Saturday, January 16, 2010

Insurance Sector in India : Economic Reforms & Beyond

The economic reforms aligned the business scenario across various domains with the global trends and with the futuristic vision for the market in compliance with the transition that was touching us with the advancement of technology, change in social fabric, enhanced urban employment, expansion of rural economy, increasing number of young population and improved lifestyle/facilities for elderly and retired persons.

Insurance sector, undoubtedly was important part of this whole gamut of events. In 1990s the process of opening up of insurance sector began. Government of India set up a committee under the able guidance of Shri R N Malhotra in 1993 to suggest the reforms in insurance sector in line with the overall economic reform that was underway. Committee submitted its report in 1994 and among the many suggestions, was an important recommendation to open up the sector for private players. Committee also recommended allowing foreign companies into Indian insurance sector through joint venture route. Relevant laws were amended by the parliament in 1999 and LIC's monopoly to transact life insurance business in India came to end.

This led to the constitution of Insurance Regulatory & Development Authority (IRDA) in 1999 as an autonomous body which was incorporated as a statutory body in April 2000. The apex body has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards effected several regulations ranging from registration of companies to carry out insurance business to protection of policyholders’ interests. IRDA did a wonderful job and started the process of opening up of the market in August 2000. The regulatory body invited application for registrations and foreign companies were allowed stakes up to 26%.

The key responsibilities of IRDA were to create an environment of competition in insurance sector by ensuring the participation of more companies in order to offer customers a vide range of options to chose from and to improve customer satisfaction level. The Regulators had to strike a balance between the low premium for the customers and financial security of the insurance market. Till December 2009, 22 life insurers had been registered to transact life insurance business in India.

On the same line, changes were brought in General Insurance too. In December 2000, the subsidiaries of the General Insurance Corporation of India were restructured into independent companies. GIC was converted into a national re-insurer. In July 2002 Parliament passed a bill de-linking the four subsidiaries from GIC. Today there are 21 general insurance companies including the ECGC and Agriculture Insurance Corporation of India who are registered to transact business of general insurance.

Insurance is a gigantic sector now which is contributing around 7% to the country’s GDP and is growing steadily at around 18% growth rate. The economic reforms and economic growth need short term and long term objectives to be taken care of and a robust insurance sector may well support achieving these objectives.

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