2/19/2015

BankersAdda:InsurancesectorinIndia

InsurancesectorinIndia
Insurance is an agreement in which a person makes regular payments to a
companyandthecompanypromisestopaymoneyifthepersonisinjuredor
dies, or to pay money equal to the value of something (such as a house or
car)ifitisdamaged,lost,orstolenorarisktransfermechanismthatensures
full or partial financial compensation for the loss or damage caused by
event(s)beyondthecontroloftheinsuredparty.Underaninsurancecontract,
a party (the insurer) indemnifies the other party (the insured) against a
specified amount of loss, occurring from specified eventualities within a
specifiedperiod,providedafeecalledpremiumispaid.In general insurance,
compensation is normally proportionate to the loss incurred, whereas in life
insuranceusuallyafixedsumispaid.
Sometypesofinsurance(suchasproductliabilityinsurance)areanessential
component of risk management, and are mandatory in several countries.
Insurance, however, provides protection only against tangible losses. It
cannotensurecontinuityofbusiness,marketshare,orcustomerconfidence,
andcannotprovideknowledge,skills,orresourcestoresumethe operations
afteradisaster.

Briefhistoryofinsurancesector
The insurance sector in India has completed all the facets of competition
frombeinganopencompetitivemarkettobeingnationalizedandthengetting
back to the form of a liberalized market once again. The history of the
insurance sector in India reveals that it has witnessed complete dynamism
for the past two centuries approximately.With the establishment of the
Oriental Life Insurance Company in Kolkata, the business of Indian life
insurancestartedintheyear1818.
ImportantmilestonesintheIndianlifeinsurancebusiness
1912: The Indian Life Assurance Companies Act came into force for
regulatingthelifeinsurancebusiness.
1928: The Indian Insurance Companies Act was enacted for enabling the
government to collect statistical information on both life and nonlife
insurancebusinesses.
1938: The earlier legislation consolidated the Insurance Act with the aim of
safeguardingtheinterestsoftheinsuringpublic.
1956:245Indianandforeigninsurersandprovidentsocietiesweretakenover
by the central government and they got nationalized. LIC was formed by an
Act of Parliament, viz. LIC Act, 1956. It started off with a capital of Rs. 5
croreandthattoofromtheGovernmentofIndia.
The history of general insurance business in India can be traced back to
Triton Insurance Company Ltd. (the first general insurance company) which
wasformedintheyear1850inKolkatabytheBritish.
ImportantmilestonesintheIndiangeneralinsurancebusiness
1907: The Indian Mercantile Insurance Ltd. was set up which was the first
companyofitstypetotransactallgeneralinsurancebusiness.
1957: General Insurance Council, an arm of the Insurance Association of
India, framed a code of conduct for guaranteeing fair conduct and sound
businesspatterns.
1968:TheInsuranceActimprovedforregulatinginvestmentsandsetminimal
data:text/htmlcharset=utf8,%3Ch3%20class%3D%22posttitle%20entrytitle%22%20style%3D%22margin%3A%200.75em%200px%200px%3B%20posi

1/5

2/19/2015

BankersAdda:InsurancesectorinIndia

solvencylevelsandtheTariffAdvisoryCommitteewassetup.
1972: The General Insurance Business (Nationalization) Act, 1972
nationalized the general insurance business in India. It was with effect from
1stJanuary1973.
107 insurers integrated 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.GICwasincorporatedasacompany.
Insuranceindustry,ason1.4.2000,comprisedmainlytwoplayers:thestate
insurers:
LifeInsurers:
(1)LifeInsuranceCorporationofIndia(LIC)GeneralInsurers:
(2)GeneralInsuranceCorporationofIndia(GIC)(witheffectfromDec'2000,
aNationalReinsurer)GIChadfoursubsidiarycompanies,namely
i)TheOrientalInsuranceCompanyLimited
ii)TheNewIndiaAssuranceCompanyLimited
iii)NationalInsuranceCompanyLimited
iv)UnitedIndiaInsuranceCompanyLimited.
(WitheffectfromDec'2000,thesesubsidiarieshavebeendelinkedfromthe
parentcompanyandmadeasindependentinsurancecompanies)
The Insurance sector in India is governed by Insurance Act, 1938, the Life
Insurance Corporation Act, 1956 and General Insurance Business
(Nationalization)Act,1972,InsuranceRegulatoryandDevelopmentAuthority
of India (IRDAI) Act, 1999 and other related Acts. With such a large
population and the untapped market area of this population, insurance
happenstobeaverybigopportunityinIndia.Todayitstandsasabusiness
growing at the rate of 1520 per cent annually. Together with banking
services, it adds about 7 per cent to the country's GDP .In spite of all this
growththestatisticsofthepenetrationoftheinsuranceinthecountryisvery
poor. Nearly 80% of Indian populations are without Life insurance cover and
the Health insurance. This is an indicator that growth potential for the
insurancesectorisimmenseinIndia.Itwasduetothisimmensegrowththat
the regulations were introduced in the insurance sector and in continuation
"MalhotraCommittee"wasconstitutedbythegovernmentin1993toexamine
the various aspects of the industry. The key element of the reform process
was Participation of overseas insurance companies with 26% capital.
Creating a more efficient and competitive financial system suitable for the
requirements of the economy was the main idea behind this reform. Since
then the insurance industry has gone through many sea changes .The
competitionthatLICstartedfacingfromthesecompanieswerethreateningto
the existence of LIC. Since the liberalization of the industry, the insurance
industry has never looked back and today stand as the one of the most
competitive and exploring industry in India. The entry of the private players
and the increased use of the new distribution are in the limelight today. The
useofnewdistributiontechniquesandtheITtools has increased the scope
oftheindustryinthelongerrun.

Insurancesectorreforms
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI
Governor R.N. Malhotra, was formed to evaluate the Indian insurance
data:text/htmlcharset=utf8,%3Ch3%20class%3D%22posttitle%20entrytitle%22%20style%3D%22margin%3A%200.75em%200px%200px%3B%20posi

2/5

2/19/2015

BankersAdda:InsurancesectorinIndia

industryandrecommenditsfuturedirection.
TheMalhotracommitteewassetupwiththeobjectiveofcomplementingthe
reformsinitiatedinthefinancialsector.Thereformswereaimedat"creating
a more efficient and competitive financial system suitable for the
requirements of the economy keeping in mind the structural changes
currentlyunderwayandrecognizingthatinsuranceisanimportantpartofthe
overall financial system where it was necessary to address the need for
similar reforms.". In 1994, the committee submitted the report and some of
thekeyrecommendationsincluded:
1)Structure
Government stake in the insurance Companies to be brought
downto50%.
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.
2)Competition
Private Companies with a minimum paid up capital of Rs.1bn
shouldbeallowedtoentertheindustry.
No Company should deal in both Life and General Insurance
through a single entity.Foreign companies may be allowed to
entertheindustryincollaborationwiththedomesticcompanies.
Postal Life Insurance should be allowed to operate in the rural
market.Only One State Level Life Insurance Company should be
allowedtooperateineachstate.
3)RegulatoryBody
TheInsuranceActshouldbechanged.
AnInsuranceRegulatorybodyshouldbesetup.
Controller of Insurance (Currently a part from the Finance
Ministry)shouldbemadeindependent.
4)Investments
MandatoryInvestmentsofLICLifeFundingovernmentsecurities
tobereducedfrom75%to50%.
GIC and its subsidiaries are not to hold more than 5% in any
company(Therecurrentholdingstobebroughtdowntothislevel
overaperiodoftime).
5)CustomerService
LICshouldpayinterestondelaysinpaymentsbeyond30days.
Insurance companies must be encouraged to set up unit linked
pensionplans.
Computerization of operations and updating of technology to be
carriedoutintheinsuranceindustry.
data:text/htmlcharset=utf8,%3Ch3%20class%3D%22posttitle%20entrytitle%22%20style%3D%22margin%3A%200.75em%200px%200px%3B%20posi

3/5

2/19/2015

BankersAdda:InsurancesectorinIndia

The committee emphasized that in order to improve the customer services

andincreasethecoverageoftheinsuranceindustryshouldbeopenedupto
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 in a
limitedwaybystipulatingtheminimumcapitalrequirementofRs.100crores.
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
proposedsettingupanindependentregulatorybody.

IndependentRegulatoryBodyIRDAI
Insurance sector has been opened up for competition from Indian private
insurance companies with the enactment of Insurance Regulatory and
DevelopmentAuthorityAct,1999(IRDAAct).AspertheprovisionsofIRDA
Act, 1999, Insurance Regulatory and Development Authority (IRDA) was
establishedon19thApril2000toprotecttheinterests of holder of insurance
policy and to regulate, promote and ensure orderly growth of the insurance
industry.
IRDA Act 1999 paved the way for the entry of private players into the
insurance market which was hitherto the exclusive privilege of public sector
insurance companies/ corporations. Under the new dispensation Indian
insurancecompaniesinprivatesectorwerepermittedtooperateinIndiawith
the following conditions: Company is formed and registered under the
CompaniesAct,1956
The aggregate holdings of equity shares by a foreign company, either by
itself or through its subsidiary companies or its nominees, do not exceed
26%, paid up equity capital of such Indian insurance company. The
company's sole purpose is to carry on life insurance business or general
insurance business or reinsurance business.The minimum paid up equity
capital for life or general insurance business is Rs.100 crores.The minimum
paid up equity capital for carrying on reinsurance business has been
prescribed as Rs.200 crores. The Authority has notified 27 Regulations on
various issues which include Registration of Insurers, Regulation on
insurance agents, Solvency Margin, Reinsurance, Obligation of Insurers to
RuralandSocialsector,InvestmentandAccountingProcedure,Protectionof
policy holders' interest etc. Applications were invited by the Authority with
effect from 15th August, 2000 for issue of the Certificate of Registration to
both life and nonlife insurers. The Authority has its Head Quarter
atHyderabad.
IndiaInsurancePoliciesataGlance
Indianinsurancecompaniesofferacomprehensiverangeofinsuranceplans,
arangethatisgrowingastheeconomymaturesandthewealthofthemiddle
classes increases. The most common types include: term life policies,
endowment policies, joint life policies, whole life policies, loan cover term
assurance policies, unitlinked insurance plans, group insurance policies,
pension plans, and annuities. General insurance plans are also available to
cover motor insurance, home insurance, travel insurance and health
insurance. Due to the growing demand for insurance, more and more
insurance companies are now emerging in the Indian insurance sector. With
theopeningupoftheeconomy,severalinternationalleadersintheinsurance
data:text/htmlcharset=utf8,%3Ch3%20class%3D%22posttitle%20entrytitle%22%20style%3D%22margin%3A%200.75em%200px%200px%3B%20posi

4/5

2/19/2015

BankersAdda:InsurancesectorinIndia

sectoraretryingtoventureintotheIndianinsuranceindustry.

data:text/htmlcharset=utf8,%3Ch3%20class%3D%22posttitle%20entrytitle%22%20style%3D%22margin%3A%200.75em%200px%200px%3B%20posi

5/5