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.

History of Insurance in India

In 19th century India, insurance business started with Life Insurance. It was the time when British officials on their postings in India felt the need of life insurance cover. Year 1818, in India, witnessed Life Insurance being initiated and transacted by an English company, The Oriental Life Insurance Company Ltd. Then it was Madras Equitable which came into insurance business in 1829.

Thereafter British Insurance Act was enacted in 1870. The English Company 'The European and the Albert' pioneered and took care of the needs of British officials. The first Indian insurance company, Bombay Mutual Assurance Society Ltd., was formed in 1870 in Mumbai. This followed by the Bharat Insurance Company in 1896 in Delhi, Empire of India in 1897 in Mumbai, United India in Chennai, National Indian and Hindustan Co-operative in Kolkata.

In the wake of the Swadeshi Movement in India in the early 1900s, quite a good number of Indian companies were formed in various parts of the country to transact insurance business as the perceived threat level gained height during this period. The Co-operative Assurance was established in Lahore, Bombay Life (originally called the Swadeshi Life), Indian Mercantile, New India and Jupitor in Mumbai and Lakshmi Insurance in New Delhi.

During the first half of the 20th century insurance business in India went through few acts and regulations that were aimed at streamlining the business to strike a balance between the interests of the insurers and the policy holders. But this could not bring much relief.

This made Government of India to nationalise life insurance business in the year 1956. Life Insurance Corporation of India (LIC) was formed on 1^st September, 1956 through an act passed by the parliament. At that time, there were 245 private companies (consisting of 170 companies and 75 provident fund societies) transacting life insurance business in India. LIC steered the business of insurance in a manner that proved to be a mutually-benefitting relationship between insurer and policy holder. LIC spread its network across the width and depth of the country and ventured overseas too. The contribution of LIC in the growth of the country is phenomenal.

On the other side, the General Insurance business also passed through various regulations before the enforcement of the act called General Insurance Business (Nationalisation) ACT 1972. Through this act acquisition and transfer of shares held by Indian insurance companies and undertakings took place which were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commenced business on January 1st 1973.

This scenario prevailed till the economic reforms started taking place and the socio-economic transition touched India to face the challanges of the new era.

Evolution of Inurance

Understanding the risk and overpowering the same was the basic acumen that mankind gained since the time of Neanderthals probably. There is no reason to doubt that the concept of Insurance would not have been there since the time immemorial, when the civilizations evolved and shaped up in human history. The endeavour to neutralize risk by man is as old as man itself.

In Indian context we may find traces of description of Concept of Insurance in our ancient scriptures, defining it as pooling in of resources so as to re-align the same to face calamities like flood, famine, fire, epidemics, war and other natural disasters. Some noted doctrines are Arthshastra by Kautilya, Manusmriti by Manu and Dharmshastra by Yagyavalk. In simple terms we may understand our age old joint family system was in place as an unwritten protection to all the members in the family by head of the family.

All the civilizations and societies across the globe recognized the phenomenon of insurance in some form or the other and pursued it accordingly. Be it Greek, Mexican, Iranian, Persian, Egyptian, Cambodian or Assyrian, there are mention of Insurance in their writings. Some of the ancient dynasties like Achaemenian Monarch in Iran recognized insurance and supported that their people should be insured.

There are reasons to believe that primarily it was fire, calamities and international trade through oceans that crystallized the fundamentals of initial insurance practices as all such civilizations evolved near the waters and were involved in trade through sea.

In medieval times, Insurance business is traced back to the city of London. Marine business was instrumental to formulate and propagate Insurance business. It was a time when marine was the lifeline of the International trade and was exposed to severe risks. Rough weather resulting in the sinking of ships, damages of goods in the high seas, robbery by pirates and capturing of ships by enemies were the factors which were potential threats to the merchants.

Therefore, a concept gradually evolved where Marine traders started the practice of gathering together where they used to agree to share the losses of goods during transportation by ship on pre-defined terms and conditions. Lloyd's Coffee House in London has witnessed the evolution and progress of such meeting which undoubtedly were the foundation of modern insurance business.

The first insurance policy was issued in England in the year 1583 and modern insurance business took off from there.