Indian Insurance Industry after the independence has been characterised with a state sector monopoly for a major part. LIC (Life Insurance Corporation of India) was formed in 1956. However, there has been a spectacular increase in the Life Insurance business.
The premiums have grown over 40 times. But a large segment of the population has remained untouched, (only 25% of insurable people have been covered). The gravity of insurance business is measured in terms of premium collection as a percentage of GDP, which is 3 percent at present. India ranks 49th among the world nations in terms of Insurance cover.
India’s attempt towards reforms of Insurance Industry started as a part of financial sector reforms. Government of India set up by R.N. Malhotra Committee, to examine the structure of insurance industry and recommended changes in insurance sector. The purpose was to make our insurance sector more productive.
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The committee recommended for establishment of Insurance Regulatory Authorities in the form of a stutory body like SEBI. Regarding restructuring of LIC the committee recommended that government should hold 50 percent of shares and remainder should be held by the public and employees. The capital size should be equal to Rs. 200 crores.
LIC should be converted into a company and to be registered under company’s Act. The hierarchical functioning of LIC should be decentralized, to bring speed in work process. Central office functioning should be confined within the premise of policy formulation, review and evaluation, pricing of product, investment and actual evaluation. Zonal offices should be made head offices for financial and administrative matters within their jurisdiction.
As far as General Insurance is concerned the committee is of the view that Capital should be raised to Rs. 200 crore. GIC should not act as a holding company rather It should function as a reinsurance company. GIC has failed to promote competition among its subsidiaries, however, GIC’s conduct of business has made it strong and financial strength is high.
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Towards Liberalisation of Industries the committee is of the view that private companies are required to bring variety in the product range and ensure more insurance coverage. Private companies will be allowed only if the Regulatory authority is satisfied about the credentials of the applicant.
Every company must have a specified proportion of their business in rural areas to avoid concentration in urban areas. Some foreign companies may also be permitted to bring a global integration in Indian Insurance Sector. But they should form an Indian Company or may for a joint venture with an Indian partner.
Though foreign firms can not invest in more than 26 percent at present but many are of the view that this participation may be raised to 49 percent and legislation will be there to this effect. As press reports shows, Sunlife of Canada is interested to hike the equity participation in Birla Sunlife up to 49 percent once legal decision is taken in this regard by the Government. According to a recent findings that in terms of market share private insurance companies in the life sector has 12 percent market share whereas for non-life sector they 15 percent market share.
Insurance Regulatory and Development Authority (IRDA):
Insurance Regulatory and Development Authority (IRDA) was the ultimate attempt after a lot of action and thought to set up a Regulatory authority. There was a lot of debate in this regard whether the body would be established.
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Ultimately it was decided that formation of this would be a necessity if there were private sector participation as well as foray of foreign players. Private sector/Foreign player participation would make our nationalised insurance sector weak. However, after a lot of debate on Dec’7, 1999, the Insurance Regulatory & Development Authority Act was passed in the parliament.
It was decided by the IRDA that paid up equity capital would be of Rs. 100 crores in case of companies carrying business whether in life sector of in non-life sector. For the business of reinsurance Rs. 200 crore should be the paid up capital.
Every Insurance Company would be formed and registered under the companies Act 1956. For a foreign player the paid up capital would be 26 percent.
Every registered insurance company should keep a deposit with RBI as sum of Rs. 10 crores either in cash or in approved securities or alternatively a sum equivalent to 1 percent of gross direct premium for life Insurance in any financial year and should be kept as a deposit or for non-life insurance a sum equivalent to 3 percent of total gross premium should be kept as deposit with RBI. It has also been decided that every life Insurance Company will investigate the actuarial transaction in every year.
According to IDRA Act, the authority will “promote, regulate, promote and ensure orderly growth of Insurance”, provide protection of interest to the insurance policy holder, decide requisite qualification of Insurance brokers as well as their code of conduct, and practical training, specify percentage of life insurance business to be undertaken by the insure company in the rural or social sector, adjudicate disputes between insurers and insurance intermediaries, promote and regulate professional organization connected with insurance and reinsurance business.
The regulatory authority will call for information, undertake audit, for insurance firms. The authority will specify the form and manner in which books of accounts shall be maintained and statement of accounts shall be prepared by insurers and in other insurance intermediaries. It will also regulate investment of funds by insurance companies.
Thus, we see, development and Regulatory Authority has wide terms of reference. The shape of Insurance business will depend on, how for the Regulator will guide the industry. The private companies and other players should give more stress on expanding the base and net work of insurance business.