Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India’s life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance business. Both LIC and GIC have played a significant role in the development of the insurance market in India and in providing insurance coverage in India through an extensive network. For example, currently, the LIC has a network of 7 zones, 100 divisions and over 2,000 branches. LIC has over 550,000 agents and over 100 million lives are covered.
From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy. It was a matter of time before this liberalization affected the insurance sector. A huge gap in the funds required for infrastructure was felt particularly since much of these funds could be filled by life insurance funds, being long tenure funds.
Consequently, in 1993, the Government of India set up an eight-member committee chaired by Mr R. N. Malhotra, a former Governor of India’s apex bank, the Reserve Bank of India to review the prevailing structure of regulation and supervision of the insurance sector and to make recommendations for strengthening and modernizing the regulatory system. The Committee submitted its report to the Indian Government in January 1994. Two of the key recommendations of the Committee included the privatization of the insurance sector by permitting the entry of private players to enter the business of life and general insurance and the establishment of an Insurance Regulatory Authority.
It took a number of years for the Indian Government to implement the recommendations of the Malhotra Committee. The Indian Parliament passed the Insurance Regulatory and Development Act, 1999 (“IRD Act) on December 2, 1999 with the aim “to provide for the establishment of an Authority, to protect the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and to amend the Insurance Act. 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act. 1972.”
The Insurance Regulatory Development Act, 1999 (IRDA Act) allowed the entry of private companies in the insurance sector, which was so far the sole prerogative of the public sector insurance companies. The act was passed to protect the concerns of holders of insurance policy and also to govern and check the growth of the insurance sector. This new act allowed the private insurance companies to function in India under the following circumstances:
- The company should be established and registered under the 1956 company Act
- The company should only the serve the purpose of life or general insurance or reinsurance business
- The minimum paid up equity capital for serving the purpose of reinsurance business has been decreed at Rs.20O cores
- The minimum paid up equity capital for serving the purpose of reinsurance business has been decreed at Rs.100 cores
- The average holdings of equity shares by a foreign company or its subsidiaries or nominees should not go above 26% paid up equity capital of the Indian Insurance company.
Investment policy in the Indian insurance market
- A policy known by the name of Health plus Life Combo Product’, offering life cover along with health insurance has been granted permission by the IRDA act and insurance companies are allowed to provide now.
- The FDI limit in the insurance sector has been capped at 26% for the foreign marketers but the government is thinking to increase it to 49% and a bill of this offer is pending at the Rajya Sabha.
- A low cost pension scheme is supposed to be formed by the Pension Fund Regulatory and Developmental Authority (PFRDA) on 1st April, 2010 to provide social security to the poorer class.
- The compulsory ceding by every General Insurance Corporation (GIC), would go on to stay at 10% under current regulations as specified by IRDA.
The Government of India liberalized the insurance sector in March 2000 with the passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry restrictions for private players and allowing foreign players to enter the market with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percentage equity cap for foreign partners in an insurance company. There is a proposal to increase this limit to 49 percentages. In 2000 IRDA started giving licenses to private sectors. ICICI prudential and HDFC standard life insurers were the first private insurers in India. In 2001 Royal Sunderam Alliance started as the first non-life insurance company in India. In 2002 banks are allowed to sell insurance plans. In 2007, first insurance online portal is Set up by an Indian insurance broker, Bonsai Insurance Broking Private Limited.
The opening up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also include restructuring and revitalizing of the public sector companies. With the deregulation of Indian insurance industry, the monopoly of Indian public sector companies in life insurance and general insurance come to an end. In the private sector 12 life insurance and 8 general insurance companies have been registered. A host of private Insurance companies operating in both life and non-life segments have started selling their insurance policies since 2001. There are now 29 insurance companies operating in the Indian market 14 private life insurers, nine private non-life insurers and six public sector companies. With many more joint ventures in the offing. the insurance industry in India today stands at a crossroads as competition intensifies and companies prepare survival strategies in a detariffed scenario.
There are opportunities in the pensions sector where regulations are being framed. Less than 10 % of Indians above the age of 60 receive pensions. The IRDA has issued the first licences for a standalone health company in the country as many more players wait to enter. The health insurance sector has tremendous growth potential. and as it matures and new players enter, product innovation and enhancement will increase.