It has been seven years since the beginning of India’s insurance liberalization journey. The 1999 passing of the Insurance Regulatory and Development Authority Act was the first significant milestone on this journey. Together with the amendments to the Insurance Act 1983 (LIC, GIC Acts), this opens the door for private players as well as the possibility of privatizing the public monopolies LIC or GIC. There have been many opportunities and challenges associated with opening up insurance to the private sector, including foreign participation.
Everyday life is characterized by uncertainty. Human behavior is influenced by the instinct to protect themselves from such risks. The concept of insurance was born as a result of this search for security. People must have been willing to sacrifice in order to secure their lives and properties by providing insurance. Insurance is, in this sense, as old as mankind.
Particularly, life insurance provides protection for the household against the possibility of income-earning members dying prematurely. Modern life insurance provides protection against other life-related risks, such as longevity (i.e. Risk of losing your source of income, and the possibility of sickness or disability (health insurance). Annuities and pensions (insurance against old-age) are two products that provide longevity. Non-life insurance offers protection against theft, property damage and other liabilities. Non-life insurance contracts typically last for a shorter time than life insurance contracts. Life insurance is unique in that it allows for saving and risk coverage to be bundled together. Life insurance offers both investment and protection.
Business concerns can benefit from insurance. Insurance offers both short-term and long-term relief. Short-term relief helps protect the insured against loss of life and property. It distributes the loss between a large number of people through professional risk bearers like insurers. This allows a businessman to be prepared for an unexpected loss. He doesn’t have to worry about it. Long-term, the goal is to increase the country’s economic and industrial growth by investing large amounts in insurance companies that cover organized commerce and the organized industry.
The GIC Act, which was first passed by the Parliament in 1971 and became effective in 1973, had been in effect prior to the nationalization of the General insurance industry. There were 107 general insurance companies, including branches of foreign businesses, in the country at the time of nationalization. These companies were amalgamated into four subsidiaries of GIC: The National Insurance Co.Ltd. of Calcutta, The New India Assurance Co. Ltd. of Mumbai, The Oriental Insurance Co. Ltd. of New Delhi, and The United India Insurance Co. Ltd. of Chennai.
India’s general insurance business is divided into three categories: marine, fire and miscellaneous GIC. Apart from handling Aviation and Reinsurance, the Comprehensive Crop Insurance Scheme, Personal Accident Insurance and Social Security Scheme are all managed by GIC. In line with nationalization’s objective to spread insurance message far and wide, and provide insurance protection for the weaker sections of society, the GIC and its affiliates are working hard to develop new covers and promote other business.
Liberalization of insurance
With the 1983 enactment the Insurance Act, India saw the introduction of comprehensive regulation for Indian insurance businesses. It was intended to establish a strong supervision and regulatory authority at the Controller of Insurance. This included powers to advise, direct, investigate, register, and liquidate insurance companies, as well as to provide advice, direction, investigation, registration, and liquidation of those companies. The Controller of Insurance lost most of its regulatory powers after the nationalization of the insurance industry. Instead, the Controller of Insurance was able to delegate many of these functions to the insurers. In 1993, the Government of India established a powerful committee headed by R.N.Malhotra (ex-Gouvernor, Reserve Bank of India) to review the structure of India’s insurance industry and make recommendations for improvements to make it more efficient and competive, keeping in mind the structural changes taking place in other areas of India’s financial system.
Recommendations of the Malhotra Committee
In January 1994, the committee presented its report recommending that private insurance companies be allowed to coexist with government companies such as LIC and GIC. The committee’s recommendation was based on several factors, including the need for deeper insurance coverage and greater mobilization of money from the economy. Also, there is a greater need to mobilize funds from government companies like LIC and GIC for infrastructural developments. The fiscal necessity to tap the large savings pool in the economy is at least partially driving liberalization of the insurance industry. These were the recommendations of the Committee:
Raising the capital base for LIC and GIC to Rs. 200 crores. Half of these funds are retained by the government. The rest is sold to the general public with appropriate reservations for its employees. Private sector is allowed to enter the insurance industry with a minimum capital of Rs. 100 crores.
It is possible to get foreign insurance by establishing an Indian company, preferably in a joint venture with Indian partners.
The establishment of an effective and strong insurance regulator is being considered.
The sector is restricted in number of private firms. However, the sector is not allowed to have any firm. However, a firm cannot operate in both life and non-life insurance.
The Tariff Advisory Committee (TAC), which is delinked from GIC, functions as a separate statuary entity under the supervision of the insurance regulatory authority.
All insurance companies must be treated equally and governed under the insurance Act. Government companies are not eligible for any special treatment.
Establishment of an effective and efficient regulatory body with independent financing source before private companies can enter the sector.
Competition to the government sector
Not only are they able to offer a wide range of insurance products, but also have to compete with private sector companies in customer service, distribution channels, and selling products. The privatization of the insurance industry has allowed for new ways to do business.
Insurance companies of the future are experimenting with new ways to transact business. It is simple to do the most business for the least cost. Slowly, however, the old norm for government companies to open branches is being lost. Hub and spoke arrangement is one of the newer techniques to provide insurance for rural and social sector customers. They, along with participants from NGOs and Self Help Groups (SHGs), have done most of the selling for rural and social sector policies.
Commercial banks with a large network of branches pose the biggest challenges. LIC and Mangalore-based Corporations Bank have entered into an agreement to leverage their infrastructure to mutual benefit with the insurance monolith. Corporation Bank acquired a strategic stake 27%. Corporation Bank has renounced its plans to promote a life insurance firm. In the future, the bank will be LIC’s corporate agent and receive commission on all policies sold through its branches. Corporation Bank will be able to open extension centers thanks to LIC’s branch network that includes close to 2100 locations. It also has ATMs and branches. Corporation Bank would then implement a Cash Flow Management System (LIC) for its customers.
1999 IRDA Act
Preamble to IRDA Act 1999 states that “An Act to provide the establishment of an authority in order to protect the interests and promote orderly growth of and to regulate the insurance industry, and for matters related therewith or incident thereto.”
Section 14 of the IRDA Act outlines the duties, powers, and functions of the authority. The authority’s powers and functions. These are the powers and functions that the Authority has.
Issue to the applicant a Certificate of Registration, which can be used to renew, cancel, modify, withdraw, suspend, or cancel that registration.
To safeguard the interests of policyholders in all matters concerning nominating policy, surrender value of policy, insurable Interest, settlement of insurance claims, and other terms and conditions.
Specification of the requisite qualifications and training for agents and intermediaries in insurance.
Specifying the code of conduct for loss assessors and surveyors.
Promotion of efficiency in the management of the insurance business
Promotion and regulation of professional regulators in the insurance and/or reinsurance industry.
Specificating the manner and form in which books of account will be kept and statements of accounts that insurers or insurance intermediaries will render.
Arbitration of disputes between intermediaries and insurers
Indicate the percentage of life insurance, general and general business that will be done by rural or social sector insurers.
Section 25 states that an Insurance Advisory Committee shall be formed and that it will consist of no more than 25 members. Section 26 allows for the approval of the Authority to make regulations containing the Insurance Act, 1938. This amendment is made in accordance with the First Schedule. These amendments to Insurance Act were made in order for IRDA to be able to regulate, promote and maintain orderly growth of the Insurance sector.
Sections 30 & 31 seek to amend the LIC Act 1956 et GIC Act 1972.
The Impact of Liberalization
Although nationalized insurance companies have done an admirable job of increasing the volume of their business, opening up the insurance sector to the private sector was necessary in the context liberalization of the financial sector. Traditional infrastructural or semipublic goods industries like banking, telecom, power, and airlines are still important. There is a significant private sector presence. Therefore, it was impossible for the state to continue its monopoly on insurance provision. The privatization of insurance was done as previously discussed. Its impact must be seen as creating many opportunities and challenges.
1. Privatization of Insurance if the monopolistic Life Insurance Corporation of India was closed down. It could help cover the broad range of risks in both life and general insurance. It allows for the introduction of new products.
2. This would result in better customer service and increase the price and variety of insurance products.
3. The entry of a new player would accelerate the spread of general and life insurance. It will increase insurance penetration and density.
4. Private players can help mobilize funds for infrastructure development.
5. Because of the large branches of banks, it will be easier to mobilize funds from rural areas by allowing commercial banks to enter the insurance business.
6. Not least, tremendous opportunities for employment will be created in insurance which is a pressing problem today.
Several leading private companies, including joint ventures, have entered the insurance business. Tata – AIG. Birla Sun Life, HDFC Standard Life Insurance. Reliance General Insurance. Royal Sundaram Alliance Insurance. Bajaj Auto Alliance. IFFCO Tokio General Insurance. INA Vysya Life Insurance. SBI Life Insurance. Dabur CJU Life Insurance. Max New York Life. SBI Life Insurance has launched three products Sanjeevan Sukhjeevan, and Young Sanjeevan thus far. It has sold 320 policies in its plan.
The above discussion shows that private players are necessary and justified in the insurance industry. This is to increase efficiency, achieve greater insurance coverage and density in the country, and to mobilize long-term savings for infrastructure prefects. The new players should not be considered rivals to the government, but they can help in achieving India’s insurance business growth goals.