UNIVERSITY LAW COLLEGE                      BANGALORE UNIVERSITY                    PAPER #1: INSURANCE LAW               ...
CONTENTS   INTRODUCTION   DEFINITION   LIFE INSURANCE IN INDIA   NON-LIFE INSURANCE   JOURNEY FROM AN INFANT TO ADOLE...
   EXPECTATION FROM IRDA   DUTIES, POWERS AND FUNCTIONS OF IRDA   INSURANCE SECTOR REFORM   PRESENT SCENARIO OF INSURA...
THE INSURANCE ACT 1938                                      AND           THE INSURANCE REGULATORY AUTHORITY ACT 2000INTRO...
But if a person thoughtfully invests in insurance for his property prior to anyunexpected contingency then he will be suit...
   LIFE INSURANCE IN INDIA"Life insurance is the heartfelt love letter ever written.It calms down the crying of a hungry ...
   NON-LIFE INSURANCE"Every asset has a value and the business of general insurance is related to theprotection of econom...
    JOURNEY FROM AN INFANT TO ADOLESCENCEHistorical PerspectiveIn India, insurance has a deep-rooted history. It finds me...
despite the growth that was witnessed, insurance remained an urban    phenomenon.    The Government of India in 1956, brou...
The General insurance business in India, on the other hand, can trace its rootsto the Triton Insurance Company Ltd., the f...
v. Insurance Regulatory and Development Authority (IRDA) Act, 1999   The Insurance Act of 1938 was the first legislation ...
1. National insurance company ltd2. New India assurance company ltd3.Oriental insurance company ltd4. United India insuran...
In addition, some 1.3 percent of the GDP are in life insurance related savingsvehicles. This figure has doubled between 19...
b. deletion of redundant and transitory provisions in the Insurance Act, 1938;c. Amendments reflect the changed policy of ...
To bring about speedy and orderly growth of the insurance industry (includingannuity and superannuation payments), for the...
Without prejudice to the generality of the provisions contained in sub-section(1), the powers and functions of the Authori...
   supervising the functioning of the Tariff Advisory Committee;      specifying the percentage of premium income of the...
IRDA Journal is available as soft copy in its website. Unlike other Indianadministrative Regulatory Agencies IRDA is perce...
Liberalization of the Indian insurance market was suggested in a reportreleased in 1994 by the Malhotra Committee, indicat...
Regulatory BodyThe Insurance Act should be changed. An Insurance Regulatory body shouldbe set up. Controller of Insurance ...
proposed setting up an independent regulatory body - The InsuranceRegulatory and Development Authority.Reforms in the Insu...
Mukherjee Committee :Immediately after the publication of the MalhotraCommittee Report, a new committee, Mukherjee Committ...
The insurance agents still remain the main source through which insuranceproducts are sold. The concept is very well estab...
from security of income bulk return in future, daughters marriage, childrenseducation and good return on savings, in that ...
Today there are 24 general insurance companies including the ECGC andAgriculture Insurance Corporation of India and 23 lif...
   Sinha, Tapen and Sinha, Dipendra. "A Comparison of Development    Prospects in India   and China." Asian    Economies...
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The Insurance Act 1938 and The Insurance Regulatory Authority Act 2000

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The Insurance Act 1938 and The Insurance Regulatory Authority Act 2000

  1. 1. UNIVERSITY LAW COLLEGE BANGALORE UNIVERSITY PAPER #1: INSURANCE LAW SEMINAR REPORTThe Insurance Act 1938 and The Insurance Regulatory Authority Act 2000 MAITRAYEE PATHAK LLM-BUSINESS LAW
  2. 2. CONTENTS INTRODUCTION DEFINITION LIFE INSURANCE IN INDIA NON-LIFE INSURANCE JOURNEY FROM AN INFANT TO ADOLESCENCE o (HISTORICAL PERSPECTIVE) INSURANCE ACTS IN INDIA MARKET SCENARIO BEFORE IRDA ACT 1999 MARKET SCENARIO AFTER IRDA ACT 1999 NATIONALIZATION OF LIFE INSURANCE A WORLD VIEWPOINT - LIFE INSURANCE IN INDIA LAW COMMISSION OF INDIA ON REVISION OF THE INSURANCE ACT 1938 - 190TH LAW COMMISSION REPORT
  3. 3.  EXPECTATION FROM IRDA DUTIES, POWERS AND FUNCTIONS OF IRDA INSURANCE SECTOR REFORM PRESENT SCENARIO OF INSURANCE INDUSTRY CONCLUSION BIBLIOGRAPHY
  4. 4. THE INSURANCE ACT 1938 AND THE INSURANCE REGULATORY AUTHORITY ACT 2000INTRODUCTION "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 becompensated for the effects of their misfortune. It lets you protect yourselfagainst everyday risks to your health, home and financial situation.Insurance in India started without any regulation in the Nineteenth Century. Itwas a typical story of a colonial epoch: few British insurance companiesdominating the market serving mostly large urban centers. After theindependence, it took a theatrical turn. Insurance was nationalized. First, thelife insurance companies were nationalized in 1956, and then the generalinsurance business was nationalized in 1972. It was only in 1999 that theprivate insurance companies have been allowed back into the business ofinsurance with a maximum of 26% of foreign holding."The insurance industry is enormous and can be quite intimidating. Insuranceis being sold for almost anything and everything you can imagine. Determiningwhats right for you can be a very daunting task."Concepts of insurance have been extended beyond the coverage of tangibleasset. Now the risk of losses due to sudden changes in currency exchangerates, political disturbance, negligence and liability for the damages can also becovered.
  5. 5. But if a person thoughtfully invests in insurance for his property prior to anyunexpected contingency then he will be suitably compensated for his loss assoon as the extent of damage is ascertained.The entry of the State Bank of India with its proposal of bank assurance bringsa new dynamics in the game. The collective experience of the other countries inAsia has already deregulated their markets and has allowed foreign companiesto participate. If the experience of the other countries is any guide, thedominance of the Life Insurance Corporation and the General InsuranceCorporation is not going to disappear any time soon.The aim of all insurance is to compensate the owner against loss arising from avariety 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 whichincludes insurance against burglary or theft, fidelity guarantee, insurance foremployers liability, and insurance of motor vehicles, livestock and crops.  Definition:In law and economics, insurance is a form of risk management primarilyused to hedge against the risk of a contingent, uncertain loss. Insurance isdefined as the equitable transfer of the risk of a loss, from one entity toanother, in exchange for payment.Insurance is a hedging instrument used as a precautionary measureagainst future contingent losses.Insurance is concerned with protection of economic value of assets. Tangibleassets are human beings, house, furniture, motor cycle etc .Intangible assetsare liabilities.
  6. 6.  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 abereaved 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 salientfeatures are not as widely understood in our country as they ought to be. Thereis no statutory definition of life insurance, but it has been defined as a contractof insurance whereby the insured agrees to pay certain sums called premiums,at specified time, and in consideration thereof the insurer agreed to pay certainsums of money on certain condition sand in specified way upon happening of aparticular 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 ofthe saver. In life insurance, on death, the full sum assured is payable (withbonuses wherever applicable) whereas in other savings schemes, only theamount saved (with interest) is payable.The essential features of life insurance are a) it is a contract relating to humanlife, which b) provides for payment of lump-sum amount, and c) the amount ispaid after the expiry of certain period or on the death of the assured. The verypurpose and object of the assured in taking policies from life insurancecompanies is to safeguard the interest of his dependents viz., wife and childrenas the case may be, in the even of premature death of the assured as a result ofthe happening in any contingency. A life insurance policy is also generallyaccepted as security for even a commercial loan.
  7. 7.  NON-LIFE INSURANCE"Every asset has a value and the business of general insurance is related to theprotection 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. Assetswould have been created through the efforts of owner, which can be in the formof building, vehicles, machinery and other tangible properties. Since tangibleproperty has a physical shape and consistency, it is subject to many risksranging 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 isdesigned to cover the various risks under a single policy. It provides protectionfor property and interest of the insured and family.Health Insurance: It provides cover, which takes care of medical expensesfollowing hospitalization from sudden illness or accident.Personal Accident Insurance: This insurance policy provides compensationfor loss of life or injury (partial or permanent) caused by an accident. Thisincludes reimbursement of cost of treatment and the use of hospital facilitiesfor the treatment.Travel Insurance: The policy covers the insured against various eventualitieswhile traveling abroad. It covers the insured against personal accident, medicalexpenses and repatriation, loss of checked baggage, passport etc.Liability Insurance: This policy indemnifies the Directors or Officers or otherprofessionals against loss arising from claims made against them by reason ofany wrongful Act in their Official capacity.Motor Insurance: Motor Vehicles Act states that every motor vehicle plying onthe road has to be insured, with at least Liability only policy. There are twotypes of policy one covering the act of liability, while other covers insurers allliability and damage caused to ones vehicles.
  8. 8.  JOURNEY FROM AN INFANT TO ADOLESCENCEHistorical PerspectiveIn India, insurance has a deep-rooted history. It finds mention in the writingsof Manu ( Manusmrithi ), Yagnavalkya (Dharmasastra ) and Kautilya( Arthasastra ). The writings talk in terms of pooling of resources that could bere-distributed in times of calamities such as fire, floods, epidemics and famine.This was probably a pre-cursor to modern day insurance. Ancient Indianhistory has preserved the earliest traces of insurance in the form of marinetrade loans and carriers’ contracts. Insurance in India has evolved over timeheavily drawing from other countries, England in particular.The history of life insurance in India dates back to 1818 when it was conceivedas a means to provide for English Widows. Interestingly in those days a higherpremium was charged for Indian lives than the non-Indian lives as Indian liveswere considered more risky for coverage.The Bombay Mutual Life Insurance Society started its business in 1870. It wasthe first company to charge same premium for both Indian and non-Indianlives. The Oriental Assurance Company was established in 1880. The Generalinsurance business in India, on the other hand, can trace its roots to the Triton(Tital) Insurance Company Limited, the first general insurance companyestablished in the year 1850 in Calcutta by the British. Till the end ofnineteenth century insurance business was almost entirely in the hands ofoverseas companies.Insurance regulation formally began in India with the passing of the LifeInsurance Companies Act of 1912 and the Provident Fund Act of 1912. Severalfrauds during 20s and 30s desecrated insurance business in India. By 1938there were 176 insurance companies. The first comprehensive legislation wasintroduced with the Insurance Act of 1938 that provided strict State Controlover insurance business. The insurance business grew at a faster pace afterindependence. Indian companies strengthened their hold on this business but
  9. 9. 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 Governments 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). Some of the important milestones in the life insurance business in India are given in the table 1.Table 1: milestone’s in the life insurance business in India Year Milestones in the life insurance business in India 1912 The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business 1928 The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses 1938 Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.
  10. 10. The General insurance business in India, on the other hand, can trace its rootsto the Triton Insurance Company Ltd., the first general insurance companyestablished in the year 1850 in Calcutta by the British.Some of the important milestones in the general insurance businessin India are given in the table 2.Table 2: milestone’s in the general insurance business in India Year Milestones in the general insurance business in India1907 The Indian Mercantile Insurance Ltd. set up, the first company to transact all classes of general insurance business1957 General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices1968 The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.1972 The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1st January 1973. 107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.  Insurance Acts in India:The insurance sector went through a full circle of phases from beingunregulated to completely regulate and then currently being partly deregulated.The Insurance Sector in India is regulated by a number of acts. The insuranceActs in India are as follows:i. The Insurance Act, 1938ii. General Insurance Business (Nationalization) Act, 1972iii. Life Insurance Corporation Act, 1956iv. Marine Insurance Act, 1963
  11. 11. v. Insurance Regulatory and Development Authority (IRDA) Act, 1999 The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. Life insurance in India was completely nationalized on January 19, 1956, through the Life Insurance Corporation Act. All 245 insurance companies operating then in the country were merged into one entity, the Life Insurance Corporation of India. The General Insurance Business Act of 1972 was enacted to nationalize the about 100 general insurance companies then and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance and United India Insurance, which were headquartered in each of the four metropolitan cities. Until 1999, there were not any private insurance companies in India. The government then introduced the Insurance Regulatory and Development Authority Act in 1999, thereby de-regulating the insurance sector and allowing private companies. Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian insurance companies. In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects and Company Secretaries. A minimum capital of US$20 million is required by legislation to set up an insurance business. Market Scenario before IRDA Act 1999 Life insurance company 1. LIC of India General insurance companies
  12. 12. 1. National insurance company ltd2. New India assurance company ltd3.Oriental insurance company ltd4. United India insurance company ltdMarket Scenario after IRDA Act 1999Stage of LiberalizationPrivatizationGlobalization(Competition between public sector & private sector)Nationalisation Of Life InsuranceThe life insurance industry was nationalized under the Life InsuranceCorporation (LIC) Act of India. In some ways, the LIC has become veryflourishing. Regardless of being a monopoly, it has some 60-70 millionpolicyholders. 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 thecustomers of the LIC are from rural and semi-urban areas. This probablywould not have happened had the charter of the LIC not specifically set out thegoal of serving the rural areas. A high saving rate in India is one of theexogenous factors that have helped the LIC to grow rapidly in recent years.Despite the saving rate being high in India (compared with other countries witha similar level of development), Indians display high degree of risk aversion.Thus, nearly half of the investments are in physical assets (like property andgold). Around twenty three percent are in (low yielding but safe) bank deposits.
  13. 13. In addition, some 1.3 percent of the GDP are in life insurance related savingsvehicles. This figure has doubled between 1985 and 1995.A World viewpoint - Life Insurance in IndiaIn many countries, insurance has been a form of savings. In many developedcountries, a significant fraction of domestic saving is in the form of donationinsurance plans. This is not surprising. The prominence of some developingcountries is more surprising. For example, South Africa features at the numbertwo spot. India is nestled between Chile and Italy. This is even more surprisinggiven the levels of economic development in Chile and Italy. Thus, we canconclude that there is an insurance culture in India despite a low per capitaincome. This promises well for future growth. Specifically, when the incomelevel improves, insurance (especially life) is likely to grow rapidly.LAW COMMISSION OF INDIA ON REVISION OF THE INSURANCE ACT 1938 -190th Law Commission ReportThe Law Commission on 16th June 2003 released a Consultation Paper on theRevision of the Insurance Act, 1938. The previous exercise to amend theInsurance Act, 1938 was undertaken in 1999 at the time of enactment of theInsurance Regulatory Development Authority Act, 1999 (IRDA Act).The Commission undertook the present exercise in the context of the changedpolicy that has permitted private insurance companies both in the life and non-life sectors. A need has been felt to toughen the regulatory mechanism evenwhile streamlining the existing legislation with a view to removing portions thathave become superfluous as a consequence of the recent changes.Among the major areas of changes, the Consultation paper suggested thefollowing:a. merging of the provisions of the IRDA Act with the Insurance Act to avoidmultiplicity of legislations;
  14. 14. b. deletion of redundant and transitory provisions in the Insurance Act, 1938;c. Amendments reflect the changed policy of permitting private insurancecompanies and strengthening the regulatory mechanism;d. Providing for stringent norms regarding maintenance of solvency marginand investments by both public sector and private sector insurance companies;e. Providing for a full-fledged grievance redressal mechanism that includes:o The constitution of Grievance Redressal Authorities (GRAs) comprising onejudicial and two technical members to deal with complaints/claims ofpolicyholders against insurers (the GRAs are expected to replace the presentsystem of insurer appointed Ombudsman);o Appointment of adjudicating officers by the IRDA to determine and levypenalties on defaulting insurers, insurance intermediaries and insuranceagents;o Providing for an appeal against the decisions of the IRDA, GRAs andadjudicating officers to an Insurance Appellate Tribunal (IAT) comprising ajudge (sitting or retired) of the Supreme Court/Chief Justice of a High Court aspresiding officer and two other members having sufficient experience ininsurance matters;o Providing for a statutory appeal to the Supreme Court against the decisionsof the IAT.EXPECTATION FROM IRDA:The law of India has following expectations from IRDATo protect the interest of and secure fair treatment to policyholders.
  15. 15. To bring about speedy and orderly growth of the insurance industry (includingannuity and superannuation payments), for the benefit of the common man,and to provide long term funds for accelerating growth of the economy.To set, promote, monitor and enforce high standards of integrity, financialsoundness, fair dealing and competence of those it regulates.To ensure that insurance customers receive precise, clear and correctinformation about products and services and make them aware of theirresponsibilities and duties in this regard.To ensure speedy settlement of genuine claims, to prevent insurance fraudsand other malpractices and put in place effective grievance redressalmachinery.To promote fairness, transparency and orderly conduct in financial marketsdealing with insurance and build a reliable management information system toenforce high standards of financial soundness amongst market players.To take action where such standards are inadequate or ineffectively enforced.To bring about optimum amount of self-regulation in day to day working of theindustry consistent with the requirements of prudential regulation.Duties, Powers and Functions of IRDASection 14 of IRDA Act, 1999 lays down the duties, powers and functions ofIRDASubject to the provisions of this Act and any other law for the time being inforce, the Authority shall have the duty to regulate, promote and ensure orderlygrowth of the insurance business and re-insurance business.
  16. 16. Without prejudice to the generality of the provisions contained in sub-section(1), the powers and functions of the Authority shall include,  issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration;  protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance;  specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents;  specifying the code of conduct for surveyors and loss assessors;  promoting efficiency in the conduct of insurance business;  promoting and regulating professional organizations connected with the insurance and re-insurance business;  levying fees and other charges for carrying out the purposes of the Act;  calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organizations connected with the insurance business;  control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938);  specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries;  regulating investment of funds by insurance companies;  regulating maintenance of margin of solvency;  adjudication of disputes between insurers and intermediaries or insurance intermediaries;
  17. 17.  supervising the functioning of the Tariff Advisory Committee;  specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations.  specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and  exercising such other powers as may be prescribed.Advisory committeeIRDA consists of a Chairman and some permanent as well as part timemembers. The regulations, however, are enacted under the guidance of astatutory advisory committee. The advisory committee consists of followingindividuals and ex-officio authorities:Chiarman: Hari Narayana is the current Chairman of IRDA.Full-time Members: Currently, they are Mr K K Srinivasan (Nonlife Member),Sri G Prabhakara (Life Member), Dr R Kannan(Member, Actuary) and Sri R.K.Nair (Member, F & I). There is provision for a panel of other members and parttime members. IRDA formed a high powered Insurance Law ReformsCommittee known as KPN Committee with important insurance advisors likeMr N Govardhan and Dr K C Mishra as its members. There were also a fewnon-advisory committee members like Mr Liaquat Khan and Mr TViswanathan etc.Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in along learning mode. Due to over delegations, Individual incumbents decide thepace and extent of utilization of prudential and statutory bodies. Research islimited to opinion seeking through legacy channels. Market waits for revision ofinsurance act and establishment meaningfully functioning regulatory organsdevoid of excess delegation and subjective localization of development agencies.
  18. 18. IRDA Journal is available as soft copy in its website. Unlike other Indianadministrative Regulatory Agencies IRDA is perceived as a silent regulator withactivities confined to its local existence.Chairman selection processGovernment of India has circulated to broad base IRDA chairman selectionprocess. It is felt in the market that placing of retired civil servants as IRDAChairman has served the purpose of administrative fiefdom of the regulator.Mostly, the regulator has become passive to market realities and most of theoriginal public policy intentions have been systematically replaced by personalpreferences. There seems to be no oversight of public policy erosions. Takingadvantage of the completion of term of current incumbent, there seem to be anattempt to correct the future course but people do not perceive any outcome toresult as the market does not seem to throw up candidates of the statureof Howard Davies for Indian market. But a right leadership is the solution tothe requirement of this booming market.INSURANCE SECTOR REFORM:Committee Reports: One Known, One Anonymous!Although Indian markets were privatized and opened up to foreign companiesin a number of sectors in 1991, insurance remained out of bounds on bothcounts. The government wanted to proceed with caution. With pressure fromthe 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 Governorof the Reserve Bank of India).Malhotra Committee
  19. 19. Liberalization of the Indian insurance market was suggested in a reportreleased in 1994 by the Malhotra Committee, indicating that the market shouldbe opened to private-sector competition, and eventually, foreign private-sectorcompetition. It also investigated the level of satisfaction of the customers of theLIC. Inquisitively, the level of customer satisfaction seemed to be high.In 1993, Malhotra Committee - headed by former Finance Secretary and RBIGovernor Mr. R. N. Malhotra - was formed to evaluate the Indian insuranceindustry and recommend its future course. The Malhotra committee was set upwith the aim of complementing the reforms initiated in the financial sector. Thereforms were aimed at creating a more efficient and competitive financialsystem suitable for the needs of the economy keeping in mind the structuralchanges presently happening and recognizing that insurance is an importantpart of the overall financial system where it was necessary to address the needfor similar reforms.In 1994, the committee submitted the report and some of the keyrecommendations included:o StructureGovernment bet in the insurance Companies to be brought down to 50%.Government should take over the holdings of GIC and its subsidiaries so thatthese subsidiaries can act as independent corporations. All the insurancecompanies should be given greater freedom to operate.CompetitionPrivate Companies with a minimum paid up capital of Rs.1 billion should beallowed to enter the sector. No Company should deal in both Life and GeneralInsurance through a single entity. Foreign companies may be allowed to enterthe industry in collaboration with the domestic companies. Postal LifeInsurance should be allowed to operate in the rural market. Only one StateLevel Life Insurance Company should be allowed to operate in each state.
  20. 20. Regulatory BodyThe Insurance Act should be changed. An Insurance Regulatory body shouldbe set up. Controller of Insurance - a part of the Finance Ministry- should bemade Independent.InvestmentsCompulsory Investments of LIC Life Fund in government securities to bereduced from 75% to 50%. GIC and its subsidiaries are not to hold more than5% in any company (there current holdings to be brought down to this levelover a period of time).o Customer ServiceLIC should pay interest on delays in payments beyond 30 days. Insurancecompanies must be encouraged to set up unit linked pension plans.Computerization of operations and updating of technology to be carried out inthe insurance industry. The committee accentuated that in order to improvethe customer services and increase the coverage of insurance policies, industryshould be opened up to competition. But at the same time, the committee feltthe need to exercise caution as any failure on the part of new competitors couldruin the public confidence in the industry. Hence, it was decided to allowcompetition in a limited way by stipulating the minimum capital requirement ofRs.100 crores.The committee felt the need to provide greater autonomy to insurancecompanies in order to improve their performance and enable them to act asindependent companies with economic motives. For this purpose, it had
  21. 21. proposed setting up an independent regulatory body - The InsuranceRegulatory and Development Authority.Reforms in the Insurance sector were initiated with the passage of the IRDABill in Parliament in December 1999. The IRDA since its incorporation as astatutory body in April 2000 has meticulously stuck to its schedule of framingregulations and registering the private sector insurance companies.Since being set up as an independent statutory body the IRDA has put in aframework of globally compatible regulations. The other decision taken at thesame time to provide the supporting systems to the insurance sector and inparticular the life insurance companies was the launch of the IRDA onlineservice for issue and renewal of licenses to agents. The approval of institutionsfor imparting training to agents has also ensured that the insurance companieswould have a trained workforce of insurance agents in place to sell theirproducts.The Government of India liberalized the insurance sector in March 2000 withthe passage of the Insurance Regulatory and Development Authority (IRDA)Bill, lifting all entry restrictions for private players and allowing foreign playersto enter the market with some limits on direct foreign ownership. Under thecurrent guidelines, there is a 26 percent equity lid for foreign partners in aninsurance 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 ofinsurance in India and this may also include restructuring and revitalizing ofthe public sector companies. In the private sector 12 life insurance and 8general insurance companies have been registered. A host of private Insurancecompanies operating in both life and non-life segments have started sellingtheir insurance policies since 2001.
  22. 22. Mukherjee Committee :Immediately after the publication of the MalhotraCommittee Report, a new committee, Mukherjee Committee was set up to makeconcrete plans for the requirements of the newly formed insurance companies.Recommendations of the Mukherjee Committee were never disclosed to thepublic. But, from the information that filtered out it became clear that thecommittee recommended the inclusion of certain ratios in insurance companybalance sheets to ensure transparency in accounting. But the Finance Ministerobjected to it and it was argued by him, probably on the advice of some of thepotential competitors, that it could affect the prospects of a developinginsurance company.PRESENT SCENARIO OF INSURANCE INDUSTRYIndia with about 200 million middle class household shows a huge untappedpotential for players in the insurance industry. Saturation of markets in manydeveloped economies has made the Indian market even more attractive forglobal insurance majors. The insurance sector in India has come to a positionof very high potential and competitiveness in the market. Indians, have alwaysseen life insurance as a tax saving device, are now suddenly turning to theprivate sector that are providing them new products and variety for theirchoice.Consumers remain the most important centre of the insurance sector. After theentry of the foreign players the industry is seeing a lot of competition and thusimprovement of the customer service in the industry. Computerization ofoperations and updating of technology has become imperative in the currentscenario. Foreign players are bringing in international best practices in servicethrough use of latest technologies
  23. 23. The insurance agents still remain the main source through which insuranceproducts are sold. The concept is very well established in the countrylike India but still the increasing use of other sources is imperative. At presentthe distribution channels that are available in the market are listed below.  Direct selling  Corporate agents  Group selling  Brokers and cooperative societies  Ban assuranceCustomers have tremendous choice from a large variety of products from pureterm (risk) insurance to unit-linked investment products. Customers areoffered unbundled products with a variety of benefits as riders from which theycan choose. More customers are buying products and services based on theirtrue needs and not just traditional money back policies, which is notconsidered very appropriate for long-term protection and savings. There is lotsof saving and investment plans in the market. However, there are still some keynew products yet to be introduced - e.g. health products.The rural consumer is now exhibiting an increasing propensity for insuranceproducts. A research conducted exhibited that the rural consumers are willingto dole out anything between Rs 3,500 and Rs 2,900 as premium each year. Inthe insurance the awareness level for life insurance is the highest inrural India, but the consumers are also aware about motor, accidents andcattle insurance.In a study conducted by MART the results showed that nearly one third saidthat they had purchased some kind of insurance with the maximumpenetration skewed in favor of life insurance. The study also pointed out theprivate companies have huge task to play in creating awareness and credibilityamong the rural populace. The perceived benefits of buying a life policy range
  24. 24. from security of income bulk return in future, daughters marriage, childrenseducation and good return on savings, in that order, the study adds.CONCLUSIONIt seems cynical that the LIC and the GIC will wither and die within the nextdecade or two. The IRDA has taken "at a snails pace" approach. It has beenvery cautious in granting licenses. It has set up fairly strict standards for allaspects of the insurance business (with the probable exception of thedisclosure requirements). The regulators always walk a fine line. Too manyregulations kill the motivation of the newcomers; too relaxed regulations mayinduce failure and fraud that led to nationalization in the first place. India isnot unique among the developing countries where the insurance business hasbeen opened up to foreign competitors.The insurance business is at a critical stage in India. Over the next couple ofdecades we are likely to witness high growth in the insurance sector for tworeasons 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.The IRDA opened up the market in August 2000 with the invitation forapplication for registrations. Foreign companies were allowed ownership of upto 26%. The Authority has the power to frame regulations under Section 114Aof the Insurance Act, 1938 and has from 2000 onwards framed variousregulations ranging from registration of companies for carrying on insurancebusiness to protection of policyholders’ interests.In December, 2000, the subsidiaries of the General Insurance Corporationof India were restructured as independent companies and at the same time GICwas converted into a national re-insurer. Parliament passed a bill de-linkingthe four subsidiaries from GIC in July, 2002.
  25. 25. Today there are 24 general insurance companies including the ECGC andAgriculture Insurance Corporation of India and 23 life insurance companiesoperating in the country.The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to thecountry’s GDP. A well-developed and evolved insurance sector is a boon foreconomic development as it provides long- term funds for infrastructuredevelopment at the same time strengthening the risk taking ability of thecountry.****************************************************************************************  BIBLIOGRRAPHY:  Berman, Peter. "Rethinking Health Care Systems: Private Health Care Provision in India." Harvard School of Public Health Working Paper, November 1996.  Business Today. "The Monitory Group Study on Insurance I and II." March 22 and April 7, 2000.  Dasgupta, Samik. "RSA, Iffco-Tokio yet to appoint actuaries," Economic Times, January 23, 2001.  Kumari, Vaswati, "India Insurers Seek Perfect Partners." National Underwriters, March 5, 2001, 38-39.  Mitra, Sumit and Nayak, Shilpa. "Coming to Life." India Today, May 7, 2001.  Patel, Freny. "Centre wants GIC to merge unviable outfits before recast." Business Standard, April 13, 2001.  Roy, Abhijit. "Pension fund business in India." The Hindu, July 16, 1997, p. 25.  Roy, Samit. "Insurance Sector: India." Industry Sector Analysis, National Trade and Development Board, US Department of State, Washington, DC, December 1999.  Sigma. "World Insurance in 1999." No. 9/2000. Published by SwissRe. Available at www.swissre.com.  Sinha, Tapen. Pension Reform in Latin America and Its Implications for International Policymakers. Boston, USA, Huebner Series Volume No. 23, Kluwer Academic Publishers, 2000.
  26. 26.  Sinha, Tapen and Sinha, Dipendra. "A Comparison of Development Prospects in India and China." Asian Economies, Vol. 27(2), June 1997, 5- 31. U.S. Department of State FY 2001 Country Commercial Guide: India. Commercial Guide for India was prepared by U.S. Embassy New Delhi and released by the Bureau of Economic and Business in July 2000 for Fiscal Year 2001

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