Insurance sector in India has tremendous potential for
growth. Here is a brief profile of insurance industry in India.
Insurance Sector in India
Insurance sector in India is one of the booming sectors of the economy
and is growing at the rate of 15-20 per cent annum. Together with
banking services, it contributes to about 7 per cent to the country's
GDP. Insurance is a federal subject in India and Insurance industry in
India is governed by Insurance Act, 1938, the Life Insurance Corporation
Act, 1956 and General Insurance Business (Nationalisation) Act, 1972,
Insurance Regulatory and Development Authority (IRDA) Act, 1999 and
other related Acts.
The origin of life insurance in India can be traced back to 1818 with
the establishment of the Oriental Life Insurance Company in Calcutta. It
was conceived as a means to provide for English Widows. In those days a
higher premium was charged for Indian lives than the non-Indian lives as
Indian lives were considered riskier for coverage. The Bombay Mutual
Life Insurance Society that started its business in 1870 was the first
company to charge same premium for both Indian and non-Indian lives. In
1912, insurance regulation formally began with the passing of Life
Insurance Companies Act and the Provident Fund Act.
By 1938, there were 176 insurance companies in India. But a number of
frauds during 1920s and 1930s tainted the image of insurance industry in
India. In 1938, the first comprehensive legislation regarding insurance
was introduced with the passing of Insurance Act of 1938 that provided
strict State Control over insurance business.
Insurance sector in India grew at a faster pace after independence. In
1956, Government of India brought together 245 Indian and foreign
insurers and provident societies under one nationalised monopoly
corporation and formed Life Insurance Corporation (LIC) by an Act of
Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5
crore.
The (non-life) insurance business/general insurance remained with the
private sector till 1972. There were 107 private companies involved in
the business of general operations and their operations were restricted
to organised trade and industry in large cities. The General Insurance
Business (Nationalisation) Act, 1972 nationalised the general insurance
business in India with effect from January 1, 1973. The 107 private
insurance companies 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).
In 1993, the first step towards insurance sector reforms was initiated
with the formation of Malhotra Committee, headed by former Finance
Secretary and RBI Governor R.N. Malhotra. The committee was formed to
evaluate the Indian insurance industry and recommend its future
direction with the objective of complementing the reforms initiated in
the financial sector.
Key Recommendations of Malhotra Committee
Structure
- Government stake 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.1billion
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.
- 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 should be made independent.
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.
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.
- Computerisation of operations and updating of technology to be
carried out in the insurance industry.
Malhotra Committee also proposed
setting up an independent regulatory body - The Insurance Regulatory and
Development Authority (IRDA) to provide greater autonomy to insurance
companies in order to improve their performance and enable them to act
as independent companies with economic motives.
Insurance sector in India was liberalized 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. There is a 26 percent equity cap for foreign partners in an
insurance company. There is a proposal to increase this limit to 49
percent. The opening up of the insurance sector has led to rapid growth
of the sector. Presently, there are 16 life insurance companies and 15
non-life insurance companies in the market. The potential for growth of
insurance industry in India is immense as nearly 80 per cent of Indian
population is without life insurance cover while health insurance and
non-life insurance continues to be well below international standards.
Note: The above information was last updated on 21-07-2007
