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Introduction Of Insurance Law

“Insurance should be bought to protect you against a calamity that would


otherwise be financially devastating.”
In simple terms, insurance allows someone who suffers a loss or accident to be
compensated for the effects of their misfortune. It lets you protect yourself
against everyday risks to your health, home and financial situation.

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.

Life Insurance In India


“Life insurance is the heartfelt love letter ever written.
It calms down the crying of a hungry baby at night. It relieves the heart of a
bereaved widow.
It is the comforting whisper in the dark silent hours of the night.”
Life insurance made its debut in India well over 100 years ago. Its salient features
are not as widely understood in our country as they ought to be. There is no
statutory definition of life insurance, but it has been defined as a contract of
insurance whereby the insured agrees to pay certain sums called premiums, at
specified time, and in consideration thereof the insurer agreed to pay certain
sums of money on certain condition sand in specified way upon happening of a
particular event contingent upon the duration of human life.

Life insurance is superior to other forms of savings!


“There is no death. Life Insurance exalts life and defeats death.
It is the premium we pay for the freedom of living after death.”
Savings through life insurance guarantee full protection against risk of death of
the saver. In life insurance, on death, the full sum assured is payable (with
bonuses wherever applicable) whereas in other savings schemes, only the
amount saved (with interest) is payable.
The essential features of life insurance are
• it is a contract relating to human life, which
• provides for payment of lump-sum amount,
• the amount is paid after the expiry of certain period or on the death of the
assured.
The very purpose and object of the assured in taking policies from life insurance
companies is to safeguard the interest of his dependents viz., wife and children as
the case may be, in the even of premature death of the assured as a result of the
happening in any contingency. A life insurance policy is also generally accepted
as security for even a commercial loan.

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.

Journey From An Infant To


Adolescence!
Historical Perspective
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 risky 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 companies.
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 desecrated 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 nationalized monopoly corporation and Life
Insurance Corporation (LIC) was born. Nationalization 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 prosper with the private sector till
1972. Their operations were restricted to organized trade and industry in large
cities. The general insurance industry was nationalized 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).
The life insurance industry was nationalized under the Life Insurance Corporation
(LIC) Act of India. In some ways, the LIC has become very flourishing. Regardless
of being a monopoly, it has some 60-70 million policyholders. Given that the
Indian middle-class is around 250-300 million, the LIC has managed to capture
some 30 odd percent of it. Around 48% of the customers of the LIC are from rural
and semi-urban areas. This probably would not have happened had the charter of
the LIC not specifically set out the goal of serving the rural areas. A high saving
rate in India is one of the exogenous factors that have helped the LIC to grow
rapidly in recent years. Despite the saving rate being high in India (compared with
other countries with a similar level of development), Indians display high degree
of risk aversion. Thus, nearly half of the investments are in physical assets (like
property and gold). Around twenty three percent are in (low yielding but safe)
bank deposits. In addition, some 1.3 percent of the GDP are in life insurance
related savings vehicles. This figure has doubled between 1985 and 1995.

A World viewpoint – Life Insurance in India


In many countries, insurance has been a form of savings. In many developed
countries, a significant fraction of domestic saving is in the form of donation
insurance plans. This is not surprising. The prominence of some developing
countries is more surprising. For example, South Africa features at the number
two spot. India is nestled between Chile and Italy. This is even more surprising
given the levels of economic development in Chile and Italy. Thus, we can
conclude that there is an insurance culture in India despite a low per capita
income. This promises well for future growth. Specifically, when the income level
improves, insurance (especially life) is likely to grow rapidly.

Insurance Sector Reform:


Committee Reports: One Known, One Anonymous!
Although Indian markets were privatized and opened up to foreign companies in a
number of sectors in 1991, insurance remained out of bounds on both counts. The
government wanted to proceed with caution. With pressure from the opposition,
the government (at the time, dominated by the Congress Party) decided to set up
a committee headed by Mr. R. N. Malhotra (the then Governor of the Reserve
Bank of India).

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.

Law Commission of India on Revision of the


Insurance Act 1938 – 190th Law Commission
Report
The Law Commission on 16th June 2003 released a Consultation Paper on the
Revision of the Insurance Act, 1938. The previous exercise to amend the
Insurance Act, 1938 was undertaken in 1999 at the time of enactment of the
Insurance Regulatory Development Authority Act, 1999 (IRDA Act).
The Commission undertook the present exercise in the context of the changed
policy that has permitted private insurance companies both in the life and non-life
sectors. A need has been felt to toughen the regulatory mechanism even while
streamlining the existing legislation with a view to removing portions that have
become superfluous as a consequence of the recent changes.
Among the major areas of changes, the Consultation paper
suggested the following:
• merging of the provisions of the IRDA Act with the Insurance Act to avoid
multiplicity of legislations;
• deletion of redundant and transitory provisions in the Insurance Act, 1938;
• Amendments reflect the changed policy of permitting private insurance
companies and strengthening the regulatory mechanism;
• Providing for stringent norms regarding maintenance of ‘solvency margin’
and investments by both public sector and private sector insurance
companies;
• Providing for a full-fledged grievance redressal mechanism that includes:
o The constitution of Grievance Redressal Authorities (GRAs)
comprising one judicial and two technical members to deal with
complaints/claims of policyholders against insurers (the GRAs are
expected to replace the present system of insurer appointed
Ombudsman);
o Appointment of adjudicating officers by the IRDA to determine and
levy penalties on defaulting insurers, insurance intermediaries and
insurance agents;
o Providing for an appeal against the decisions of the IRDA, GRAs and
adjudicating officers to an Insurance Appellate Tribunal (IAT) comprising a
judge (sitting or retired) of the Supreme Court/Chief Justice of a High Court
as presiding officer and two other members having sufficient experience
in insurance matters;
o Providing for a statutory appeal to the Supreme Court against the
decisions of the IAT.

Life & Non-Life Insurance –


Development and Growth!
The year 2006 turned out to be a momentous year for the insurance sector as
regulator the Insurance Regulatory Development Authority Act, laid the
foundation for free pricing general insurance from 2007, while many companies
announced plans to attack into the sector.
Both domestic and foreign players robustly pursued their long-pending demand
for increasing the FDI limit from 26 per cent to 49 per cent and toward the fag end
of the year, the Government sent the Comprehensive Insurance Bill to Group of
Ministers for consideration amid strong reservation from Left parties. The Bill is
likely to be taken up in the Budget session of Parliament.
The infiltration rates of health and other non-life insurances in India are well below
the international level. These facts indicate immense growth potential of the
insurance sector. The hike in FDI limit to 49 per cent was proposed by the
Government last year. This has not been operationalized as legislative changes
are required for such hike. Since opening up of the insurance sector in 1999,
foreign investments of Rs. 8.7 billion have tipped into the Indian market and 21
private companies have been granted licenses.
The involvement of the private insurers in various industry segments has
increased on account of both their capturing a part of the business which was
earlier underwritten by the public sector insurers and also creating additional
business boulevards. To this effect, the public sector insurers have been unable to
draw upon their inherent strengths to capture additional premium. Of the growth
in premium in 2004-05, 66.27 per cent has been captured by the private insurers
despite having 20 per cent market share.
The life insurance industry recorded a premium income of Rs.82854.80 crore
during the financial year 2004-05 as against Rs.66653.75 crore in the previous
financial year, recording a growth of 24.31 per cent. The contribution of first year
premium, single premium and renewal premium to the total premium was
Rs.15881.33 crore (19.16 per cent); Rs.10336.30 crore (12.47 per cent); and
Rs.56637.16 crore (68.36 per cent), respectively. In the year 2000-01, when the
industry was opened up to the private players, the life insurance premium was
Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium,
Rs. 25191.07 crore of renewal premium and Rs. 2740.45 crore of single premium.
Post opening up, single premium had declined from Rs.9, 194.07 crore in the year
2001-02 to Rs.5674.14 crore in 2002-03 with the withdrawal of the guaranteed
return policies. Though it went up marginally in 2003-04 to Rs.5936.50 crore (4.62
per cent growth) 2004-05, however, witnessed a significant shift with the single
premium income rising to Rs. 10336.30 crore showing 74.11 per cent growth over
2003-04.
The size of life insurance market increased on the strength of growth in the
economy and concomitant increase in per capita income. This resulted in a
favourable growth in total premium both for LIC (18.25 per cent) and to the new
insurers (147.65 per cent) in 2004-05. The higher growth for the new insurers is to
be viewed in the context of a low base in 2003- 04. However, the new insurers
have improved their market share from 4.68 in 2003-04 to 9.33 in 2004-05.
The segment wise break up of fire, marine and miscellaneous segments in case of
the public sector insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59
crore, i.e., a growth of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The
public sector insurers reported growth in Motor and Health segments (9 and 24
per cent). These segments accounted for 45 and 10 per cent of the business
underwritten by the public sector insurers. Fire and “Others” accounted for 17.26
and 11 per cent of the premium underwritten. Aviation, Liability, “Others” and Fire
recorded negative growth of 29, 21, 3.58 and 1.43 per cent. In no other country
that opened at the same time as India have foreign companies been able to grab
a 22 per cent market share in the life segment and about 20 per cent in the
general insurance segment. The share of foreign insurers in other competing
Asian markets is not more than 5 to 10 per cent.
The life insurance sector grew new premium at a rate not seen before while the
general insurance sector grew at a faster rate. Two new players entered into life
insurance – Shriram Life and Bharti Axa Life – taking the total number of life
players to 16. There was one new entrant to the non-life sector in the form of a
standalone health insurance company – Star Health and Allied Insurance, taking
the non-life players to 14.
A large number of companies, mostly nationalized banks (about 14) such as Bank
of India and Punjab National Bank, have announced plans to enter the insurance
sector and some of them have also formed joint ventures.
The proposed change in FDI cap is part of the comprehensive amendments to
insurance laws – The Insurance Act of 1999, LIC Act, 1956 and IRDA Act, 1999.
After the proposed amendments in the insurance laws LIC would be able to
maintain reserves while insurance companies would be able to raise resources
other than equity.
About 14 banks are in queue to enter insurance sector and the year 2006 saw
several joint venture announcements while others scout partners. Bank of India
has teamed up with Union Bank and Japanese insurance major Dai-ichi Mutual Life
while PNB tied up with Vijaya Bank and Principal for foraying into life insurance.
Allahabad Bank, Karnataka Bank, Indian Overseas Bank, Dabur Investment
Corporation and Sompo Japan Insurance Inc have tied up for forming a non-life
insurance company while Bank of Maharashtra has tied up with Shriram Group
and South Africa’s Sanlam group for non-life insurance venture.

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.

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