Insurance Law – An Indian Perspective

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INTRODUCTION

“Insurance should always be purchased to protect against financial disasters.”

Insurance allows someone to get compensation for their loss or accident. Insurance allows you to protect your financial, health and financial well-being from everyday threats.

In India, insurance was established in 19th century without regulation. It was typical of colonial times: there were few British-owned insurance companies that dominated the market, which served large urban centers. It took a dramatic turn after independence. Nationalization was made in insurance. In 1956, the first nationalization of life insurance companies was done. Then, in 1972, the general insurance industry was nationalized. Private insurance companies were only allowed to return to the insurance business in 1999 with a maximum 26% foreign holding.

The insurance industry can seem overwhelming. There are many insurance products that can be sold to you for just about anything. It can be difficult to decide what is right for you.

Insurance concepts have expanded beyond coverage for tangible assets. Insurance can now cover the risk of loss due to sudden fluctuations in currency exchange rates, political disturbances, negligence, and liability for damages.

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However, if an individual invests in insurance before any unanticipated contingency occurs, he will be compensated for the loss as soon as it is established.

With its bank assurance proposal, the State Bank of India has entered the fray. The experience of other Asian countries has deregulated their markets, allowing foreign companies to join. If other countries’ experience is any indication, the dominance and influence of the Life Insurance Corporation (and the General Insurance Corporation) is unlikely to change. The goal of insurance is to protect the owner from loss that may result from various risks to his business, life, and property. There are two main types of insurance: general insurance and life insurance. General insurance includes Fire, Marine, and Miscellaneous insurance. This includes insurance against theft, fidelity guarantee, insurance to the employer’s liability, insurance for motor vehicles, livestock, and crops.

LIFE INSURANCE IN INDIA

“Life insurance is the most heartfelt love letter you have ever read.

It soothes a baby who is hungry at night. It soothes the heart of a widow who has lost her husband.

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It is the comforting whisper during the dark silent hours of night.”

India was home to life insurance for over 100 years. The main features of life insurance are not well-known in India. Although there is no legal definition for life insurance, it can be described as an agreement between the insured and the insurer to pay certain amounts, called premiums. In return, the insurer agrees to pay specified sums of money upon the occurrence of a specific event that is contingent on the length of human life.

Life insurance is better than other savings options!

“There is no death.” Life Insurance elevates life and defeats the death.

It is the price we pay to enjoy the freedom of living after our deaths.”

Life insurance provides full protection from the risk of death for those who have saved. Life insurance pays the entire sum insured upon death (with any bonuses where applicable), while other savings plans only pay the interest-bearing amount.

Life insurance is a contract that relates to human life. It b) pays a lump-sum amount and c) is paid upon expiry of a certain period or death. In taking out policies from life insurance companies, the sole purpose of the insured is to protect the interests of his dependents, viz., wife, and children, in the event of any eventuality. A life insurance policy can also be accepted as security for a commercial loan.

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NON-LIFE INSURANCE

“Every asset has value, and general insurance is about protecting the economic value of assets.”

Non-life insurance is insurance that does not include life insurance. It includes insurance other than fire, water, accident, medical, motor vehicle, and household insurance. The owner would have created assets through his efforts. These assets can include buildings, vehicles, machinery, and other tangible property. Because tangible property is of a physical form and consistency, it is susceptible to fire, theft, and other perils.
The following policies are not included in the General Insurance policy:

Property insurance: Your home is the most valuable possession. This policy covers all risks. It protects the property and interests of the insured and their families.

Health insurance: This provides coverage that covers medical expenses after hospitalization due to sudden illness or accident.
Personal Accident Insurance: This policy covers injury or death that is partially or permanently caused by an accident. This policy covers the cost of treatment as well as the use of hospital facilities.

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Travel insurance: This policy protects the insured against certain eventualities when traveling abroad. The policy covers you against personal injury, medical expenses, repatriation, lost baggage, passport, etc.

Liability Insurance: This policy protects Directors, Officers and other professionals from any loss that may result from any wrongful Act they have performed in their official capacity.

Motor Insurance: Motor Vehicles Act requires that all motor vehicles on the roads must be insured with at least a Liability-only policy. One policy covers the act of negligence, and another covers all liability and damage to vehicles.

JOURNEY FROM A CHILD TO ADOLESCENCE

Historical Perspective

Indian life insurance dates back to 1818, when it was created to provide for English Widows. In those days, Indians were charged a higher premium than non-Indians because they were more likely to be covered.

In 1870, the Bombay Mutual Life Insurance Society was founded. It was the first to offer the same premium for Indian and non-Indian life. In 1880, the Oriental Assurance Company was founded. The Indian General Insurance business can be traced back to the Triton Insurance Company Limited. This was the first insurance company founded in India in 1850 by the British. Almost all of the insurance business in India was managed by overseas companies until the end of the nineteenth century.

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India’s first official regulation of insurance was established by the passage of the Provident Fund Act of 1912, and the Life Insurance Companies Act of 1911. In India, insurance was desecrated by fraudsters in the 20’s and 30s. There were 176 insurance companies in India by 1938. With the 1938 Insurance Act, which established strict state control over insurance businesses, was the first comprehensive legislation. After independence, the insurance industry grew faster. Indian companies gained a stronger hold on the business, but insurance remained a urban phenomenon despite all of this growth.

1956 saw the creation of the Government of India, which brought together more than 240 private insurance companies and provident societies into one nationalized monopoly corporation. The Life Insurance Corporation (LIC), was created. The government justified nationalization on the ground that it would provide much-needed funds for rapid industrialization. This was in line with the Government’s preferred path of State-led planning and development.

The private sector continued to support the (non-life insurance) business until 1972. They were limited to organized trade and industry within large cities. In 1972, the general insurance industry was nationalized. Nearly 107 insurance companies were merged and grouped into four companies – National Insurance Company (New India Assurance Company), Oriental Insurance Company and United India Insurance Company. These were subsidiaries of General Insurance Company (GIC).

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The Life Insurance Corporation (LIC Act of India) nationalized the life insurance industry. The LIC is a very successful organization. It is a monopoly but it has 60-70 million policyholders. The LIC is able to capture around 30 percent of the Indian middle-class, which amounts to between 250-300 million and 300 million. Nearly 48% of LIC customers are from rural or semi-urban areas. If the charter of LIC had not stated the goal of serving rural areas, this would have not happened. The LIC has experienced rapid growth due to India’s high savings rate. Despite India’s high saving rate (as compared to other countries with similar levels of development), Indians are highly risk-averse. Nearly half of all investments are made in physical assets, such as property and gold. Around 23 percent of the GDP are bank deposits, which can be low yielding but still safe. A further 1.3 percent of GDP is in savings vehicles related to life insurance. Between 1985 and 1995, this figure doubled.

Life Insurance in India: A World View

Insurance has been an important form of savings in many countries. Donation insurance plans make up a large portion of domestic savings in many countries. This is not surprising. It is even more surprising to see some developing countries prominently. South Africa, for example, is ranked number 2. India sits between Chile and Italy. This is surprising considering the economic growth in Italy and Chile. We can see that India has a strong insurance culture despite having a low per-capita income. This bodes well for future growth. Insurance (especially life insurance) will likely grow quickly when income levels improve.

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REFORM OF THE INSURANCE SECTOR:

Committee Reports: One known, one anonymous!

Insurance was not allowed to be sold in India, even though the Indian market was privatized and made more accessible to foreign companies in certain sectors. The government was cautious. The government, at the time dominated by Congress Party, decided to create a committee headed Mr. R. N. Malhotra, then Governor of Reserve Bank of India.

Malhotra Committee

In 1994, the Malhotra Committee released a report suggesting that Indian insurance markets should be liberalized. It suggested that Indian private-sector competitors and then foreign private-sector competitors. The report also examined the satisfaction levels of LIC customers. It was able to determine that customer satisfaction was high.

The Malhotra Committee, headed by Mr. R. N. Malhotra, former Finance Secretary and RBI Governor, was established in 1993 to assess the Indian insurance industry and suggest its future direction. Malhotra was established to complement the reforms in the financial sector. These reforms were designed to create a more efficient, competitive and appropriate financial system for the economic needs. They also considered the structural changes currently taking place and recognized that insurance was an integral part of the overall financial sector. The 1994 report was submitted by the committee. Some of the most important recommendations were:

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Structure

The government’s stake in insurance companies should be reduced to 50%. The government should assume control of GIC and its affiliates so that they can function as independent corporations. All insurance companies should have greater freedom of operation.
Concurrence

Private companies with minimum capital of Rs.1billion should be permitted to enter the sector. A single company should not be allowed to deal in both Life and General Insurance. In collaboration with domestic companies, foreign companies may be permitted to enter the industry. Rural life insurance should only be available to postal life insurers. Each state should allow only one State Level Life Insurance Company to operate.

Regulatory Body

It is necessary to amend the Insurance Act. A body called the Insurance Regulatory Body should be established. The Finance Ministry should make the Controller of Insurance an independent body.

Investments

Compulsory Investments of LIC Life Fund into government securities to be decreased from 75% to half-off GIC and its affiliates are not allowed to own more than 5% of any company. Current holdings will be reduced over time to that level.

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Customer Service

LIC should pay interest for payments delayed beyond 30 days. Insurance companies should be encouraged to establish unit-linked pension plans. The insurance industry must encourage the use of computerization and technology updating. The committee stressed that competition is necessary to improve customer service and expand coverage. The committee recognized the need to be cautious as failures by new competitors could jeopardize the industry’s confidence. The minimum capital requirement for new competitors was set at Rs.100 crores to limit competition.

In order to improve the performance of insurance companies and allow them to be independent businesses with economic motives, the committee felt that they needed to give more autonomy. It had suggested the establishment of an independent regulatory body, The Insurance Regulatory and Development Authority.

The IRDA Bill was passed in Parliament in December 1999, and reforms were made in the insurance sector. Since its incorporation in April 2000, the IRDA has maintained a strict schedule for registering private sector insurers and framing regulations.

The IRDA was established as an independent statutory body and has since developed a set of internationally compatible regulations. Another decision was made to support the insurance industry, and specifically life insurance companies. The IRDA launched the online service to issue and renew licenses to agents. Insurance companies will have a qualified workforce of agents to sell their products if they approve institutions that can provide training.

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In March 2000, the Government of India opened up the Indian insurance sector to foreign investors. The Insurance Regulatory Development Authority (IRDA Bill) lifted all restrictions on private players and allowed foreign players to enter with certain limits. The current guidelines place a 26 percent equity limit on foreign partners to an insurance company. This limit could be increased to 49 percent.

This sector opening is expected to increase the spread and depth of Indian insurance. It may also lead to restructuring and revitalization of public sector companies. There have been 8 general and 12 life insurance companies registered in the private sector. Since 2001, a number of private insurance companies have been selling their insurance policies to both the life and non-life segment.

Mukherjee Committee

The Malhotra Committee Report was published immediately. A new committee, the Mukherjee Committee, was established to develop concrete plans for the needs of newly-formed insurance companies. The public was never made aware of the recommendations by the Mukherjee Committee. However, the Mukherjee Committee recommended that certain ratios be included in balance sheets of insurance companies to ensure transparency in accounting. The Finance Minister opposed it, and he argued, likely on advice from some potential competitors that it could impact the prospects for a developing insurance business.

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LAW COMMISSION INDIA ON REVISION of THE INSURANCE ACT 1938 – 190th Law Commission Report

On 16 June 2003, the Law Commission released a Consultation Paper about the Revision of the Insurance Act 1938. The last attempt to amend the Insurance Act, 1938 took place in 1999, at the time of the enactment, of the Insurance Regulatory Development Authority Act, (1999 IRDA Act).

This exercise was undertaken by the Commission in light of the new policy which has allowed private insurance companies in both the life and nonlife sectors. It was felt that the current legislation needed to be streamlined and toughened, while also allowing for more flexibility.

The Consultation paper recommended the following as one of the most important areas for changes:

a. Merging of the provisions under the IRDA Act and the Insurance Act to reduce the number of laws;

b. Removal of redundant or transitory provisions from the Insurance Act, 1938

c. Amendments reflect a change in policy to allow private insurance companies and strengthen the regulatory system;

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d. Establishing strict norms for maintaining a’solvency margin’ as well as investments by public and private sector insurance companies.

e. A full-fledged grievance redressal system that includes:

The creation of Grievance Resolution Authorities (GRAs), consisting of one judicial member and two technical members to handle complaints/claims from policyholders against insurers (the GRAs will replace the current system of an insurer appointed Ombudsman);

The IRDA appoints adjudicating officers to decide and levy sanctions on insurance agents, intermediaries, and insurers that are in default.

Providing an opportunity to appeal against the decisions made by the IRDA, GRAs, and adjudicating officials to an Insurance Appellate Tribunal. (IAT) consists of a sitting or retired judge of the Supreme Court/Chief justice of a High Court as presiding officers and two other members with sufficient experience in insurance matters.

Provides for a statutory appeal to Supreme Court against decisions of the IAT.

LIFE & Non-LIFE INSURANCE: Development and Growth

2006 was a landmark year in the insurance industry. The Insurance Regulatory Development Authority Act, which is the regulator of the sector, set the stage for general insurance at no cost starting in 2007. Many companies also announced plans to enter the sector.

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Foreign and domestic players vigorously pursued their long-standing demand to increase the FDI limit, from 26 percent to 49%. The Government sent the Comprehensive Insurance Bill (with strong reservations from Left parties) to the Group of Ministers towards the end of the year. It is expected that the Bill will be considered in Parliament’s Budget session.

India’s infiltration rates for non-life and health insurances are much lower than the international average. These figures indicate the immense potential for growth in the insurance sector. Last year, the Government proposed increasing the FDI limit to 49%. As legislative changes are needed for this hike, it has not been implemented. Foreign investments have reached Rs. 8.7 billion have entered the Indian market, and 21 private companies were granted licenses.

Private insurers have become more involved in different industry segments due to their capture of a portion of the business that was previously underwritten by public sector insurers, and the creation of additional business boulevards. The public sector insurers were unable to tap into their inherent strengths to capture premium. Private insurers have captured 66.27 percent of the premium growth in 2004-05, despite holding only 20 per cent market share.

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In 2004-05, the premium income for life insurance was Rs.82854.80 crore. This compares to Rs.66653.75 million in the previous year. The increase of 24.31 percent is impressive. The contributions of single premium, first year premium, and renewal premiums to the total premium were Rs.15881.33 Crore (19.16%), Rs.10336.30crore (12.47%) and Rs.56637.16crore (68.36%), respectively. The life insurance premium in 2000-01 was Rs.34898.48 crore, which was Rs. 6996.65 crore for the first year premium. Rs. 25191.07 crore for renewal premium, Rs. 2740.45 million of single premium. Single premium fell from Rs.9 194.07 crore in 2001-02 to Rs.5674.14 million in 2002-03 after the removal of the guaranteed returns policies. It rose marginally to Rs.5936.50 million in 2003-04 (4.62 percent growth), but 2004-05 saw a major shift, with single premium income reaching Rs. 10336.30 million, representing a 74.11% increase over 2003-04.

Due to the strong economic growth and the concomitant rise in per capita income, the size of the life insurance market increased. The result was a favorable growth in total premium for both LIC (18.25%) and the new insurers (14.75%%) in 2004-05. It is important to consider the low base of 2003-04 when comparing the higher growth for new insurers with the previous year. The market share of the new insurers has increased from 4.68 percent in 2003-04, to 9.33 percent in 2004-05.

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Segment-wise, the breakdown of miscellaneous, fire and marine segments in case public sector insurers was Rs.2411.38 lakh, Rs.982.99 crore, and Rs.10578.59 million, respectively. This equates to a growth rate of (-)1.43 percent, 1.81 percentage, and 6.58 percent. Public sector insurers reported an increase in Motor and Health segments (9 and 24% respectively). These segments represented 45 percent and 10% of the business underwritten in the public sector insurances, respectively. The premiums underwritten were 17.26 and 11% respectively for Fire and Other. Liability, Fire, and Liability saw negative growth of 29.21, 3.58, and 1.43 percent, respectively. Foreign companies have been able to capture a 22% market share in life and around 20% in general insurance segments in India, as well as in any other country that opened simultaneously. Foreign insurers do not have a greater share in Asian markets that are competing.

While the general insurance sector saw a slower growth rate, premiums in life insurance grew at a new rate. Shriram Life and Bharti Axa Life were two new players in life insurance, bringing the total of life players to 16. Star Health and Allied Insurance was the only new entrant in the non-life insurance sector. This brings the total number of non-life players up to 14.

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Many companies, most of which are nationalized banks (about 14, including Bank of India and Punjab National Bank), have announced plans to enter insurance. Some of these have also created joint ventures.

The comprehensive amendments to insurance laws include the Insurance Act of 1999, LIC Act 1956, and IRDA Act 1999. The proposed change in FDI caps is part of these comprehensive amendments. The proposed changes to the insurance laws would allow LIC to keep reserves and insurance companies to raise other resources.

There are currently 14 banks waiting to enter the insurance sector. In 2006, there were several joint venture announcements. Bank of India has joined forces with Union Bank and Japanese insurance giant Dai-ichi Mutual Life, while PNB teamed up to Vijaya Bank (Principal) for life insurance. Allahabad Bank and Karnataka Bank, Indian Overseas Bank and Dabur Investment Corporation have teamed up to form a non-life insurer, while Bank of Maharashtra has partnered with Shriram Group in South Africa and Sanlam Group in India.

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CONCLUSION

It is not surprising that the GIC and the LIC will die in the next decade. The IRDA has been slow to move. It was very careful in issuing licenses. It has established very strict standards for all aspects (with the possible exception of disclosure requirements) of the insurance industry. Regulators must tread carefully. Too many regulations can discourage newcomers from coming to the country. However, too few regulations could lead to failure or fraud that ultimately led the nation to be nationalized. India is not the only developing country where foreign competition has opened up the insurance industry.