With largest number of life insurance policies in
force in the world, Insurance happens to be a mega opportunity in
India. It’s a business growing at the rate of 15-20 per cent
annually and presently is of the order of Rs 450 billion. Together
with banking services, it adds about 7 per cent to the country’s
GDP. Gross premium collection is nearly 2 per cent of GDP and funds
available with LIC for investments are 8 per cent of GDP.
Yet, nearly 80 per cent of Indian population is without
life insurance cover while health insurance and non-life insurance
continues to be below international standards. And this part of
the population is also subject to weak social security and pension
systems with hardly any old age income security. This itself is
an indicator that growth potential for the insurance sector is immense.
A well-developed and evolved insurance sector is needed
for economic development as it provides long term funds for infrastructure
development and at the same time strengthens the risk taking ability.
It is estimated that over the next ten years India would require
investments of the order of one trillion US dollar. The Insurance
sector, to some extent, can enable investments in infrastructure
development to sustain economic growth of the country.
Insurance is a federal subject in India. There are
two legislations that govern the sector- The Insurance Act- 1938
and the IRDA Act- 1999. The insurance sector in India has come a
full circle from being an open competitive market to nationalisation
and back to a liberalised market again. Tracing the developments
in the Indian insurance sector reveals the 360 degree turn witnessed
over a period of almost two centuries.
The history of life insurance in India dates back
to 1818 when it was conceived as a means to provide for English
Widows. Interestingly in those days a higher premium was charged
for Indian lives than the non-Indian lives as Indian lives were
considered more riskier for coverage.
The Bombay Mutual Life Insurance Society started its
business in 1870. It was the first company to charge same premium
for both Indian and non-Indian lives. The Oriental Assurance Company
was established in 1880. The General insurance business in India,
on the other hand, can trace its roots to the Triton (Tital) Insurance
Company Limited, the first general insurance company established
in the year 1850 in Calcutta by the British. Till the end of nineteenth
century insurance business was almost entirely in the hands of overseas
Insurance regulation formally began in India with
the passing of the Life Insurance Companies Act of 1912 and the
provident fund Act of 1912. Several frauds during 20's and 30's
sullied insurance business in India. By 1938 there were 176 insurance
companies. The first comprehensive legislation was introduced with
the Insurance Act of 1938 that provided strict State Control over
insurance business. The insurance business grew at a faster pace
after independence. Indian companies strengthened their hold on
this business but despite the growth that was witnessed, insurance
remained an urban phenomenon.
The Government of India in 1956, brought together
over 240 private life insurers and provident societies under one
nationalised monopoly corporation and Life Insurance Corporation
(LIC) was born. Nationalisation was justified on the grounds that
it would create much needed funds for rapid industrialization. This
was in conformity with the Government's chosen path of State lead
planning and development.
The (non-life) insurance business continued to thrive
with the private sector till 1972. Their operations were restricted
to organised trade and industry in large cities. The general insurance
industry was nationalised in 1972. With this, nearly 107 insurers
were amalgamated and grouped into four companies- National Insurance
Company, New India Assurance Company, Oriental Insurance Company
and United India Insurance Company. These were subsidiaries of the
General Insurance Company (GIC).
Important milestones in the life insurance business
1912: The Indian Life Assurance Companies Act enacted
as the first statute to regulate the life insurance business.
1928: The Indian Insurance Companies Act enacted to
enable the government to collect statistical information about both
life and non-life insurance businesses.
1938: Earlier legislation consolidated and amended
to by the Insurance Act with the objective of protecting the interests
of the insuring public.
1956: 245 Indian and foreign insurers and provident
societies taken over by the central government and nationalised.
LIC formed by an Act of Parliament- LIC Act 1956- with a capital
contribution of Rs. 5 crore from the Government of India.
Important milestones in the general insurance business
in India are:
1907: The Indian Mercantile Insurance Ltd. set up-
the first company to transact all classes of general insurance business.
1957: General Insurance Council, a wing of the Insurance
Association of India, frames a code of conduct for ensuring fair
conduct and sound business practices.
1968: The Insurance Act amended to regulate investments
and set minimum solvency margins and the Tariff Advisory Committee
1972: The general insurance business in India nationalised
through The General Insurance Business (Nationalisation) Act, 1972
with effect from 1st January 1973. 107 insurers amalgamated and
grouped into four companies- the National Insurance Company Limited,
the New India Assurance Company Limited, the Oriental Insurance
Company Ltd. and the United India Insurance Company Ltd. GIC incorporated
as a company.
Insurance Sector Reforms
In 1993, Malhotra Committee- headed by former Finance
Secretary and RBI Governor R.N. Malhotra- was formed to evaluate
the Indian insurance industry and recommend its future direction.The
Malhotra committee was set up with the objective of complementing
the reforms initiated in the financial sector. The reforms were
aimed at creating a more efficient and competitive financial system
suitable for the requirements of the economy keeping in mind the
structural changes currently underway and recognising that insurance
is an important part of the overall financial system where it was
necessary to address the need for similar reforms. In 1994, the
committee submitted the report and some of the key recommendations
Government stake in the insurance Companies to be brought down to
50%. Government should take over the holdings of GIC and its subsidiaries
so that these subsidiaries can act as independent corporations.
All the insurance companies should be given greater freedom to operate.
Private Companies with a minimum paid up capital of Rs.1bn should
be allowed to enter the sector. No Company should deal in both Life
and General Insurance through a single entity. Foreign companies
may be allowed to enter the industry in collaboration with the domestic
Postal Life Insurance should be allowed to operate in the rural
market. Only one State Level Life Insurance Company should be allowed
to operate in each state.
iii) Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body
should be set up. Controller of Insurance- a part of the Finance
Ministry- should be made independent
Mandatory Investments of LIC Life Fund in government securities
to be reduced from 75% to 50%. GIC and its subsidiaries are not
to hold more than 5% in any company (there current holdings to be
brought down to this level over a period of time)
v) Customer Service
LIC should pay interest on delays in payments beyond 30 days. Insurance
companies must be encouraged to set up unit linked pension plans.
Computerisation of operations and updating of technology to be carried
out in the insurance industry.
The committee emphasised that in order to improve
the customer services and increase the coverage of insurance policies,
industry should be opened up to competition. But at the same time,
the committee felt the need to exercise caution as any failure on
the part of new players could ruin the public confidence in the
industry. Hence, it was decided to allow competition in a limited
way by stipulating the minimum capital requirement of Rs.100 crores.
The committee felt the need to provide greater autonomy
to insurance companies in order to improve their performance and
enable them to act as independent companies with economic motives.
For this purpose, it had proposed setting up an independent regulatory
body- The Insurance Regulatory and Development Authority.
Reforms in the Insurance sector were initiated with
the passage of the IRDA Bill in Parliament in December 1999. The
IRDA since its incorporation as a statutory body in April 2000 has
fastidiously stuck to its schedule of framing regulations and registering
the private sector insurance companies. Since being set up as an
independent statutory body the IRDA has put in a framework of globally
compatible regulations. The other decision taken simultaneously
to provide the supporting systems to the insurance sector and in
particular the life insurance companies was the launch of the IRDA
online service for issue and renewal of licenses to agents. The
approval of institutions for imparting training to agents has also
ensured that the insurance companies would have a trained workforce
of insurance agents in place to sell their products.