer
 Ensure that the policy proposed is suitable to the needs of
the prospective client;
 Give advice only on those matters in which they are
knowledgeable and seek or recommend other specialist
advice when necessary;
 Not make inaccurate or unfair criticisms of any insurer or
IBAI member;

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  Explain why a policy or policies are proposed and provide
comparisons in terms of price, cover and/or service where
they are able to offer more than one choice of product;
 Explain the period for which the quotation remains valid if
cover is not effected immediately;
 Explain when and how the premium is payable and how it is
to be collected. Where another party is financing all or art
of the premium, full details should be given to the client
including any obligations that the client may owe to that
party, and explain the procedures to follow in the event of a
complaint.

c. DUTY TO DISCLOSE INFORMATION

Insurance Brokers must:

 Ensure that the consequences of non-disclosure and

inaccuracies are pointed out to the prospective client;
 Avoid influencing the prospective client and make it clear
that all the answers or statements given are the latter’s –
own responsibility. The client should always be asked to
check the details of information given;
 Request their clients to make true, fair and complete
disclosure where they believe that the client has not done
so. If further disclosure is not forthcoming they should
consider declining to act further;

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  Explain to their clients the importance of disclosing all
subsequent changes that might affect the insurance
throughout the duration of the policy; and
 Disclose on behalf of their client all material facts within
their knowledge and give a fair presentation of the risk.

d. EXPLANATION OF CONTRACT
Insurance Brokers must:

 Identify the insurer and insurers. Any changes once the

contract has commenced must be advised immediately;
 Explain all the essential provisions of the cover afforded by
the policy(ies), they are recommending so that, as far as
possible, the prospective client understands what is being
purchased;
 Draw attention to any major or unusual restrictions and
exclusions in the policy, explain how the contract may be
cancelled;
 Provide the client with prompt written confirmation that
insurance has been affected. If the full working of the
contract is not included with this confirmation, it should be
forwarded as soon as possible;
 Notify changes to the terms and conditions of any insurance
contract and give reasonable notice before any changes
take effect;

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  Advise their clients of any insurance proposed on their
behalf which will be effected with an insurer outside India
and, if appropriate, of the possible risks involved; and
 Advise their client that any non-insurance product will not
be subject to IBAI and, if appropriate, implications in terms
of consumer redress and solvency.

e. RENEWAL PROCEDURES
Insurance Brokers must:

 Ensure that their clients are aware of the expiry date of the
insurance even if they choose not to offer further cover to
the client,
 Ensure that renewal notices contain a warning about the
duty of disclosure including the necessity to advise changes
affecting the policy, which have occurred since the policy
inception or the last renewal date;
 Ensure that renewal notices contain a warning that the
proposer should keep a record (including copies of letters) of
all information supplied to the insurer for the purpose of
renewal of the contract; and
 Ensure that their client always receives the insurer’s renewal
invitation (unless they have delegated authority from an
Insurer to issue one on their behalf).

f. CLAIMS

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 Insurance Brokers must:

 Explain to their clients their obligations to notify claims

promptly and to disclose all material facts and advise
subsequent developments as soon as possible;
 Request their clients to make true, fair and complete
disclosure where they believe that the client has not done
so. If further disclose is not forthcoming they should
consider declining to act further for the client;
 Give prompt advise to the client of any requirements
concerning the claim;
 Forward any information received from the client regarding a
claim or an incident that may give rise to a claim without
delay, and in any event within three working days;
 Advise the client without delay of the insurers decision or
otherwise of a claim, and on request give all reasonable
assistance to a client in pursuing his claim.

g. COMPLAINTS
Insurance Brokers must:

 Ensure that letters of instruction, policies and renewal

documents contain details of complaints handling
procedures;
 Accept complaints either by phone or in writing;

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  Acknowledge a complaints not later than 14 days from the
receipt of correspondence, advise the member of staff who
will be dealing with the complaint and the timetable for
dealing with it;
 Ensure that response letters inform the complaints of what
they should do if they are unhappy with the response;
 Ensure that they have a procedure so that complaints are
dealt with at a suitably senior level;
 Have in place a system for recording and monitoring
complaints.

h. DOCUMENTATION
Insurance Brokers must:

 Ensure that any documents issued by them comply with all

statutory or regulatory requirements from time to time in
force;
 Send policy documentation without avoidable delay;
 Make available, with policy documentation, advice that the
documentation should read carefully and retained by the
client;
 Not withhold documentation from their clients without their
consent, unless adequate and justifiable reasons are
disclosed in writing and without delay to the client. Where
documentation is withheld, the client must still receive full
details of the insurance contract;
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  Acknowledge receipt of all money received in connection
with an insurance policy;
 Ensure that they reply promptly or use their best endeavors
to obtain a prompt reply to all correspondence;
 Ensure that all written terms and conditions are fair in
substance and set out clearly and in plain language client’s
rights and responsibilities; and
 Subject to the payment of any monies owed to them, make
available to any new Insurance Broker instructed by the
client all documentation to which the client is entitled and
which is necessary for the new Insurance Broker to act on
behalf of the client.

i. HANDLING CLIENT’S/ INSURERS MONEY

Insurance Brokers must:

 ensure that the moneys belonging to clients or insurers are

not mixed with their/his own;
 separate accounts are properly maintained in regard to
those amounts and proper information is periodically made
to the client/insurer.
 Ensure that these moneys are banked in a proper manner;
 Ensure that moneys belonging to others are kept with them
for a reasonable period only;
 Ensure strict compliance of the provisions of regulation 17
(i.e Segregation of Insurance moneys).
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Insurance Money Segregation this is something very
specifically given in the draft bill by IRDA. Subject to the
provision of Section 64 VB of the Insurance Act, 1938 every
Insurance Broker must:

1. treat all money (premiums and claims) received from or

on behalf of an Insured as ‘Insurance money’.
2. ensure that ‘Insurance money’ is held in an ‘Insurance
Bank Account ‘ with one or more approved scheduled
banks or with such other institutions as approved by the
Authority.
3. give written notice to, and receive written confirmation
from, the bank, or other institutions that he is not entitled
to combine the account with any other account, or to
exercise any right of set-off, charge or lien against money
in the account.
4. ensure that all money received from or on behalf of an
Insured is paid into the ‘Insurance Bank Account’ and will
remain there until it is passed on to the insurer or to the
insured.
5. only remove from the ‘Insurance Bank Account’ charges,
fees or commission earned and interest received from any
funds comprising the account.

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 6. take immediate steps to restore the required positions if
at any time he becomes aware of any deficiency in the
required segregated amount.

j. REMUNERATION
Insurance brokers must:

 Reveal all fees or charges (not commission) they propose to

charge the client, which will be in addition to the insurance
premium. Score back of commission will be considered as a
charge for these purposes;
 Recommend the client in writing of the Insurance premium
and any fees or charges separately and the purpose of any
related services;
 If requested by a client, disclose the amount of their
commission or other remuneration they receive as a result
of effecting Insurance for that client. This will include any
payment received as a result of securing on behalf of the
client any service additional to the arrangement of the
contract of Insurance; and
 Advice their clients prior to effecting the Insurance of their
intention to make any deductions from the amount of claim
collected for a client where this is a recognized practice for
the type of Insurance concerned.

DO’S AND DON’TS OF INSURANCE BROKERS

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 Giving below are some Do’s and Don’ts of what a professional
Brokers with ethics should follow which has been compiled from
the existence practices worldwide. This can assist them in
establishing a recognized standard of professional conduct.

The following are the acts, which if not observed by a licensed

insurance broker may constitute unprofessional conduct:
 Business is to be conducted with utmost good faith and integrity.
 The insurance requirements of the client and
interests of the same client must be satisfies before all
other considerations.
 Advertising shall not be misleading and extravagant.

The following are some examples for the application of these

principles:

1. advice is to be provided objectively and independently

2. the description “insurance broker” must only be used in
connection with the business of insurance in accordance with
the requirements of the guidelines of IRDA, India.
3. Insurance broker must equip himself with the required
product knowledge and the developments in the Insurance
field which will help the insured to have most appropriate
policy at an economical rate.

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4. all work carried out in connection with insurance broking must
be under the supervision of a qualified and experience
insurance broker.
5. the different types of insurance and relative costs must be
explained on request of the client.
6. a sufficient number of insurance companies policies must be
made available by the broker to satisfy the insurance
requirements of the client.
7. the amount of commission paid by the insurer under any
relevant policy of insurance must be disclosed to the client on
request.
8. the broker must use his skill objectively in the best interests
of the client when choosing an insurance policy
9. written evidence or documentation relating to the contract of
insurance must not be withheld from the policyholder.
10. the name of all insurers with whom a contract of insurance is
placed must be revealed to the client.
11. the amount to be charged must be disclosed to the client
before any work involving a charged is concluded.
12. any payment which is received as a result of securing any
service additional to the arrangement of a contract of
insurance on behalf of the client is to be disclosed
13. there is to be proper regard for the wishes of a policy holder
or client who seeks to terminate any agreement with the
broker.

33
14. any information acquired by an insurance broker from his
client shall not be misused.

IV WHAT KIND OF BUSINESS SHALL A BROKER BE DOING?

CLASSIFICATION FROM BUSINESS POINT OF VIEW

From business point insurance can be classified into two broad

categories:
1. Life insurance; and
2. General insurance

Life insurance contains the element of investment and

protection, while the accidental, sickness or health insurance
contains the element of indemnity only. Also the contract
provides for the payment of periodic premium periodically to the
insurer by the insured for a long period of time. This is
something very unique to this.

General insurance business refers to fire, marine, and

miscellaneous insurance business whether carried on singly or in
combination with one or more of them but does not include
capital redemption business and annuity certain business.

34
 CLASSIFICATION FROM RISK POINT OF VIEW

From risk point of view, insurance can be classified into four

categories:
1. Personal insurance
2. Property insurance
3. Liability insurance
4. Fidelity guarantee insurance

A brief description of each is given below.

Personal insurance
Personal insurance refers the loss to life by accident, or sickness
to individual, which is covered by the policy. The insurer
undertakes to pay the sum insured on the happening of certain
event or on maturity of the period of insurance. The insurable
sum is determined at the time of affecting the policy and includes
life insurance, accident insurance, and sickness insurance.

Property insurance
Contract of property insurance is a contract of indemnity. Proof
by the assured of loss is an essential element of property
insurance. The policies of insurance against burglary, home
breaking or theft etc. fall under this category. The assured is
required to protect the insured property. After the loss has taken

35
place, the assured usually required notifying the police as to
losses.

Liability insurance
Liability insurance is the major field of General insurance whereby
the insurer promises to pay the damage of property or to
compensate the losses to a third party. The amount of
compensation is paid directly to third party. The fields of liability
insurance include: workmen compensation insurance, third party
motor insurance, and professional indemnity insurance. There
may be various reasons for the arising of liability, viz, accident of
a worker at the workplace, defective goods, explosion in the
factory during the process of production and formation of
poisonous gas within the factory due to the uses of chemicals and
other such substances in the manufacturing process.

Fidelity guarantee insurance

In this type of insurance, the insurer undertakes to indemnity the
assured (employer) in consideration of certain premium, for
losses arising out of fraud, or embezzlement on the part of the
employees. This kind of insurance is frequently adopted as a
precautionary measure in cases where new and untrained
employees are given position of trust and confidence.

GLOBAL INDUSTRY STATISTICS

36
This section gives the important and detailed statistics of the
Indian as well as the Global insurance industry:

• The global life insurance market stands at $1,521.2 billion

while the non-life insurance market is placed at $922.4
billion.
• The United States itself accounts for about one-third of the
$2443.6 billion global insurance market and Japan stands
next with a 20.62% share.
• India takes the 23rd position with US $9.933 billion annual
premium collections and a meagre 0.41% share.
• Out of one billion people in India, only 35 million people are
covered by insurance.
• India's life insurance premium as a percentage of GDP is just
1.77 per cent.
• The income derived by GIC and its subsidiary companies
through investment was Rs.2491.76 crore and the investible
funds generated was Rs.2843 crore in 1999-2000.
• Indian insurance market is set to touch $25 billion by 2010,
on the assumption of a 7 per cent real annual growth in
GDP.
• Brokers' commissions amounted to €134 million in 2002

37
 Following are some tables which show the business of Insurance
Internationally and India’s ranking in the world.

Global Insurance Scenario

(Total in 1999: (Total in 2000:

$2,128.7 billion) $2,244.3 billion)
(%) (%)
North America 34.5 37.32
Europe 31.4 31.93
Asia 29.1 26.46
Oceania 1.9 1.59
Latin America 1.8 1.67
Africa 1.3 1.03

Total premiums by Country, 2000

Share of
Premiums *Premiums
world *Premiums per
Country (USD in % of
market (in capita (in USD)
millions) GDP
%)
United States 865327 35.41 8.76 3152.1
Japan 14 504005 20.62 10.92 3973.3
United 236960 9.7 15.78 3759.2

38
Kingdom
Germany + 123722 5.06 6.54 1491.4
France + 121910 4.99 9.4 2051.1
Italy 63062 2.58 5.8 1084.3
South Korea
58348 2.39 13.05 1234.1
14
Canada 11 46587 1.91 6.56 1516.8
Spain 37617 1.54 6.73 954.2
Netherlands 36450 1.49 9.87 2290.2
India 14* 9933 0.41 2.32 9.9

* estimated
11 Life business: net premiums
14 Financial year 01.4.2000–31.3.2001
+ provisional

V POTENTIAL IN INDIA

INSURANCE SECTOR IN INDIA

India, with a population of 1 Billion offers great potential and

opportunity for the insurance industry. The insurance business in

India is pegged at $ 6.6 Billion whereas industry leaders feel

privatization will increase it to $ 40 Billion within next 3-5 years.

Today hardly 20 per cent of the population in India is insured and

insurance premium (life as well as non-life) account for just 2 per

cent of GDP as against the G-7 average of 9.2 per cent.

39
The Malhotra Committee estimated that the insurance penetration

in India is to the extent of about 25 % of the insurable population.

The poor reach of insurance in the country and the sheer numbers

make India a market with tremendous potential.

The following facts show how under-developed the Indian

insurance business is due to state monopoly and lack of aggressive

marketing of insurance policies:

 Per capita insurance premium in India is a mere US$ 6, one

of the lowest in the world. In South Korea, the
corresponding figure is US$1,338, in USA it is $ 2250 and
in UK it is $1589.
 Insurance premium in India accounts for a mere 2 per cent
of GDP compared to the world average of 7.8 per cent and
G-7 average of 9.2 per cent.

As of 1999-2000, LIC’s Insurance premium Income was

approximately Rs.32000 crores. It is observed that currently LIC
has about 10 crore policies in force, which contributes a premium
of about 6% of the Gross Domestic Saving of households in India.
By the year 2010, the premium Income is expected to account for
18% of the GDS, amounting to Rs.512,000 crore. In the previous
fiscal (2002-03), 8.36 lakh policies were sold by 12 private
insurance companies.

40
All this reports suggest that there is a huge potential market to be
tapped in India.

IRDA GUIDELINES AS OF TODAY

The Insurance Regulatory and Development Authority have

stipulated the withdrawal of the five per cent discount offered by
the companies to their clients. A special discount of 5% in lieu of
Agency Commission / Broker's Remuneration is now available for
companies with a paid up capital above Rs. 10 lakhs.

IRDA has now fixed the agency commission and brokers'

remuneration rates, which vary between 5-17.5 per cent
depending on the type of risks covered and the size of the
company. The new rates will be applicable from April one
for a period of one year.

IRDA had made it compulsory for brokers to invest Rs. 50 lakh in

order to offer professional services. Brokers also have to take up
professional indemnity policy three-times their brokerage income,
with a minimum amount of Rs. 50 lakh.

PRIVATE COMPANIES STATUS

The following table summaries current status of various

companies, which have shown keen interest in this industry.

41
COMPANY FOREIGN SECTOR STATUS
PARTNER
Birla Ltd. Sunlife Life Insurance Active
Cadila - General Planning
Pharmaceuticals Insurance
Corporation - Life Insurance Planning
bank
Dabur Allstate, USA Life Insurance Applied for
License
Gujurat Ambuja Money Life Life Insurance Planning
Cement Insurance
HDFC Standard Life Life Insurance License
Received
ICICI Lombard, General Joint Venture
Canada Insurance formed
ICICI Prudential, Life Insurance Active
UK
India Farmer Tokio Marine, Non Life In principal
Fertilizer Co- Japan Insurance clearance
operative
Kotak Mahindra Old Mutual, Life Insurance Active
Finance South Africa
Max India New York Life Life Insurance Active
International
Punjab National - Life Insurance Planning
Bank, Bank of
Baroda
Punjab National - Non Life Planning
Bank, Vijaya Insurance
Bank, Allahabad

42
 Bank, Bank of
India
Reliance Group - Life Insurance License
Received
Reliance Group - Non Life License
Insurance Received
Sundaram Royal & Non Life License
Finance Sundaram Insurance Received
Alliance

PRIVATE COMPANIES’ PREPAREDNESS OR ATTITUDE

TOWARDS BROKERS:

Of the companies, which have started their operation, all are ready
to accept business brought in by insurance brokers. For them it
shall be another mode of business generation along with the
agents or the insurance consultants as they call. Internationally
also it is the Brokers who bring the majority of the business for the
insurance companies as against the agents.

VI AREAS FROM WHERE REVENUES CAN BE GENERATED

AMOUNT OF COMMISSION THAT COMPANIES PAY:

It is expected that brokers are going to be treated on the same

lines, as are the agents today, as far as the commission is
concerned. The structure for paying commission for the insurance

43
policies is given by IRDA where it has given the upper limits or the
maximum commission payable. So a company is free to pay
commission as per its wish provided it does not exceed the upper
limits. Brokers' commissions amounted to €134 million in 2002

Avenues for income, for an insurance agent/broker are one time

commission recurring commission and annual bonuses. One time
commission and recurring commission are paid as percentage of
premium and annual bonus is paid out of the income that is been
generated from the investments.
The limits for the same is given below.

TYPE OF POLICY COMMISSON LIMITS

Immediate Annuity 2% of Premium
Deferred Annuity 2% of Premium
(Single Premium)
Deferred Annuity 7.5% of the first years
(regular Premium) Premium
2% of Premium
All other cases  A maximum of 40% of
(Endowments, Money back the first years Premium
etc.)  A maximum of 7.5% of
the 2nd & 3rd years
Premium
 A maximum of 5% of
the 4th & 5th years
Premium

44
  Thereafter, 5% of the
renewal Premium
Total commission payable
in the first 5n years cannot
exceed 60% of the annual
premium payable on the
policy.

These are the upper limits but the exact amount of commission
given companies is not available. Being an up coming industry and
a very competitive one the players in the industry are not ready to
spell out openly what is the commission that they are offering.

However all have to adhere the to IRDA guidelines which has given
the upper levels beyond which the company cannot give
commission to an agent/consultant.

VII LIABILITIES TOWARDS BOTH THE PARTIES

MEMBERSHIP TO CLAIM SETTLEMENTS

Insurance broker has to be registered broker with the IRDA. IRDA

has made it mandatory for every broker to appear for a
certification exam every three years irrespective of he or she
having cleared it before. Also every insurance broker shall take
out and maintain a professional indemnity insurance cover

45
throughout the validity of the period of license granted by the
Authority.

The terms and conditions of the insurance cover must comply with
the following requirements.

1) The insurance cover must indemnify, as a minimum, an

insurance broker against:

(i) breach of duty in relation to any aspect of the broker’s

business by reason of any negligent act, error or
omission;
(ii) Libel or slander committed in the course of business;
(iii) any loss of money or other property for which the
broker is legally liable in consequence of any financial
or fraudulent act or omission;
(iv) legal liability incurred by the broker by reason of loss of
documents and costs and expenses incurred in
replacing or restoring such documents;
(v) dishonest or fraudulent acts or omissions by brokers
employees or former employees; and
(vi) any financial penalty imposed by the authority or by
any ‘ombudsman’ scheme to which the broker belongs.

46
 2) The insurance policy must not contain any terms to the
effect that payments of claims depend upon the insured
having first made payment.
3) The insurance policy must ensure the payment of all
claims made and reported during the period of the insurance
regardless of the time at which the event-giving rise to the
claim may have occurred.
4) The insurance policy period shall not be more than 12 months
form
Inception or the last renewal date (unless approved by the
Authority). The broker will be required to take insurance
policy on a yearly basis for the entire period of license.
5) Limit of Indemnity to any one claim and in the aggregate
shall be:

Category I A and Category I B 4 times of brokerage and fees in a

year subject to a minimum limit of Rs 60 lakhs.

Category II 4 times of brokerage and fees in a year subject to a

minimum limit of Rs.3 crores.

Category III 4 times of brokerage and fees in a year subject to a

minimum limit of Rs.6 crores.

Category IV 4 times of brokerage and fees in a year subject to a

minimum limit of Rs.30 lakhs.

47
 6) The uninsured excess in respect of each claim must not
exceed Rs.
50,000. The excess may be increased above Rs. 50,000
provided that
the solvency margin required in sub-regulation 18 is
maintained.

7) The insurance policy must be taken out with any licensed

insurer in
India who has agreed to :
(i) provide the broker with an annual certificate as evidence
that the cover meets the requirements of the Authority.
The certificate will contain the name and address,
including the license number of the broker, the policy
number, the limit of indemnity, the excess and the name
of the Insurer; and
(ii) send a duplicate certificate to the Authority at the time
the certificate is issued to the broker; and
(iii) inform the authority by means of monthly lists, of any
case of voidance, non-renewal or cancellation of cover
mid-term.

8) Every insurance broker must:

(i) inform the authority immediately should any cover be
cancelled or voided or if any policy is not renewed;

48
 (ii) immediately inform the insurer in writing of any claim
made by or against it;
(iii) immediately advise the insurer of all circumstances or
occurrences that may give rise to a claim under the
policy; and
(iv) advise Authority as soon as an insurer has intimated that
it intends to decline indemnity in respect of a claim
under the policy.

Since a broker acts on behalf of the insured he should see that

even the claim settlements takes place very easily. At the same
time it is very important that the broker is only an intermediary
he can facilitate in claim procedure but not settle the claim. An
insurance agreement is between the insured and the insuring
company. So in case if there are any complications or the errors
as to settlement of the claims the two parties involved are only
the insured and the insurance company. The broker has no
capital commitment towards the insured. He purely works on the
principle of utmost good faith where the insured provide all the
information which are true and fair and at the same time it is the
duty of the company to honor genuine claims.

VIII MISCELLANEOUS

OTHER INTERMEDIARIES IN INSURANCE BUSINESS

49
Ideally an insurance company would have openings in the
marketing, distribution, actuarial, underwriting, operations and
investing departments. Though some jobs like investing,
marketing and distribution are the same in any other industry,
actuarial and underwriting jobs are exclusive to the insurance
industry.

Actuaries
An actuary is the heart of an insurance business. An actuary solves
a wide range of financial problems in insurance, investment,
financial planning and management through the use of
mathematical, statistical and economic models. An actuary not
only fixes the premium rates for new products, but also revises
both products and prices. Generally, a big insurance firm abroad
has about 50 actuaries. Even a medium sized firm has to have
half-a-dozen actuaries, one or two qualified and the rest
apprentices.

Underwriters
Both life and non-life segments require professional underwriters,
who assess the risk in the business. In the life insurance business,
an underwriter is expected to filter the “bad or substandard lives”,
whereas he takes care of risk management in the general
insurance segment.

Surveyors

50
Surveyors are professionals who assess the loss or damage. An
insurance surveyor must possess a license issued by the Controller
of Insurance under Ministry of Finance, Govt. of India. Licenses
are issued to technically qualified people who are engineering
graduates or diploma holders in any discipline, Chartered
Accountants, Graduates in Medical Sciences or Associates in
Insurance of the Chartered Insurance Institute of London or
Federation of Insurance Institute of India. A surveyor after
obtaining the license may be empanelled by any or all of the
insurance companies.

Operations
It’s InfoTech everywhere! The new players would require elaborate
database, a network, and in-house packages to have an edge over
their rivals. Database and network professionals will, therefore, be
in great demand. The industry would also require software
programmers to develop customized off-the-shelf packages.

Investment
Like banks and mutual funds, an insurance firm will also need
investment professionals to manage its assets. People with
experience in banks and mutual funds would be preferred.
Remuneration would be on par with the financial sector.

Marketing and Distribution

51
Insurance is a push product and marketing plays a major role in a
company’s success. And the key marketing men would be the
traditional agents. But the private insurance companies would look
at a more professional agent who not only sells insurance products
but also acts like a personal finance consultant to the customers.
There would be openings for both the experienced and the novice.
Remuneration would be on commission basis.

IT IN THE INSURANCE INDUSTRY

Today the companies are actively pursuing new IT initiatives, such

as, data ware housing, e-commerce and componentization. The
objective is to get clarity around the products channels and service
features for new entrants investments in information technology is
crucial for success. It takes time to build it systems and the new
firms need to get of the block soon as possible. Core processes
such as finance policy administration investment management and
basic rate system need to be set up first. The following processes
should be set up after the core processes:
 Sales system and publicity
 Claim management and loss control
 MIS, product design and supply system,
 Data ware housing solutions will be helpful to the insurance
industry in:
• Facilitate strategic decision based on the timely and
accurate data.
52
 • Functioning as an effective decision support system and
executive information system.
• Capture data quickly from disparate databases and
translating into a format easily understandable to
business and system professionals.
• Assist in understanding customer behaviour and trends
• Freeing up internal technical staff.

Worldwide interest in E-commerce and India's predominant

position in information technology and software development is
also likely to be a major factor in the marketing of insurance
products in the immediate future.

53
CONCLUSION

With the opening up of insurance business in the country ‘Broker’

in insurance, are going to play a very important role in days to
come. They are not just going to be provider of insurance
schemes but shall be acting as the professional financial
intermediaries providing risk management services to the
prospective insured.

Broking in insurance is going to be a big industry as it has been

internationally with insurance brokers evolving to be the main
business generator for the Insurance Company. With the amount
of commission that has been offered to insurance agents it is
expected that the same or probably more shall be offered to
insurance brokers. Super imposing this to the fact that about only
20 % insurable population of the country is currently insured this
business holds very good prospect.

54
This industry also makes a very good business as it attracts a
very less investment and has virtually no liability that a broker
has to take on his name.

To conclude insurance broking shall be a pure financial service

intermediary, which shall put life in all the non-life activities of
the Indians.

BIBLOGRAPHY

• irdaindia.org
• irdaonline.org
• bimaguru.com

55
• bimaonline.com
• bimakoj.com
• themanagementor.com

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