Chapter 2

INSURANCE SECTOR REFORMS IN INDIA

Insurance sector reforms

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 lamina. 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 dawn 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.

The Government of India started publishing returns of Insurance Companies in India in 1914. 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. The Life Insurance Company was nationalized in 1956, and then the general insurance business was nationalized in 1972. An Ordinance was issued on 19h January, 1956 nationalizing 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 socleties-245 Indian and foreign insurers in all. The LIC had monopoly up the late 90s when the Insurance sector was reopened to the private sector.

The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce In the 17 century. Il came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Lad., in the year 1850 In Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd was set up. This was the first company to transact all classes of general Insurance business. 1957 saw the formation of the General Insurance Counsel, a wing of the Insurance Association of India. The General Insurance Council framed a code of conduct for ensuring fair conduit and sound business practices.

The Insurance Act was amended in 1968 to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. The General Insurance Business (Nationalization) Act was passed in1972: general insurance business was nationalized with effect from 1″ January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 197l and it commenced business on list January 1973. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, Iormer 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 are allowed to enter by floating Indian companies, preferably 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. On July 14, 2000 Insurance Regulatory and Development Authority bill was passed to protect the interest of the policyholders from private and foreign players and to regulate, promote and ensure orderly growth of 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. Only in 1999 private insurance companies were allowed back into the business of insurance with a maximum of 26 per cent of foreign holding (World Bank Economic Review 2000). The entry of the State Bank of India with its proposal of bank assurance brings a new dynamics in the game. The following companies are entitled to do insurance business in India. Insurance sector has been opened up for competition from Indian private insurance companies with the enactment of Insurance Regulatory and Development Authority Act, 1999 (IRDA Act). IRDA Act 1999 paved the way for the entry of private players into the insurance market, which was hitherto the exclusive privilege of public sector insurance companies/ corporations. Under the new dispensation Indian insurance companies in private sector were permitted to operate in India with the following conditions:

  1. Company is formed and registered under the Companies Act, 1956:
  2. The aggregate holdings of cults shares by a foreign company, either by itself or through its subsidiary companies or its nominees, do not exceed 26%, paid up equity capital of such Indian insurance company:
  3. The company’s sole purpose is to carry on life insurance business or general insurance business or reinsurance business.
  4. The minimum paid up equity capital for life or genera insurance business is Rs.100 cores.
  5. The minimum paid up equity capital for carrying on reinsurance business has been prescribed as Rs.200 cores.

The Authority has notified 27 Regulations on various issues, which include Registration of Insurers, Regulation on insurance agents, Solvency Margin, Re-insurance, Obligation of Insurers to Rural and Social sector, Investment and Accounting Procedure, Protection of policyholders’ interest etc. In December, 2000 the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national re-insurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July. 2002.

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