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Insurance in India started without any regulation in the Nineteenth Century. It was
a typical story of a colonial epoch: few British insurance companies dominating
the market serving mostly large urban centers.
After the independence, it took a theatrical turn. Insurance was nationalized. First,
the life insurance companies were nationalized in 1956, and then the general
insurance business was nationalized in 1972. It was only in 1999 that the private
insurance companies have been allowed back into the business of insurance with
a maximum of 26% of foreign holding.
“The insurance industry is enormous and can be quite intimidating. Insurance is
being sold for almost anything and everything you can imagine. Determining
what’s right for you can be a very daunting task.”
Concepts of insurance have been extended beyond the coverage of tangible
asset. Now the risk of losses due to sudden changes in currency exchange rates,
political disturbance, negligence and liability for the damages can also be
covered.
But if a person thoughtfully invests in insurance for his property prior to any
unexpected contingency then he will be suitably compensated for his loss as soon
as the extent of damage is ascertained.
The entry of the State Bank of India with its proposal of bank assurance brings a
new dynamics in the game. The collective experience of the other countries in
Asia has already deregulated their markets and has allowed foreign companies to
participate. If the experience of the other countries is any guide, the dominance of
the Life Insurance Corporation and the General Insurance Corporation is not going
to disappear any time soon.
The aim of all insurance is to compensate the owner against loss arising from a
variety of risks, which he anticipates, to his life, property and business. Insurance
is mainly of two types: life insurance and general insurance. General insurance
means Fire, Marine and Miscellaneous insurance which includes insurance against
burglary or theft, fidelity guarantee, insurance for employer’s liability, and
insurance of motor vehicles, livestock and crops.
Non-Life Insurance
“Every asset has a value and the business of general insurance is related to the
protection of economic value of assets.”
Non-life insurance means insurance other than life insurance such as fire, marine,
accident, medical, motor vehicle and household insurance. Assets would have
been created through the efforts of owner, which can be in the form of building,
vehicles, machinery and other tangible properties. Since tangible property has a
physical shape and consistency, it is subject to many risks ranging from fire, allied
perils to theft and robbery.
Few of the General Insurance policies are:
Property Insurance: The home is most valued possession. The policy is
designed to cover the various risks under a single policy. It provides protection for
property and interest of the insured and family.
Health Insurance: It provides cover, which takes care of medical expenses
following hospitalization from sudden illness or accident.
Personal Accident Insurance: This insurance policy provides compensation for
loss of life or injury (partial or permanent) caused by an accident. This includes
reimbursement of cost of treatment and the use of hospital facilities for the
treatment.
Travel Insurance: The policy covers the insured against various eventualities
while traveling abroad. It covers the insured against personal accident, medical
expenses and repatriation, loss of checked baggage, passport etc.
Liability Insurance: This policy indemnifies the Directors or Officers or other
professionals against loss arising from claims made against them by reason of
any wrongful Act in their Official capacity.
Motor Insurance: Motor Vehicles Act states that every motor vehicle plying on
the road has to be insured, with at least Liability only policy. There are two types
of policy one covering the act of liability, while other covers insurers all liability
and damage caused to one’s vehicles.
Malhotra Committee
Liberalization of the Indian insurance market was suggested in a report released
in 1994 by the Malhotra Committee, indicating that the market should be opened
to private-sector competition, and eventually, foreign private-sector competition.
It also investigated the level of satisfaction of the customers of the LIC.
Inquisitively, the level of customer satisfaction seemed to be high.
In 1993, Malhotra Committee – headed by former Finance Secretary and RBI
Governor Mr. R. N. Malhotra – was formed to evaluate the Indian insurance
industry and recommend its future course. The Malhotra committee was set up
with the aim 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 needs of the economy keeping in mind the structural changes
presently happening and recognizing 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 included:
• Structure
Government bet 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.
• Competition
Private Companies with a minimum paid up capital of Rs.1 billion 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 companies. 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.
• 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.
• Investments
Compulsory 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).
• 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.
Computerization of operations and updating of technology to be carried out in the
insurance industry. The committee accentuated 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 competitors 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 meticulously 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 at the
same time 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.
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 percent equity lid for foreign partners in an insurance
company. There is a proposal to increase this limit to 49 percent.
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. 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
Mukherjee Committee
Immediately after the publication of the Malhotra Committee Report, a new
committee, Mukherjee Committee was set up to make concrete plans for the
requirements of the newly formed insurance companies. Recommendations of the
Mukherjee Committee were never disclosed to the public. But, from the
information that filtered out it became clear that the committee recommended
the inclusion of certain ratios in insurance company balance sheets to ensure
transparency in accounting. But the Finance Minister objected to it and it was
argued by him, probably on the advice of some of the potential competitors, that
it could affect the prospects of a developing insurance company.
Conclusion
It seems cynical that the LIC and the GIC will wither and die within the next
decade or two. The IRDA has taken “at a snail’s pace” approach. It has been very
cautious in granting licenses. It has set up fairly strict standards for all aspects of
the insurance business (with the probable exception of the disclosure
requirements). The regulators always walk a fine line. Too many regulations kill
the motivation of the newcomers; too relaxed regulations may induce failure and
fraud that led to nationalization in the first place. India is not unique among the
developing countries where the insurance business has been opened up to foreign
competitors.
The insurance business is at a critical stage in India. Over the next couple of
decades we are likely to witness high growth in the insurance sector for two
reasons namely; financial deregulation always speeds up the development of the
insurance sector and growth in per capita GDP also helps the insurance business
to grow.