INDIAN INSURANCE SECTOR

INTRODUCTION
Marine insurance was practiced in India some 3000 years ago.
Travelling by sea and land was exposed to risk. The practice of insurance was quite common during the rule of

AKBAR to AURANZEB but the nature and coverage is not well known. It was the BRITISH insurers who introduced GENERAL INSURANCE in INDIA in its modern form. The britishers opened general insurance in India around the year 1700. The first company known as the SUN INSURANCE OFFICE LTD set up in Calcutta. This was followed by several insurance companies on different parts of the world in the field of marine insurance. In 1972 the GENERAL insurance business was nationalized by the GOI by forming GIC.

INSURANCE ACT 1938

The insurance act was passed in 1938 and was brought into

force from 1st July 1939. It was a well balanced and was the first comprehensive piece of insurance legislation in this country governing both life and non life of insurance. This act provided to prevent mushrooming of companies to enforce working on sound principles, to prevent misappropriation of funds and to protect the assets. The act was wide and more comprehensive. There was strict control over the insurance business. Since 1938 there were six amendments up to 1945. In 1945 it was deemed necessary to protect the interest of the insured companies. Therefore a committee was appointed under the chairmanship of Shri. Kavanji Jahangir.

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On the basis of the committees recommendations an amendment bill

was made on 18th April 1950 by the parliament. As per the amendment act the total right of control was with the central government . It controls the insurance business by appointing controller of insurance . The insurance companies violating these rules were penalized. This Act applies to all types of insurance business like fire, marine etc. done by companies incorporated in India or elsewhere. This Act prohibits persons to carry insurance business until he is: 1. A public company 2. A society registered under the co-operative Act 1912 or under any other law of any state relating to co-operative societies.

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A body corporate incorporated under the law of any country

outside India being the nature of private company. To prevent the growth of small insurance companies or speculative concern the Act provided for registration of all insures and a substantial deposit with the reserve bank. Registration of insurance business is a must as per the law. This law also emphasize in issues like: 1. Restriction of commission and prohibition on rebating 2. Limitation of expenditure on commission. 3. Licensing of insurance agents 4. Investments 5. Right to investigate 6. Prohibition of loan

GROWTH OF INSURANCE BUSINESS IN INDIA

The five years of its existence were devoted to integration and

consolidation work. Of these the first few years were devoted to the framing of rules and regulations and setting up of other administrative procedure. In addition to the structural reorganization and decentralization human resource development was also given importance. There were operations abroad i.e LIC went abroad to the countries like MAURITIUS & FIJJI. Insurance density is very low. In insurance the productivity could be measured in terms of collection of premium per developmental officer, issue of documents per employee, claim settlement per employee.

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IT in the industry has not been to the desired extent. There is a

need to create technology infrastructure such as computerization, electronic fund transfer, internet, ATM, etc. In 1993 the govt decided to make changes in the financial sector. The aim was to bring the Indian financial system to international standards in terms of financial viability, competence and technology. The local demand for reforms and pressure from international community made the GOI to appoint a high powered committee in 1993 under the chairmanship of R.N MALHOTRA former governor of RBI

MAJOR RECOMMENDATIONS OF MALHOTRA COMMITTEE

In 1994, the committee submitted the report and some of the key recommendations were: i) STRUCTURE : Government stake in the insurance Companies to be brought down to 50% Government should take over the holding 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 ii) COMPETITION: Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry. 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.

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iii) 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 then) should be made independent. iv) INVESTMENTS: Mandatory 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 holdings to be brought down to this level over a period of time if was more) v) CUSTOMER SERVICE: LIC should pay interest on delays in payments beyond 30 day. 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.

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The advantages of liberalization are expected to be in terms of: Development of nations infrastructure Market development through new intermediaries and distribution

channels Enhanced level of customer satisfaction Competitive pricing as against tariff rates Professionalism & technology driven processes The committee emphasized that in order to improve the customer services and increase the coverage of the insurance 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 players could ruin the public confidence in the industry. Hence, it was decided to allow competition by stipulating the minimum capital requirement of Rs.100 crores.

Opening up of Indian insurance sector for competition

Three major reasons for inviting competition in the sector where

Government had monopoly, could be (1) low insurance penetration, (2) lack of customer focus and low service levels and (3) expectation of additional funding for infrastructure. New companies came into Indias insurance horizon from 2000 onward. GIC was separated from 4 state owned general insurance companies in 2001 and was made exclusively are insurance company

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

As per the recommendations of Malhotra Committee the government

constituted an interim Insurance Regulatory Authority on 23rd Jan 1996. IRA bill was accordingly introduced in Parliament in 1996. The bill was retitled as INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY and was introduced and passed in parliament in 1999. As per the act it is an act to provide for the establishment of an authority to protect the interest of holders of insurance policies to regulate, promote and ensure orderly growth of insurance industry and for matters connected therewith and incidental thereto. Current Chairman- C S RAO

DUTIES, POWERS AND FUNCTIONS OF IRDA SECTION 14

Issue to the applicant, certificate of registration, to review, modify,

withdraw suspend or cancel such registration. To protect the interest of the policyholders in all matters relating to nomination, surrender of insurable interest, settlement and other terms and conditions of insurance. Specifying requisite qualification and practical training for insurance intermediary and agents. Specifying code of conduct for surveyors and loss assessors to promote efficiency in the conduct of insurance business. Promoting and regulating professional regulation connected with the and reinsurance business. To specify the form and manner of accounts to be maintained.. Adjudication of disputes between insurers and intermediaries.

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To give the guidelines for the rural or social sector insurance to

be undertaken by insurance companies. To constitute insurance advisory committee.

Development and growth of insurance industry in India

1. 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).
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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.
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2. NATIONALIZATION OF INSURANCE BUSINESS IN INDIA

The Life Insurance Corporation (LIC) was formed in Sept

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ember 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. BGIMS 3/14/2012

Continued.
The general insurance business was also nationalized with effect

from January 1, 1973, through the introduction of the General Insurance Business (Nationalization) Act, 1972 (GIC Act). 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 (GIC) 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 (Companies Act) 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.
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These companies were amalgamated and grouped into

four subsidiary companies of GIC viz. the National Insurance Company Ltd. (National Co.), the New India Assurance Company Ltd. (New India Co.), the Oriental Insurance Company Ltd. (Oriental Co.), and the United India Assurance Company Ltd. (United Co.). GIC undertakes mainly re-insurance business apart from aviation insurance. The bulk of the general insurance business of fire, marine, motor and miscellaneous insurance business is under taken by the four subsidiaries.
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3. 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 BGIMS insurance funds, being long tenure funds. 21

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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 permit ting 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 Regulator y 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 BGIMS 3/14/2012 22

ULIP
Unit Linked Insurance Polices (ULIPS) ULIP is a life insurance policy which provides a

combination of risk cover and investment. The dynamics of the capital market have a direct bearing on the performance of the ULIPs. REMEMBER THAT IN A UNIT LINKED POLICY, THE INVESTMENT RISK IS GENERALLY BORNE BY THE INVESTOR. An ULIP - Unit Linked Insurance Plan - is a financial product that offers you life insurance as well as an investment like a mutual fund. Part of the premium you pay goes towards the sum assured (amount you get in a life insurance policy) and the balance will be invested in whichever investments you desire - equity, fixed-return or a mixture of both.

Latest developments by June 2010

The US$ 41-billion Indian life insurance industry is

considered the fifth largest life insurance market, and growing at a rapid pace of 32-34 per cent annually, according to the Life Insurance Council. Life Insurance Corporation of India (LIC) registered an 83 per cent increase in new business income in March 2010, while private players posted a 47 per cent growth in new business premium. Moreover, according to IRDA, insurers sold 10.55 million new policies in 2009-10 with LIC selling 8.52 million and private companies 2.03 million policies. At the end of March 2010, LIC held 65 per cent market share in terms of new business income collection with the private sector contributing the

 According to IRDA, total premium collected in 2009-10 was US$

24.64 billion, an increase of 25.46 per cent over US$ 19.64 billion collected in 2008-09. A growth of 18 per cent is expected in total premium income and is likely to cross the US$ 64.93 billion mark, according to B Mathur, Secretary General, Life Insurance Council. According to data released by IRDA, the general insurance industry recorded 13.42 per cent growth in gross premium collected during 2009-10. The industry collected gross premium of US$ 7.84 billion in 2009-10 compared with US$ 6.91 billion in 2008-09. The public sector players posted 13.85 per cent growth in gross premium in 2009-10. At the same time, private players recorded a 12.82 per cent increase in gross premium till March 2010. The four state-run insurers fared better than their private counterparts, with New India Insurance collecting the maximum premium of US$ 294.5 million in April and May 2010, compared to US$ 253.15 million in the previous year, growing by 16.34 per cent

 Bancasssurance Private insurers have adopted bancassurance in a much bigger way

than the state-owned Life Insurance Corporation (LIC) in recent years. Bancassurance is distribution of insurance products through a bank's network. In 2008-09, private insurers forked out US$ 44.64 million as commission for bancassurance, while the payout by LIC for this distribution model was only US$ 26,075, as per official data. According to a guidance note released by IRDA, the regulator has increased the lock-in period for all unit-linked insurance plans (ULIPS) to five years from the current three years, thereby making them longterm financial instruments, which basically provide risk protection. The commission and expenses have also been reduced by evenly distributing them throughout the lock-in period. Moreover, IRDA said that insurers will provide a mortality cover or a health cover to all ULIPS, other than pension and annuity products, thereby increasing the risk cover component on them. IRDA has ordered life insurers to offer customers a guaranteed return of 4.5 per cent per annum on pension and annuity plans.