INSURANCE BUSINESS IN INDIA
The development and growth of the insurance industry in India has gone through three distinct stages.
Formation of the Insurance Industry in India
Insurance law in India had its origins in the United Kingdom with the establishment of a British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in 1874. However, till the establishment of the Bombay Mutual Life Assurance Society in 1871. Indians were charged an extra premium of up to 20% as compared to the British. The first statutory measure in India to regulate the life insurance business was in 1912 with the passing of the Indian Life Assurance Companies Act, 1912 (Act of 1912) (which was based on the English Act of 1909). Other classes of insurance business were left out of the scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and legislative controls were not considered necessary.
General insurance on the other hand also has its origins in the United Kingdom. The first general insurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in Calcutta. The first general insurance company established by an Indian was Indian Mercantile Insurance Company Ltd. in Bombay in 1907. Eventually, with the growth of fire, accident and marine insurance, the need was felt to bring such kinds of insurance within the purview of the Act of 1912.
While there were a number of attempts to introduce such legislation over the years, non-life insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938 (Act of 1938). The Act of 1938 along with various amendments over the years continues till date to be the 1 definite piece of legislation on insurance and controls both life insurance and general insurance.
General insurance, in turn, has been defined to include *fire insurance business”. “marine insurance business” and “miscellaneous insurance business”, whether singly or in combination with any of them.
Nationalization of the Insurance Business in India
On January 19, 1956, the management of life insurance business of two hundred and forty five Indian and foreign insurers and provident societies then operating in India were taken over by the Central Government. The Life Insurance Corporation (“LIC”) was formed in September 1956 by the Life Insurance Corporation Act, 1956 (“LIC Act”) which granted LIC the exclusive privilege to conduct life insurance business in India. However, an exception was made in the case of any company: firm or persons intending to carry on life insurance business in India in respect of the lives of “persons ordinarily resident outside India” provided the approval of the Central Government was obtained. The exception was however not absolute and a curious prohibition existed. Such company, firm or person would not be permitted to insure the life of any “person ordinarily resident outside India”, during any period of their temporary residence in India. However, the LIC Act, 1956 left outside its purview the Post Once Life Insurance Fund, any Family Pension Scheme framed under the Coal Mines Provident Fund, Family Pension and Bonus Schemes Act, 1948 or the Employees’ Provident Funds and the Family Pension Fund Act, 1952.
The general insurance business was also nationalized with effect from January 1, 1973, through the introduction of the General Insurance Business (Nationalization) Act, 1972.Under the provisions of the GIC Act, the shares of the existing Indian general insurance companies and undertakings of other existing insurers were transferred to the General Insurance Corporation to secure the development of the general insurance business in India and for the regulation and control of such business. The GIC was established by the Central Government in accordance with the provisions of the Companies Act. 1956 in November 1972 and it commenced business on January 1, 1973. Prior to 1973, there were a hundred and seven companies, including foreign companies, offering general insurance in India. These companies were amalgamated and grouped into four subsidiary companies of GIC viz. the National Insurance Company Ltd, The New India Assurance Company Ltd. the Oriental Insurance Company Ltd. And the United India Assurance Company Ltd. GIC undertakes mainly re-insurance business apart from aviation insurance. The bulk of the general insurance business of ire, marine, motor and miscellaneous insurance business is under taken by the four subsidiaries. With effect from December 2000, these subsidiaries have been de-linked from the parent company and were set up as independent insurance companies: Oriental Insurance Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited.
Entry of Private Players
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.