Post Reform in Insurance

7/30/2019 Post Reform in Insurance

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ABSTRACT

The financial sector in India banking, capital markets, insurance, mutual funds, etc. has changed

during the decade of reform of the nineties. Although many improvements have been effected, the

scope of many of these changes has been relatively narrow and predominantly mechanistic. It is not

surprising, therefore, that the outcomes of these actions have not been as far-reaching as required.While the sector is probably more robust than at the beginning of reforms, it is still susceptible to

inefficiencies engendered inter alia by the blunted incentives associated with large public sector

involvement in the sector, institutional rigidities and regulatory forbearance.

The financial sector reforms have created metamorphic changes in the Indian insurance sector. With

the opening up of the insurance sector to private players in 1999, the insurance market has become

more competitive and dynamic.The public sector insurance companies are now actively facing

competition. The insurance industry in India was first opened up to the private sector in 1999. In the

following decade, total insurance penetration has doubled, rising from 2.3 per cent of the GDP in 2001

to 5.2 per cent of GDP for 2011. India has tremendous economic potential due to its large labor force

and rapidly growing middle class. The projected increase in per-capita GDP will correlate with an

increased demand for a wide variety of insurance and investment products. Rising income levels,

coupled with increased purchasing power, low penetration for most consumer products, availability of

financing and changes in lifestyles are likely to boost consumer demand in the future.


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1. INTRODUCTION

Life is synonym to uncertainty and has become prone to contingency at any point of time. Any injury

or accident can happen to anyone of us or our loved ones at any point of time. The material value of

our life or immortal possessions of ours cannot be correctly estimated but of course we can keep a

backup in case something fatal happens to them. This very function is served by insurance that provides us with a mental and financial security and makes our life easier in case some contingency

happens. In short insurance is that extra security that helps to pay or replace a thing or even receive

regular payments in case something unfavourable happens to our life or property without having to

take the extra pain to arrange for funds after the casualty. Insurance in today s scenario serves the dual

purpose of savings and security. It is particularly important now days because of the increased

quantum of unpredictability and proneness or susceptibility to chronic infections and diseases on

account of changing lifest yle, pollution, etc. The need to insure one s property arises because of the

crime rate which is almost occupying every strata of the society. It is the call of the hour to provide

oneself with an additional umbrella of protection because of the multiple benefits of insurance like:

planning for later life stages, protection against rising health expenses, risk cover, safe and profitable

long term investment, thrift or regular savings in an individual, tax benefits, assured income through

annuities, facilities of loan without affecting the policy benefits, diverse and wide variety of insurance

policies designed to cater the needs of everyone, mental security the value of which cannot be

estimated, to take care of one s loved ones in case of his / her absence, etc. The benefits of insurance

are innumerable which should keep anyone now in double mind whether they should insure

themselves or not. The various types of insurance are: life insurance, health insurance, vehicle

insurance, agricultural insurance, business insurance, unemployment insurance, marine insurance,

casualty insurance, payment protection insurance, liability insurance, property insurance, child

insurance, etc. The customised, innovative and novel products and services provided by different

players in the industry further increases the growth and attractiveness of the industry.

1.1 Before Independence

The insurance industry originated in India in the year 1818 with the formation of Life Insurance

Corporation in Calcutta. The idea behind starting LIC was to provide insurance coverage for English

widows and different premium was charged for the English and for the Indians. In 1870 Bombay

Mutual Life Insurance Society established its Insurance business and the same premium was charged

for both Indians and English. In 1912 the Insurance sector came under the purview of regulations


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when the government passed the Life Insurance Companies Act. But it was in the year 1938 when the

government came up with the first legislation to bring the insurance sector under state control.

1.2 Post Independence

In 1956, the Government of India nationalized insurance companies bringing Indian Insurance sector

under the purview of the Government. These state owned Insurance companies became highly

inefficient and bureaucratic, had excess manpower and countless delay in settlement of claims but the

nation did not have an alternative. Any effort by the government to privatize the industry met with stiff

resistance from the trade unions.

1.3 Post Liberalization

Under the recommendation of Malhotra Committee the Insurance Regulatory And Development

Authority was set up to monitor and control the Insurance industry .Some of the initiatives taken by

the government after Insurance sector reforms are:

Government to have not more than 50 per cent stake in insurance companies.

Insurance sector to be opened up for private companies and any number of insurance

enterprises can operate.

Private players with minimum paid up capital of Rs 1 billion should be given opportunity to do

business.

Foreign companies can enter Indian market through joint ventures with Indian companies.

The state controlled Insurance companies like LIC and GIC faced stiff competition from private

insurance companies post reforms. The monopoly of the national Insurance companies came to an end.

The private Insurance companies were able to exploit the shortcomings in the state run Insurance

companies. The private insurance companies launched a variety of new insurance products like health

care, pension plans, annuity plans, income protection, market linked products which were welcomed

by the end customers. The business for the private sector boomed in both urban and rural sector alike.

http://www.tradechakra.com/indian-economy/service-sector/insurance-sector.html


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MARKET SHARE OF DIFFERENT INSURANCE COMPANIES IN INDIA FOR THEFINANCIAL YEAR 2012


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2. REFORM PROCESS OF INSURANCE SECTOR IN INDIA

The insurance industry in India has witnessed many radial transformations during the last about one

hundred ninety years of its inception. The insurance business remained in the hands of private insurers

with minimal government intervention up to 1956. Both the life insurance as well as the general

insurance companies were nationalized by the government in the years 1956 and 1972 respectively,giving them a chance to have monopoly in the field. But, unlike life insurance, a different structure

was created for the general insurance industry. One holding company was formed with four

subsidiaries, and again, the private sector was allowed to enter the insurance business in the year 2000.

2.1 Insurance Industry in India: A Historical Perspective

The history of insurance in India can be traced with the establishment of a British company called the

Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company in 1823, and

the Madras Equitable Life Insurance Society in 1829. All these companies operated in India but didnot insure the lives of Indians. They were insuring only the lives of Europeans living in India. The first

general insurance company known as Triton Insurance Company Ltd., was established in 1850. It was

owned and operated by the British. The first indigenous general insurance company was the Indian

Mercantile Insurance Company Limited set up in Bombay in 1907 (Sinha, 2005; Sharma and Agarwal,

2005). The wholly Indian-owned insurance company, namely, The New India Assurance Company

Limited was incorporated on July 23, 1919 which commenced its operations in October the same year

(Narayanan, 2006).

There was no exclusive legislation to govern the activities of insurance companies during the 19th

century. To control the operations of life insurance in India, the Indian Life Insurance Companies Act,

1912 was enacted. However, the first comprehensive legislation was introduced with the passing of

Indian Insurance Act, 1938. The Act made provision for required equity capital to carry out insurance

business, ceiling on shareholding pattern, strict control on investments, agency commission etc.

Subsequently, a separate wing was established in the Ministry of Finance to administer the provisions

under the Act (Sharma and Agarwal, 2005). Though a number of statutory laws and insurance Acts

were passed from time to time to regulate and control the business, yet as many as 66 out of 215 life business companies perished between 1935 and 1955. This was largely due to growing business

mismanagement and malpractices, manipulation of life funds to indulge in speculative trading, large

scale liquidation of insurance companies, inter-locking of funds, and control and influence of large

business houses which led to public disenchantment and resentment (Rajan and Dhunna, 2002). This

led to the nationalization of life insurance by amalgamating all private companies under one


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corporation, i.e., L.I.C. The number of companies in the general insurance sector increased steadily,

and by 1972 their number had gone to 107. However, out of these 107 companies, more than 50%

were in financially bad shape. Taking into account the bad health of private operators and vast fund

mobilization potential in this sector, Government of India nationalized the General Insurance sector

w.e.f. 1st January, 1973. It formed four subsidiaries, namely, (1) The New India Assurance Company

Ltd., (2) The Oriental Insurance Company Ltd., (3) The National Insurance Company Ltd., and (4)

The United India Insurance Company Ltd., with a holding company General Insurance Corporation of

India.

In spite of the commendable growth and performance of the LIC and GIC on both economic and social

fronts, a vast potential still exists as majority of insurable population is still untapped. Macro

indicators such as population coverage, per capita premium, contribution to employment and GDP are

still very low as compared to developed countries, although they compare reasonably well with other

developing countries. The consumers have less choice of products in the absence of tailor-made

products to suit different categories of people in terms of their levels of income, nature of profession

and needs. Therefore, the criticism that is voiced against the state monolith is on grounds of

efficiency . It is beli eved that competition would lead to reduction of costs (premium rates) and shall

offer a wider choice of products to the consumers. In consonance with these concerns, the reform

process of Indian insurance sector was initiated by the Government of India.

2.2. Reform Process of Insurance Sector in IndiaThe Government of India constituted the Malhotra Committee to examine and recommend the

measures for the introduction of the reforms process in the insurance sector. R.N. Malhotra, retired

Governor of the Reserve Bank of India, was named its Chairperson. The committee examined the

structure of the insurance industry and recommended changes to make it more efficient and

competitive, keeping in view the structural changes in other parts of the financial system of the

economy (Sharma and Agarwal, 2005). The Government accepted the report of the Committee, which

was submitted to the Government in January 1994.

2.3 Recommendations of the Malhotra Committee

The Malhotra Committee had made certain recommendations to the Government to change the face of

the industry and to give it a more meaningful direction. Regarding the liberalization of the insurance

industry, the Committee made the following important recommendations:

(a) Private sector should be allowed to enter the insurance business:


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The Committee had deliberated on the subject and the following issues weighed in favour of opening

the industry to competition:

Competition would lead to better customer service.

It would improve the quality and price of insurance products.

The entry of new players would lead to better penetration of the market.

When other wings of the financial sector like banking, mutual funds, merchant banking, and

non-banking financial sectors were exposed to competition, there was no reason to keep insurance

insulated.

Public view was converging towards competition in the insurance sector.

As public sector insurance institutions had created a good pool of professional talent and

marketing network, there was no fear of they being incapable of facing competition.

(b) No composite Insurance Companies:

The Committee recommended that no single company should be allowed to transact both life and

general insurance business. The Committee had so recommended as life and general insurance are two

different lines of business, and prudence demands that there should not be any mixing up of funds.

(c) Number of new entrants to be controlled:

The Committee felt that this step was necessary to control the cropping up of small private sector

companies and their wilting away during a financial crisis.

(d) Minimum paid-up capital:With a view to ensure that only companies with a good track record in their line of business apply for

licenses to act as insurance companies, the Committee recommended a paid- up capital of Rs.100 crore

for the new entrants. At the same time, the Committee felt that this requirement could be lowered in

cases where the promoters are state level co-operative institutions.

(e) Obligation to do business in rural areas and for weaker sections of the community:

This stipulation was introduced to ensure a level-playing ground for all insurance companies. New

entrants may tend to concentrate on more lucrative business to the neglect of the common people and

the rural areas. To avoid this, the Committee had recommended that both life and non-life companies

should procure a prescribed percentage of business from these segments.

(f) Selective entry to foreign companies:

The Committee felt that permitting foreign insurance companies would be in the interest of the Indian

economy, particularly in the context of globalization. It recommended that entry to foreign companies


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should be on a selective basis. Foreign companies entering India should be required to float an Indian

company, preferably as a joint venture.

(g) Technology upgradation:

The insurance has become an information-driven industry all over the world. This, in effect, means

heavy dependence on IT and development of computer support systems. The industry has to develop

software to improve effective customer service and claim management.

(h) Pension Sector:

To popularize the contribution to individual pension funds by self-employed professionals, traders and

workers in the unorganized sectors, the Committee recommended income tax concessions up to a

prescribed limit for contribution to individual pension schemes floated and managed by insurance

companies. The Committee cited the nature of tax concessions available on individual contributions to

the pension funds and concessions available to pension funds in the UK; it suggested that substantial

concessions should also be available for contributions to pension funds in India, and this should cover

schemes managed by all the insurance companies as well.

(i) Privatization of LIC and GIC:

The Committee felt that as a State-owned entity, LIC suffered many operational constraints, and its

flexibility and ability to respond to changing situations was limited. Many of the constraints are due to

the reason that, in the eyes of law, LIC falls within the definition of 'State'. To overcome this situation,

LIC should be taken out of the definition of 'State'. To achieve this, the share of the Government in theequity of LIC should be reduced to 50% or to 49% as the Government had decided in the case of

certain PSUs. To enable LIC to run as a board managed company with a dominant shareholding by the

Government, the shareholding pattern has to change, and LIC has to be registered as a company under

the Indian Companies Act.

As far as GIC is concerned, it was recommended that GIC should cease to be a holding company of

four of its subsidiaries, and should act as an Indian Reinsurer under the Indian Insurance Act. It was

further recommended that the share capital of GIC should be raised to Rs.200 crore from its present

level of Rs.107.50 crore. Out of this, 50% of the equity should be held by the Government and the rest

by the Public at large, including employees of GIC. As far as the four subsidiary companies are

concerned, it was suggested that they should function as independent companies run by a board. It was

further proposed that the equity capital of each of these companies should be raised to Rs.100 crore

with a 50% holding by the Government and the rest by the public and the employees of the respective

companies.


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(j) Establishment of an Insurance Regulator:

While considering the implications of opening up the industry to competition, the Committee also

examined the role of the Controller of Insurance, and the need for a regulatory body for the insurance

sector. The Controller of Insurance was vested with wide powers under the Indian Insurance Act,

1938. With the progressive nationalization of the life and general insurance sectors, the powers of the

Controller of Insurance were reduced as many of the functions were transferred to the nationalised

companies themselves or, wherever necessary, the Government itself started exercising the powers

directly. The Committee felt that this dispensation was flawed even in the context of a State monopoly

and would have to change in a competitive environment. The Committee suggested restoring the office

of the Controller of Insurance to its full statutory powers and segregating it from the Ministry of

Finance. The Committee had also suggested setting up an Insurance Regulatory Authority as a multi-

member body and as a highly professional and compact organisation with adequate IT support, similar

to the Securities and Exchange Board of India (SEBI). With this in view, the Committee proposed the

establishment of a powerful and autonomous regulatory body on the lines of SEBI. The Committee

also further stated that the regulatory authority should have full functional autonomy and operational

flexibility to discharge its functions in a free and fair manner (Narayanan, 2006).

2.4. Mukherjee Committee Report

Immediately after the publication of the Malhotra Committee Report, a new committee(called the

Mukherjee Committee) was set up to make concrete plans for the requirements of the newly formedinsurance companies. Recommendations of the Mukherjee Committee were never made public. But,

from the information that filtered out it became clear that the committee recommended the inclusion of

certain ratios in insurance company balance- sheets to ensure transparency in accounting. But the

Finance Minister objected. He argued (probably on the advice of some of the potential entrants) that it

could affect the prospects of a developing insurance company (Banga, 2007).

2.5 Insurance Regulatory Authority (IRA)

Based on the recommendations of the Committee, the Government constituted an interim authority,

called the Insurance Regulatory Authority, to look into the implementation aspects of the report. The

Authority comprised a Government nominee and a member each from the life and general insurance

industries. The primary task of the Authority was to frame regulations on its functioning and act as the

insurance regulator. Subsequently, based on the recommendations of a standing committee, the

Authority was vested with the responsibility of developing the insurance business in India and also


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train and develop professionals and intermediaries for the purpose. In August 1997, when the

Insurance Regulatory Authority Bill was piloted in the Lok Sabha, it could not be passed. The Bill was

strongly criticized and denounced and had to be withdrawn.

2.6 Insurance Regulatory and Development Authority (IRDA)

The IRA Bill, renamed as Insurance Regulatory and Development Authority Bill, 1998 was passed by

the Lok Sabha on December 2, 1999 and subsequently by the Rajya Sabha on December 7, 1999, and

notified on December 29, 1999. The enactment of the Insurance Regulatory and Development

Authority Act, 1999 ended the State monopoly of the sector. The IRDA, as an autonomous body, was

constituted on April 19, 1999 vide Government of India notification no. 277. The Act vested the IRDA

with the responsibility of regulating and developing the business of insurance and re-insurance in

India.

The principal responsibility of the IRDA includes:

Framing various regulations governing the activities of the insurance companies and

corporations-both Indian and Indian companies with foreign business partners.

Discharging the responsibility of the Controller of Insurance in opening offices, licensing

intermediaries, etc.

Monitoring the activities of the Tariff Advisory Committee (TAC), divesting the GIC of its

authority to transact non-life business and designating it as the Indian Reinsurer.

Objectives of the Insurance Regulatory and Development Authority (IRDA):

To protect the interest of and secure fair treatment to policyholders.

To bring about speedy and orderly growth of the insurance industry for the benefit of the

common man, and to provide long-term funds for accelerating growth of the economy.

To set, promote, monitor and enforce high standards of integrity, financial soundness, fair

dealing and competence of those it regulates.

To ensure speedy settlement of genuine claim, to prevent insurance frauds and other

malpractices and put in place effective grievance redressal machinery.

To promote fairness, transparency and orderly conduct in financial markets dealing with

insurance and build a reliable management information system to enforce high standards of financial

soundness amongst market players.

To take action where such standards are inadequate or ineffectively enforced.


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To bring about optimum amount of self-regulation in day-to-day working of the industry

consistent with the requirement of prudential regulation (Annual Report of IRDA 2002-03).

Functions of Insurance Regulatory and Development Authority:

The IRDA has been established to perform the following regulatory functions:

Issue and withdraw licenses.

Specify qualification codes of conduct and training for intermediaries and agents.

Specify the form and manner in which books of accounts shall be maintained.

Regulate investment of insurance funds.

Specify and percentage of life insurance business to be undertaken by the insurer in both rural

and social sectors.

Approve the appointment of the managing directors (Ali et al.,2007).

The IRDA began functioning on April 19, 2000 with N. Rangachary as its first Chairperson and with 4

full-time directors and 2 part-time directors, in addition to the 25-member Insurance Advisory

Council. The members of the council represented various industries and professions. The IRDA

appointed its first advisory panel with 23 members on May 25, 2000.

2.7 Insurance Councils

The insurance councils that were in existence under the provision of the Indian Insurance Act 1938,were not effective and practically defunct during the days of State monopoly. After the advent of the

IRDA in February 2001, vide the power vested in it under Sections 64C and 64F of the Insurance Act,

1938, the IRDA revived the Life Insurance Council and the General Insurance Council. These two

councils, each headed by a member of the IRDA, play significant roles in establishing industry

standards. As a need was felt for the constitution of an appellate authority for the various decisions of

the IRDA, on the lines of the Securities Appellate Tribunal, the Government notified the setting up of

an appellate authority for the insurance industry, and also set up a single bench and a division bench; it

is expected that shortly a full-fledged appellate body would be set up as envisaged in the Law

Commission Report on the subject.

Regulation of insurance is not an exclusive Indian phenomenon. Insurance is amongst the highly

regulated businesses in the world. Interestingly, a view is strongly emerging that, in India, the

insurance council representing the industry and the IRDA should become a self-regulatory body and

address itself to issues relating to the management of the industry as is being done in some countries


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abroad. However, some industry experts opine that while regulatory mechanisms are regaining lost

ground in many countries, as self-regulation had turned out to be a poor proxy, a switchover from

well-established regulatory systems to a liberal, self-regulatory mechanism might not be in the interest

of the customers.

2.8 Detariffication of Insurance Sector in India

Detariffication has been the most awaited reform in the general insurance industry ever since the

Malhotra Committee recommended gradual removal of tariffs in the non-life insurance sector. The

detariffing exercise has two phases. The first phase started on January 1, 2007 when the IRDA allowed

companies to charge their own premium for all classes of business that had been under a tariff till then.

The exception was Motor Third Party Liability Insurance for commercial vehicles. The second phase

was started from 1st January, 2009 as the General Insurance Companies have given more freedom to

design their own products. IRDA in its circular issued on November 6, 2008 has given the general

insurance companies the freedom to offer certain covers outside the scope of the descriptions in the

erstwhile tariffs (GIC Re News, 2008).

The reforms have changed the whole scenario of Indian insurance industry. Its character has changed

altogether in the wake of transition from a controlled to a competition-driven market. Several new

players have entered into the insurance business. The foreign insurers have entered through the joint

venture route. Their entry into the field has generated a tough competition in the market which resulted

into better customer service. The quality and price of insurance products has greatly improved. Therange of products and services has increased so as to give a wider choice to the customers. Both the

existing as well as new players have got ample opportunities to penetrate into untapped areas, sectors

and sub-sectors and unexploited segments of population as presently both insurance density and

penetration are at a low level. Thus, the reform process started in India has helped the insurance sector

to grow in a quick and orderly manner for the benefit of the common man.


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3. INSURANCE REFORMS : WHOM WILL IT BENEFIT

As part of further rerorms in the insurance sector, there are attempts to bring in two laws to amending

the existing insurance acts. These laws are: The Insurance (Laws) Amendment Bill 2008 and The LIC

(Amendment) Bill 2009. These amendments have far reaching inpact on the insurance sector in India

in particular and for the entire national economy in general.

The Insurance (Laws) Amendment Bill 2008 seeks to amend certain provisions of the Insurance Act

1938, General Insurance Business (Nationalisation) Act 1972 (GIBNA) and Insurance Regulatory and

Development Authority Act 1999.

3.1 AMENDMENTS TO THE GENERAL INSURANCE BUSINESS (NATIONALISATION

(ACT) 1972

Even a cursory reading of the above amendment makes it clear the purpose of this amendment is to

privatize the GIC and the four companies. The GIC and the four public sector companies have been

performing admirably well. While doing business, they have never neglected the social objectives of

the public sector. They have a number of schemes catering to the needs of the rural and social sectors.

The General Insurance Corporation is very sound financially. It has a large asset base and reserves. It

is capable of meeting the capital needs through internal resources. Similarly, the four companies are

also financially very sound. They have assets worth Rs.78198 crore and reserves of Rs.13254 crore as

on 31 st March 2008. They have been regularly generating profits and making huge dividend pay outs

to the government. Therefore, these national institutions do not require approaching the capital

markets to raise funds for their expansion. Privatising these successful institutions does not serve any

national interest. Rather than this measure to privatize, the government must seriously consider the

merger of the four companies into a single monolithic corporation on the lines of LIC as suggested by

the Parliamentary Committee on Public Undertakings. This would help them to serve the social and

rural sector and fulfill the objectives of a public sector with greater amount of success.

3.2 AMENDMENT TO THE INSURANCE REGULATORY AND DEVELOPMENT ACT 1999

The major amendment that is being proposed is to increase the foreign equity participation to 49

percent from the present 26 percent. It is being argued that insurance business being capital intensive,

the Indian partners lack resources to expand the business. The other arguments are that hike in FDI


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would bring technology, enable product innovation and generate resources for infrastructure

development. These arguments are in total variance with the actual experiences since the opening up

of the insurance sector and therefore do not stand test of reasoning. The argument that Indian partners

are short of resources is simply unacceptable. It is known that many of the private insurance

companies are subsidiaries of flagship corporate houses such as Tatas, Birlas and Reliance which have

extremely strong balance sheets, ready access to financial markets and healthy capital reserves. In the

recent period, we have seen that the Indian Corporate houses have invested heavily abroad to acquire

foreign companies. Acquisition of Corus by Tatas is just an example. Therefore the argument that

Indian partners in the insurance companies lack resources to meet the needs of their business just

cannot be true.

Insurance industry has made impressive progress in the last few years thanks to the growth in the

economy and increased disposal income in the hands of the middle classes. The life insurance penetration in India is much higher than many developed countries thanks to the performance of LIC.

The private sector has spread across the country . Therefore, the argument that they have not be able to

expand due to resource crunch is simply not true.

The Indian insurance industry is highly developed and technology adopted sector. In fact LIC has the

highest technology spend in the entire country and is in possession of the best possible technology.

Therefore, hike in FDI is not required for technology import. The Indian insurance industry has a large

number of products designed to suit the needs of every section of population and there are continuous

innovation of products to benefit the customers. Even on this count, there is absolutely no need for

FDI.

The 26 percent limit on foreign equity participation has not been an entry barrier. Today around 35

private life and non-life insurance companies are operating businesses in India. The IRDA is

continuously receiving applications for licences from the foreign players and their Indian partners to

operate business in India.

Today more than 92 percent of the life insurance business transacted by the private companies is in the

form of unit linked policies. Under these policies, the risk of investment is undertaken by the

policyholder and a large portion of the premium fund is invested in the stock markets. This limits the

ability to invest in the infrastructure and social sector. Of the 90000 crore invested in the

infrastructure as at 31.3.2008, LIC alone has invested close to Rs.82000 crore.


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The assurances given at the time of opening up of the insurance sector in 1999 that foreign partners

would bring considerable portion of their global premium into India has not proved right. Except for

the share of their capital, the foreign partners have not brought any additional funds for investment in

Indian infrastructure. The hike in FDI would allow foreign capital to gain greater access and control

over our domestic savings. This surely cannot be in national interests.

The benefits of FDI are being critically re-assessed across the globe. The World Bank which

stridently pushed the idea that FDI is the most important element to promote the domestic economies

has now adopted a more cautious approach. The World Bank supported Growth Commission under the

chairmanship of Noble Laureate Micheal Spence observes our view is that foreign saving is an

imperfect substitute for domestic saving, including public saving to finance the investment a booming

economy requires. This observation and the experiences of FDI across the globe makes it clear that it

is the domestic savings that provide most stable funds for investments in economy and therefore theGovernment must control these savings rather than place them at the disposal of foreign capital.

The world is going through a period of worst financial crisis. The entire insurance industry in United

States, Europe and Japan is in great turmoil. The bail out of AIG is too well known. Similarly in

Europe Fortis, ING, Aegon had to be bailed out by their governments. The big insurance companies

have been seeking aid from their governments for survival. The rating agencies including Fitch have

down graded insurance industry in all these countries. These rating agencies have also projected that

the insurance industry would remain in a stagnant stage for the next 18-24 months. Under such

circumstances further liberalizing the Indian insurance sector is highly imprudent.

Insurance industry plays the important role of providing security to the policyholders and converting

the small savings into capital for investment in critical infrastructure sector. At a time when the

government has to make heavy investments in infrastructure to create domestic demand, the savings

mobilized through insurance play a very important role. Therefore, the government must gain total

control over the domestic savings rather than allowing the foreign capital to use them for their

speculative endeavours.

3.3 THE LIC (AMENDMENT) BILL 2009

LIC (Amendment) Bill 2009 aims to increase the equity of LIC from Rs.5 crores to Rs.100 crores.

This on the face of it appears to be a harmless amendment. But read in the context of the Malhotra

Committee recommendations which recommended disinvestment of LIC and GIC to 50%, this has a


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portent of being the first step towards disinvestment of LIC in future. LIC has assets worth Rs.8,

73,000 crores and a liability of Rs.8,07,000 crores. Thus the assets are Rs.66,000 crores more than the

liability. For the past 53 years the expansion of LIC was met by its own funds and government did not

provide any additional capital. This goes to show that LIC does not need any equity increase except

for the argument that Rs.5 crores equity is too small to disinvest and would not enthuse the market and

hence it had to be increased to Rs.100 crores to facilitate disinvestment. The LIC (Amendment) Bill

2009 also contains another amendment to provide sovereign guarantee on a selective basis, instead of

the absolute guarantee provided all these years.

LIC never utilized the sovereign guarantee for marketing its products, nor did it utilize sovereign

guarantee for meeting the claims even during the natural calamities like Gujarat Earth quake, Tsunami

etc. Apart from paying the taxes, LIC also pays dividend every year to the Government and the

dividend paid to the Government for the year 2008 alone was Rs.829.59 crores and during the year 2009 the dividend declared is Rs.929 crores. So LIC has no history of dependence on the government

for its payments. LIC paid the claims promptly out of its own funds during the natural calamities like

earthquake, tsunami etc.

Hence, there is no case for withdrawl or modification of the sovereign guarantee since such a proposal

would affect the confidence of the policyholders. It is acknowledged that no other institution in this

country evoked such massive confidence as LIC which has succeeded in earning tremendous

confidence of its policyholders and trust of the nation as a whole. The confidence of the people is

once again exhibited when LIC could mobilize more than Rs.10,600 crores under one single product

named Jeevan Astha within a period of 45 days during the financial year 2 008-09.

Presently the surplus generated by LIC each year is distributed to the policyholders and the

government in the ration of 95:5. Now an amendment proposed in the Bill suggests that the

policyholders share may be brought down to 90%. This is against the interests of the policyholders

who are the real owners of LIC. As on 31.3.2009 LICs investments in the government and social

sector investments stand at Rs.5, 29,525 crores. During first two years of the current five year plan,

LIC already contributed Rs. 218510 crores to the five year plan. The government should not make any

moves to destabilize this institution. Report of the Committee on Investor Awareness and Protection

3.4 INSURANCE IS THE SUBJECT MATTER OF SOLICITATION.


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Unlike other financial products Insurance is a service which is sold and not bought. Unlike mutual

funds where bulk of the investments are made by the Corporate Sector and they having the ability to

negotiate the terms, life insurance is a hundred percent retail sale.

It requires an enormous amount of patience to close one insurance sale and there is no guarantee that

every attempt would succeed. Some of the LIC agents say by experience that out of 10 persons they

approach one may seek the insurance policy. That is the reason why there are huge numbers of drop

outs among the people who come to take up agency as their profession. The Insurance Act 1938

prescribes a ceiling on commission rates, which could be paid to agents for different classes of

business. Commission rates are lower for short term and high premium policies and higher for long

term and low premium policies in order to regulate the absolute commission earned.

So, even when the LICs premium income grew during 2002 to 2009 manifold, the commission paid

to the agents during the last seven years shows that as a percentage of the total premium collected, the

commission paid to the agents has come down from 9.15% to 6.38%.

The average commission payouts by the insurance industry as a whole have also been reducing every

year.

There are recommendations in the Report of the Committee on Investor Awareness and Protection that

the customer would directly pay the compensation for the advice/sale. These are not practicable and

fair in the present situation where insurance as a product is only to be sold and not bought by the

customers. It must be understood that in India a customer would feel that he had done a service by

taking out a policy through an agent, instead of feeling that he has taken the service of the agent. This

being the position, the argument that the customer would directly pay is not a practicable solution and

it would drive away the agency force and would impact the whole insurance industry and the capacity

of the insurance companies to mobilise the savings of the people even the IRDA chief express similier

concerns. At a time when the country needs huge resources for infrastructure development, any

tinkering with the existing commission payment pattern would not only harm the industry but would

severely impact the national economy.

http://indiacurrentaffairs.org/insurance-reforms-whom-will-it-benefit/

4. POST EFFECTS
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4.1 IRDA UNVEILS REFORMS IN INSURANCE SECTOR

Major highlights of the new initiatives approved are:

1. Insurance repositoriesto be established. This will lead of dematerialization of insurance

policies. Policies would no longer be needed to be held in paper form, but can be maintained asdemat or electronic form.

2. IRDA will grant certificate of registration to five entities for setting up insurance repositories.

Demat policies will enable consumers to get their policies serviced anywhere and allow a one-

time know your customer process that will be valid for al l insurance purchases across

companies.

3. The companies that have received IRDA approval for setting up insurance repositories are:

NSDL, CDSL, Karvy, CAMS and STCI.

4. Demat policies will benefit policyholders as they will not have to worry about losing the

document which has to be preserved for 20-30 years and it will also do away with the need to

transfer their policies if they shift their home.

5. Repository services will also conduct basic policy servicing on behalf of insurance companies.

6. Insurance companies would be able to buy credit protection through derivatives, lend up to

10% of their shares and carry out short-term repo transaction in bonds.

7. The regulator will ease investment limits that will give Life Insurance Corporation of India

more flexibility to invest in companies.

8. IRDA will also come out with a whistleblower policy on the lines of Reserve Bank of India.

http://thecalibre.in/diary-of-events/irda-unveils-reforms-in-insurance-sector/082012/?p=773/

4.2 INSURANCE SECTOR REFORMS ON THE ANVIL

Soon after rolling out foreign direct investment (FDI) in multi-brand retail and aviation in a renewed

surge of reforms, Finance Minister P. Chidambaram, on a fast-forward mission mode, is keen on

raising the FDI cap in the insurance sector to 49 per cent from the existing 26 per cent.
http://thecalibre.in/diary-of-events/irda-unveils-reforms-in-insurance-sector/082012/?p=773/http://thecalibre.in/diary-of-events/irda-unveils-reforms-in-insurance-sector/082012/?p=773/http://thecalibre.in/diary-of-events/irda-unveils-reforms-in-insurance-sector/082012/?p=773/


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While work is in progress in this regard at a feverish pitch and a Cabinet note is under preparation for

approval of the higher FDI limit in the insurance sector, the UPA government is also engaged in

assessing the political fall-out of the financial sector reform.

Such as exercise, according to government sources, is essential as though the Bill on the insurance

sector was tabled in the Rajya Sabha with a proposed higher FDI limit of 49 per cent, the

Parliamentary Standing Committee on Finance had suggested retention of the investment cap at 26 per

cent. Even in May, the government was forced to postpone a decision on hiking the FDI limit

following pressure from its own coalition partners.

However, with the Trinamool Congress out of the way and the Samajwadi Party lending outside

support, the minority government appears to be ready in trying to push the insurance sector reforms

through, just as the Narasimha Rao government had succeeded in initiating the reform measures in

1991-92 when Prime Minister Manmohan Singh was the then Finance Minister.

The move assumes significance as at the insurance summit in Mumbai earlier this week, Insurance

Regulatory and Development Authority (IRDA) Chairman J. Hari Narayan had stressed the need for

larger investments for growth of the sector while noting that a hike in FDI limit would be welcome.

Faster approval of policies

Alongside, IRDA is also working on developing a mechanism for faster clearance of insurance

policies aimed at encouraging companies to roll out low premium products as that would increase

insurance penetration throughout the country.

Speaking to reporters after a meeting here on Wednesday between the Finance Minister and the IRDA

chief, Financial Services Secretary D.K. Mittal said: Roadmap has been agreed upon for faster

approval of products [by the insurance regulator]The meeting discussed how to increase insurance

penetration, how insurance companies can do more business, how better products can be introduced at

lower premium, and how more investments can flow into infrastructure sector. Some decisions are

expected by today or tomorrow, he said.

http://www.thehindu.com/business/Economy/insurance-sector-reforms-on-the-

anvil/article3939087.ece
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4.3 SECOND-GENERATION INSURANCE REFORMS ON HORIZON

The government appears to be gearing up for second-generation reforms in the insurance sector.

When he resumed charge of the finance ministry, P Chidamabaram held a slew of meetings with the

insurance regulator and captains of the industry in October 2012. Also, at a meeting in Singaporerecently, the finance minister told the global community that the government was committed to

seeking parliamentary approval for increasing the FDI limit in the insurance and pension sectors to

49% from the current ceiling of 26%.

The reforms introduced in 1999 were focussed more on opening up of the sector, enabling private

players to enter and for attracting FDI to support this highly capital-intensive industry. The new

regulations served the industry well and, over a period of time, the country witnessed entry of as many

as 44 insurance entities. The contribution of the sector to the GDP increased to a record 5.1% in 2009-

10, up from 2.9% in 1999. In the life sector, the number of intermediaries rose to a high of 2.9 million.

As a result, the sector experienced a boom similar to the telecom sector during the best period of the

economic reforms. The industry reclaimed its role in the economy as an important component of

development strategies. During 2010-11, however, the trend started weakening after almost a decade

of fabulous growth in market penetration, distribution reach and product innovation.

The last two years were quite frustrating and the possibility of a revival seemed remote till the finance

minister made the policy of the government explicit by announcing the 12-point programme for the

life insurance sector and governments views on the issues plaguing the non -life and health business in

the backdrop of the limitations faced by the insurers due to regulatory pressures.

The spate of regulatory guidelines, aimed at protecting policyholders interest and curbing wasteful

expenditure, did bring with them a trail of misery, putting many companies completely out of track.

Such steps were motivated by the need to curb mis-selling, but coinciding with the global economic

slowdown, the regulatory interventions drew curtains on the first phase of reforms. The constraintsfaced by the insurers and their pain were noted by the finance minister during his interactions with the

CEOs.

The 12-point programme for life insurers tries to address issues in the domain of taxation, product

approval, revamping of the distribution channel, etc. For the non-life sector, the government has hinted

at the need to bring more transparency and standardisation in terms and conditions of health insurance,


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urgency for reaching out to the poor and those in far-flung areas, and the need to create awareness

among people for protecting themselves and their property against natural disasters. It is felt that there

is a huge opportunity in this sector as the penetration has remained constant at 0.7% for many years.

The ratio of non-life premium to life premium in India is far below the global average. This has further

prompted the government to encourage fresh initiatives to deepen penetration of non-life insurance

through more personal products going far beyond the statutory line of business like motor, fire,

marine, etc. The second-generation reforms are also warranted due to the emerging issues like initial

public offerings by insurers, mergers and acquisitions, new investment imperatives like one allowing

LIC to invest up to 30% in a single company and allowing Indian insurers to actively expand their

footprints overseas, encashing on their experience in the Indian market, which provides numerous

challenges created by the fast-changing demography on various parameters like economic, social,

cultural, health and longevity. Apart from these, much more needs to be done on the platform of financial inclusion through sustainable micro insurance, creating real value for the poor and BPL

families.

The next round of reforms will also have to address insurers concerns regarding distribution channels,

learning from the experience of the first decade. There is an urgent need to recognise the fact that the

importance of distribution cannot be overlooked in the business of insurance and the channels must be

carefully nurtured as the main driver of growth and stability in mobilising premium income.

There is a need to further stabilise and activate the grievance redressal mechanism so that the voice of

the customers is heard with respect and is utilised as a valuable input. The role of technology will have

to be made more clear with suitable changes in law for facilitating buying of insurance products as

well as for maintaining records in demat forms on scale larger than the existing one. There is a need to

strengthen corporate governance in the sector and closer regulatory supervision. The government may

consider revamping the regulatory structure to deal with such issues more effectively by issuing

necessary directives or legislative changes. A strong political will, as pronounced by the immediate

steps taken by the FM since October 2012 , and the issues likely to come up during the Budget session

of Parliament may unleash the second generation of reforms in the insurance sector very soon.

http://www.financialexpress.com/news/secondgeneration-insurance-reforms-on-horizon/1066121/4
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CONCLUSION

A well-developed insurance sector is necessary for the economic development of an emerging

economy like India, as it provides long-term funds for physical and social infrastructure, while

simultaneously strengthening risk-taking abilities. The investment requirements for India in the

coming years are well-known and the rapid growth of the insurance sector in the post-liberalisation period is seen as a good sign as it can, to some extent, facilitate investment in infrastructure

development to help sustain the economic growth of the country. Against this backdrop, this paper

raises an important question: what has been the contribution of insurance sector growth to economic

development in India? The paper further examines the economic growth effects of insurance sector

reforms and the rate of growth of insurance reforms. The claims brought forward by this study are

mixed. The contribution of the insurance sector to economic development is positive and exhibits a

long-run equilibrium relationship. We find that reforms exert no strong relationship, but the rate of

growth of reforms has a positive influence on economic development.

A situation where almost all the major industries are suffering an economic meltdown, Indian

insurance industry can be said as one sector that is still experiencing a good economic growth. The

adaptability of the industry to mould and shape itself as per the changing trends and lifestyle led it to

carve out a safe path of growth and sustenance for itself. All the players in the industry are striving

hard to provide the customers with the best possible solution through innovative, varied products and

making their services easily accessible and more visible in the market. There is a tough competition in

the industry each one trying to grab the market share of the other. Transition of the industry from non

linked to unit linked insurance policies is one of the major change that lead to improvisation of the

industry s services with the government liberalised policies and IRDA adding tint of flavour

propagating the growth. The sector has immense potential as not even 50% of the population is insured

in India. Growing population and rising standard of living of the people will further make the task of

the companies less burdensome. More and more population can be insured only when the companies

go for an extensive market research before actually designing or positioning their products and

targeting them to the specific segments so that time and resources both can be saved. The companies

should go and tap the rural population has there is huge rigorous strength in that crowd to provide with

substantial profit margins. The focus of the insurance companies to target the densely populated areas

instead of providing insurance to qualitative segment of the population can sweeten the emerging

growing prospects of the industry. Its not far that India will become an insurance giant in the coming

few years. A report by Deccan Herald predicts the Indian insurance industry to be worth $400 billion


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by the year 2020 further increasing the appeal of the industry. In a report titled, "India Life Insurance

2012: Fortune Favors the Bold," McKinsey & Co. sets out the positives. "All factors are in place

for the Indian life insurance industry to blossom into one of the fastest-growing financial

services markets in the world." So, we can say, the future of the industry is undoubtedly progressive

and investment made in this sector would not go futile.


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REFERENCES Ali, S.; Mohammad, R.; and Masharique, A. (2007), "Insurance Sector in Post- Liberalization, an

Impact on Legal Framework" Insurance In India , Regal Publications, New Delhi, pp.118-124.

Banga, J.S. (2007), "Market Strategies of General Insurance Companies in India (A Study of

Public Sector & Private Sector)," Ph.D. Thesis, Submitted to Punjab School of Management

Studies, Punjabi University, Patiala.

GIC Re News (2008) "De-tarriffication in India. The Progress So Far" issue 01, Vol.2, Dec., pp 5-

6.

Narayanan, H. (2006), "Indian Insurance and Globalization", Indian Insurance: A Profile, Jaico

Publishing House, Mumbai, pp.94-101.

Rajan, A.K.; and Dhunn a, M. (2002), Liberalization of Insurance Sector : Social Implications,

Indian Management Studies Journal, Vol.6, No.1, April, pp.109-118.

Sharma, M.K.; and Agarwal, P. (2005), Globalization of Indian Insurance Sector The Emerging

Scenario, Indian Management Studies Journal , Vol.9, No.2, Oct., pp.47-58.

Sinha, T. (2005), "An Analysis of the Evolution of Insurance in India", Centre for Risk and

Insurance Studies , Discussion Paper Series-III, pp. 1-68.

www.nottingham.ac.uk/business/cris/papers 2005-3.pdf Accessed on Aug.10, 2008.

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