Key Players: Insurance Companies

Insurance Companies (a.k.a Insurers)

These are the people who provide you with an insurance policy, collect a premium for it and also payout the claim. They are also the only ones in the entire chain who can issue an insurance policy.

How do Insurance companies make money?

While most people think that insurers only earn from the premium collected, it's not their only source (or a major one). Most insurers end up paying back 60 to 75% of their premiums collected as claims. If you want to know your insurer's financial health, check their ICR ratio

1. Investment Income: Just as the bank uses a part of your deposit to invest and build a portfolio, the insurer also does the same with the premiums that they collect. This is why insurer always try to pick candidates who won't claim for multiple years so that they can make their profits by the time they do.

2. Underwriting profits: Insurers try to accurately assess risk and set appropriate premiums to ensure that the premium collected ends up more than the claims disbursed. This is called an underwriting profit. If an insurer collects ₹50 crore in premiums and pays out ₹30 crore in claims, they make an underwriting profit of ₹20 crore.

3. Risk Pooling: By spreading the risk across many policyholders, insurers reduce the financial impact of large claims. Not all policyholders will make claims at the same time, so the overall risk is distributed. For e.g., a company insures 1,000 vehicles. While some may have accidents, most will not, allowing the company to cover the costs of the few claims with the premiums collected from all.

4. Fee based Incoming: Insurers may also earn fees from services such as policy management fees, or consulting services. This can include fees for policy changes, endorsements, or additional coverages.

Type of Insurance companies

1. Life Insurance Companies: These companies specialise in providing insurance coverage related to life events. For e.g. LIC, Acko Life Insurance etc.

2. General Insurance Companies: These companies offer non-life insurance products, covering a wide range of risks, like your health, vehicle, property, travel etc. For e.g., ICICI Lombard, Acko General Insurance etc.

3. Stand-alone Health Insurance Companies: While technically part of general insurance, some companies specialise solely in health insurance, focusing on medical expenses and health-related coverage. For e.g., Care Health, Niva Bupa etc.

4. Re-insurance Companies: These companies are the insurers for insurance companies. They act as a safety net for insurers and help manage risk by insuring a part of the liabilities of other insurance companies in case of a massive claim. For e.g., in case if there is a natural disaster due to which a lot of claims come together in one go, the reinsurer will cover a part of the insurance company's claim so that they don't go under. They can be either India based like GIC Re (General Insurance Corporation of India) or foreign based like Swiss Re, Allianz Global etc.

5. Captive Insurance Companies: These are insurance companies set up by a parent company or a group to insure their own risks rather than buying insurance from an external company. A lot of fortune 500 companies follow this practice like British Petroleum, Tennessee etc.

6. Specialised Insurance Companies: Focus on specific sectors or types of insurance. For e.g., Agriculture Insurance Company of India (crop insurance), ECGC Ltd. (export credit insurance)

7. Composite Insurance Companies: These companies would be more generic than general insurance and would be able to offer both life and non-life products. While currently not allowed in India as of writing this article, the IRDAI is keeping it under consideration.

FAQs:

Q. I saw you mention Acko life insurance and Acko general insurance in the above examples? Are they not the same company?

A. Yes and No. While yes, they are part of the same parent, Acko life and general insurance are 2 separate subsidiaries. This is because IRDAI doesn't allow same entity to hold a composite license (Life insurance as well as general). Why? because of the following reasons:

• Specialisation: Life and non-life insurance are different in nature. Life insurance is long-term, while general insurance covers short-term risks. Separate licenses help companies focus and become experts in each area.
• Avoiding Conflicts: Managing both types of insurance under one roof could lead to conflicts of interest. Keeping them separate ensures clear priorities.
• Consumer Clarity: When companies specialise, it's easier for consumers to understand what they're buying. It also helps the IRDAI regulate better.
• Financial Stability: Life and non-life insurance have different financial risks. Separate licenses help companies manage these risks more effectively.
• Encouraging Competition: Specialisation promotes competition and innovation, preventing any one company from dominating both markets.

Q. Why would I go for a standalone health insurance license when I can just get the general insurance (GI) license which includes health product?

A. While mostly everyone prefers to go for a GI license due to its diverse product offering, there are some advantages to being a standalone health insurer:

• You can focus and tailor your products better if you're just building for the health sector.
• Your regulatory burdens would be less as compared to GI company
• You would have a better brand positioning and market perception if you show your specialisation like Care Health insurance, or Star health insurance (Just how you'd trust an Orthopaedic over a general physician when it comes to an ACL tear).

Q. Why would I setup a captive insurance company if I have a big company with excess funds? Shouldn't I just put that money in a "rainy day fund" and call it a day?

A. Tax benefit. Ok, think of it this way. You have a huge company who pays millions of dollars in Insurance to some insurer to cover your workers, your assets etc. This money moves from your pocket to some insurer's pocket who will have its own conditions to disperse the money. Now, say you were to create an insurance company (a proper legal entity with an insurance license) and only insure yourself, you could write off the premium as a liability but the money from the premium would still be with you. Moreover, you can customise the conditions according to your needs to bring it back as an Insurance claim.

Please note that all of this is monitored by the Tax authorities to ensure the companies don't exploit the system too much like keeping an over-inflated premium without proper logic or disbursing too many claims without proper proof but you can still get significant tax benefits on this.

Q. If I have to take the hassle of getting an insurance license, why shouldn't I just sell get a GI license and open a new line of business?

A. This majorly depends on the focus of the company. Getting a captive license is far less costly, easier to obtain and maintain than getting a GI license. If the focus is purely tax saving, then captive license is better.

So there you have it — the grand menagerie of insurance companies in India! From life insurers promising to have your back even when you're six feet under, to general insurers protecting everything from your beloved bike to your neighbour's mischievous cat (pet insurance is really on the rise. You should read about it).