Understanding Reforms in the Life Insurance Sector of India

IJCAES SPECIAL ISSUE ON BASIC, APPLIED & SOCIAL SCIENCES, VOLUME III, JANUARY 2013 [ISSN: 2231-4946] Understanding Reforms in the Life Insurance Sector of India Leela Ram Newar Research Scholar, CMJ University ramnewar@gmail.com Abstract - The primary legislations that deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority Act, 1999. With the end of government monopoly and passing of the Insurance Regulatory and Development Authority (IRDA) Act, 1999, there has been a revolution in the Indian insurance sector. Foreign companies were allowed ownership of up to 26% both in life as well as general insurance. The Life Insurance Corporation of India (LICI) - the only insurance company belonging to the public sector, now has to compete with several other corporate entities of its kind which often are heavyweight Indians as well as multinational life insurance brands in themselves. Tracing the developments in the Indian insurance sector reveals the 360-degree turn witnessed over a period of almost two centuries. The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The committee was set up with the objective of complementing the reforms initiated in the financial sector. Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Keywords - Insurance Act 1938, Monopolistic Life Insurance Corporation of India (LICI),Tthe Malhotra Committe, 1993, IRDA Ac, 1999, Percentage Ownership by Foreign Companies (FDI), Ample Scope for Rural Penetration, Positive Overall Growth Rate. I. INTRODUCTION Writings available in development economics forcefully articulate the key role of savings in the process of development. It is argued that every incremental year enhances mobilizations of savings and resources and promotes growth and development. There are various ways in which savings can be invested; investing on insurance is one of them. The primary legislations that deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory & Development Authority Act, 1999. Insurance is defined as the equitable transfer of the risk of a loss, from one entity to another, in exchange for a premium, and can be thought of as a guaranteed small loss to prevent a large, possibly devastating loss. An insurer is a company selling the insurance; an insured is the person or entity buying the insurance. The insurance rate is a factor used to determine the amount to be charged for a certain amount of insurance coverage, called the premium. Apart from helping as a protective cover, insurance acts as a flexible money-saving scheme, which empowers to build up wealth. Insurance also triples up as a perfect tax-saving scheme. II. THE BACKGROUND With the end of government monopoly and passing of the Insurance Regulatory and Development Authority (IRDA) Act, 1999, there has been a revolution in the Indian insurance sector. Foreign companies were allowed ownership of up to 26% both in life as well as general insurance. The form of insurance business has been changing across the globe and this wave is no different in India. Insurance constitutes an important and increasing proportion of the gross financial savings of the households. It has been estimated that the potential of Indian insurance industry is huge considering the fact that insurance has not yet reached to large, untapped population of the country. Only 20 per cent of the insurable population is covered under various life insurance schemes/segments. The insurance sector is experiencing a growth rate of 15 to 20 per cent over the years since the establishment of Insurance Regulatory & Development Authority Act (IRDA) in 1999. The insurance and banking services contribution to the country's gross domestic product (GDP) is 7 per cent of which the gross premium collection 18 P a g e

Leela Ram Newar forms a significant part. The funds available with the state-owned Life Insurance Corporation (LIC) of India for investments are 8 per cent of GDP. The penetration rates of health and other non-life insurances in India is also well below the international level. (Economic Survey, 2008-09). III. THE INSURANCE SECTOR A major role played by the insurance sector is to mobilize national savings and channelize them into investments in different sectors of the economy. However, no significant change seems to have occurred as far as mobilizing savings by the insurance sector is concerned, following the liberalization of the insurance sector in 1999. Data from the RBI show that the trend of the savings in life insurance by the households to GDP ratio, while showing a clear upward trend through the 1990s signifying increasing business for the insurance sector, does not show any structural break after 1999. It is, therefore, understood that the foreign capital which flowed in after the opening up of the insurance sector has not been accompanied by any technological innovation in the insurance business, which would have created greater dynamism in savings mobilization. Far from expanding the market for the insurance sector, the business activities of the private companies are limited in urban areas, where a fairly good market network of the public sector insurance companies already exists. Given this scenario, further increase in foreign participation is only going to lead to intensified competition for the urban insurance markets, rather than leading to a growth in overall savings. While the proposals for hike in FDI were placed, the arguments advanced were that FDI will continue to be encouraged and actively sought, particularly in areas of infrastructure, high technology and exports. The Life Insurance Corporation of India (LIC) - the only insurance company belonging to the public sector, now has to compete with several other corporate entities of its kind which often are heavyweight Indians as well as Multinational Life Insurance Brands in themselves. In the present era of liberalization, privatization and globalization (LPG), employment opportunities, especially permanent employment are becoming very limited. Casual and contract based employment is increasing. The people employed in such contract based jobs are not certain about the duration and permanence of their jobs. In such uncertainties, the insurance sector can play a very important role for the welfare of the society providing safety net to the masses. IV. REFORMS IN INSURANCE The insurance sector in India have come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360- degree turn witnessed over a period of almost two centuries. The business of life insurance in India in its existing form started in India in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. The General insurance business in India, on the other hand, can trace its roots to the Triton Insurance Company Ltd., the first general insurance company established in the year 1850 in Calcutta by the British. The main objective of this section is to review the insurance sector at broader aspects and to outline the main findings of important studies relating to insurance sector to use the analysis as a background, for delineating the area of the present work. In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction. The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes then underway and recognizing that insurance was an important part of the overall financial system where it was necessary to address the need for similar reforms. In 1994, the committee submitted the report and recommendations. The committee emphasized that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competitions. But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body- The Insurance Regulatory and Development Authority. Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Since being set up as an independent 19 P a g e

Understanding Reforms in the Life Insurance Sector of India statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products. V. REVIEW OF LITERATURE The Insurance Sector in India has witnessed tremendous growth particularly after opening up of the industry for over a decade to the private sector, which had remained under the monopoly of LIC of India and General Insurance Corporation and its subsidiaries. Ranade and Ahuja (1999) presented an overview of life insurance operations in India, and have identified the emerging strategic issues in light of liberalization and the impending private sector entry into insurance. The need for private sector entry has been justified on the basis of enhancing the efficiency of operations, achieving a greater density and penetration of life insurance in the country, and for a greater mobilization of long-term savings for long gestation infrastructure projects. Vijayakumar (2001) in a paper explains that the needs of the nation and its people have finally prevailed and privatization of insurance is now a reality towards further liberalization of the Indian economy. With the opening up of the industry after reforms, private sector operators in collaboration with their overseas partners are likely to bring in a more professional and focused approach. Ahuja (2004) points out that for the continued development of the insurance industry, there is a need to review the 26 per cent limit on foreign equity ownership. In insurance, the extent of insurance business that an insurance company can underwrite depends on the amount of capital available with it. This is because it has to follow the solvency norms defined by the regulator. Underwriting higher risk thus calls for having a higher capital. Given the limited ability of the Indian partners to garner additional capital, there is a strong case for raising the FDI limit so that the competition in insurance can blossom fully. Henneberger and Ziegler, (2006) in a paper analyzed the employment effects of FDI in the service sector. It was shown that positive employment effects of FDI in services which have been taken for granted in the literature are likely only for a very limited subset of services, namely services that require physical proximity and whose users have high mobility costs. For all other services, negative effects of FDI on domestic employment are possible, and in some cases even likely. Rastogi and Shankar (2007) claims that insurance industry contributes to the financial sector of an economy and also provides an important social security net in developing countries. This study identifies the causes and the objectives with which the sector was reformed in 2000 to conclude that only in the last decade, the hybrid model of privatization with regulation adopted by the Government has yielded positive results and the sector has started to look up. The sector in its present form looks promising for the consumers, the insurers and the nation as a whole. Balasubramaniam (2008) in his paper reveals that a helpful approach of an insurer towards selling policy coverage and educating the policyholder in the event of terrorist attacks for coverage of such events has become imperative in the current state of affairs when attacks by terrorists have become unpredictable and causing severe damage and despair to the families of claimants. Good communication skills and intelligent diplomacy would lessen the ultimate pain that may be inflicted by the terrorist attacks on the families of policy holders. There should be empathy rather than finding out the loopholes and repudiating and rejecting the claims. VI. ANCIENT TRACES OF INSURANCE: The Insurance sector in India has gone through a number of phases and changes, particularly in the recent years when the Government of India in 1999 opened up the insurance sector by allowing private companies to solicit insurance. Ever since, the Indian insurance sector is considered as a booming market with every other global insurance company wanting to have a lion's share. Currently, the largest life insurance company in India as Life Insurance Corporation of India (LICI) is still owned by the government. The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire and flood and loss of life; and were willing to make some sort of sacrifice to achieve security. For example, if a house burned down, the members of the community helped build a new one. This type of insurance has survived to the present day, especially in tribal society. 20 P a g e

Leela Ram Newar The earliest form of insurance was in the nature of Marine Insurance. The early methods of transferring or distributing risk were practiced by Chinese and Babylonian traders. Whereas the Chinese merchants redistributed their wares across many vessels to limit the loss, traversing precarious rivers, the Babylonians practiced a system (recorded in the Code of Hammurabi, 1750 BC) of paying the lender an additional sum in exchange for the lender's guarantee to cancel the loan should the shipment be stolen. The Greeks and Romans introduced the origins of health and life insurance in 600 AD when they organized guilds called "benevolent societies" which cared for the families and paid funeral expenses of members upon death. In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. The word Yogagshema used in Rig Veda suggests that some form of community insurance was carried on by the Aryans in our country well over 3000 years ago! The existence of burial societies during the Buddhist Period also acknowledges the existence of insurance which used to help the family of a deceased person by building a house and protecting the widows. Ancient Indian history has also preserved the earliest traces of insurance in the form of marine trade loans and carriers contracts. VII. HISTORICAL PERSPECTIVE: The present form of Marine Insurance was developed with the formation of Lloyd s Association in London by one Mr. Edward Lloyd, a coffee merchant. After marine insurance, came the Fire Insurance. The demand for fire insurance became prominent as a result of the Great Fire of London in 1666. In 1680, Nicholas Barbon established England's first fire insurance company, "The Fire Office," to insure brick and frame homes. The Industrial Revolution gave impetus to the fire insurance because of the demand for protection of the massive expansion of material, wealth, machinery, etc. In the United States, the first insurance company underwrote fire insurance which was formed in Charles Town (modern-day Charleston), South Carolina, in 1732. Insurance in India has its history dating back till 1818, when the Oriental Life Insurance Company was started by Europeans in Kolkata, to cater to the needs of the European community. Pre-independent era in India saw discrimination between the life of foreigners and Indians, with higher premiums being charged for the latter. It was only in the year 1870, that the Bombay Mutual Life Assurance Society, the first Indian insurance company covered Indian lives at normal rates. In the year 1912, the Life Insurance Companies Act, and the Provident Fund Act were passed to regulate the insurance business. The oldest existing insurance company in India is National Insurance Company Ltd, which was founded in 1906 and is doing business even today. The Insurance industry earlier consisted of only two state insurers: Life Insurers i.e. Life Insurance Corporation of India (LICI) and General Insurers i.e. General Insurance Corporation of India (GIC). GIC had four subsidiary companies. With effect from December 2000, these subsidiaries have been de-linked from parent company and made as independent insurance companies: Oriental Insurance Company, New India Assurance Company Limited, National Insurance Company Limited and United India Insurance Company Limited. It was the Industrial Revolution that gave birth to Miscellaneous Insurance too, like accident insurance, theft and burglary insurance; latest being cattle insurance, crop insurance, etc. VIII. INSURANCE ACTS IN INDIA: The insurance sector went through a full circle of phases from being unregulated to fully regulated and then currently being partly deregulated. It is governed by a number of acts, with the first one being the Insurance Act, 1938. A. The Insurance Act, 1938 The Insurance Act, 1938 was the first legislation governing all forms of insurance to provide strict state control over insurance business. B. Life Insurance Corporation Act, 1956 Even though the first legislation was enacted in 1938, it was only on 19 th January, 1956 that life insurance in India was completely nationalised through a Government ordinance; the Life Insurance Corporation Act, 1956 which created the Life Insurance Corporation of India (LICI) on 1st September, 1956. About 154 Indian insurance companies, 16 non-indian companies and 75 provident funds (total 245 companies) were operating in India at the time of nationalisation. 21 P a g e

Understanding Reforms in the Life Insurance Sector of India C. General Insurance Business (Nationalisation) Act, 1972 The General Insurance Business (Nationalisation) Act, 1972 was enacted to nationalize the 100 odd general insurance companies and subsequently merging them into four companies. All the companies were amalgamated into National Insurance, New India Assurance, Oriental Insurance and United India Insurance and these were headquartered in each of the four metropolitan cities. D. Insurance Regulatory and Development Authority (IRDA) Act, 1999 The Govt. of India introduced the Insurance Regulatory and Development Authority Act (IRDA) in 1999, thereby de-regulating the insurance sector and allowing private companies into the insurance. Further, Foreign Direct Investment (FDI) was also allowed and capped at 26 per cent holding in the Indian insurance companies, which has now increased to 49 per cent. In recent years many private players entered in the Insurance sector of India. E. IRDA Regulations The IRDA opened up the market in August 2000 with the invitation for registration of companies. The Authority has the power to frame regulations under Section 114A of the Insurance Act, 1938 and has from 2000 onwards, framed various regulations ranging from registration of companies for carrying on insurance business to protection of policyholders interests. IX. LIFE INSURANCE COMPANIES OF INDIA The Life Insurance Corporation of India (LICI) was established on 19 th June, 1956 as a Statutory Corporation under the Life Insurance Act, 1956, to carry on life insurance business. The LIC had started its operation with 5 zonal offices, 33 divisional offices and 212 branch offices, apart from its corporate office in the year 1956. Reorganization of LICI took place and large numbers of new branch offices were opened. It worked wonders with the performance of the Corporation. It may be seen that from about 200.00 crores of New Business in 1957 the Corporation crossed 1000.00 crores only in the year 1969-70. By 1985-86, LICI had already crossed 7000.00 crore Sum Assured on new policies. Today LICI functions with more than 2048 fully computerized branch offices, 100 divisional offices, 7 zonal offices and the corporate office. LICI s Wide Area Network covers 100 divisional offices and connects all the branches through a Metro Area Network. LICI has tied up with some Banks and Service providers to offer on-line premium collection facility in selected cities. With a vision of providing easy access to its policyholders, LICI has launched its Satellite Sampark offices. The satellite offices are smaller, leaner and closer to the customer. The digitalized records of the satellite offices will facilitate anywhere servicing and many other conveniences in the future. X. PRIVATE LIFE INSURANCE COMPANIES The enforcement of New Economic Reforms in 1991 coupled with the formation of Insurance Regulatory and Development Authority Act (IRDA), 1999 (which started issuing licenses to private life insurers) has diluted the monopolistic attitude commanded by LICI. A number of insurance companies in the private sector have come up in the recent years to share the burden of LICI. Prominent private companies are: a) HDFC Standard Life Insurance Company Limited, b) Max New York Life, c) ICICI Prudential Insurance, d) Kotak Mahindra Life Insurance, e) Birla Sun Life Insurance, f) Tata AIG Life Insurance, g) SBI Life Insurance, h) ING Vysya, i) Bajaj Allianz, j) Reliance Life Insurance, k) Aviva Life Insurance, l) Sahara India Life Insurance Company Limited, m) DLF Pramerica etc. XI. CONCLUSION The overall growth in the insurance industry has been positive. Global players have exhibited an interest in the huge market that India offers. Given that 42.9 percent of the financial savings are parked with the banking sector, there is a vast potential for the insurance sector to grow. Many international studies have estimated that the insurance industry in India can grow by over 125 per cent in the next ten years. In fact, India has been identified as one of the fastest growing insurance markets. The growth in the life segment is expected to be faster as against the non-life segment. In the liberalized environment insurers were expected to create additional markets by enhancing the level of risk awareness amongst the uninsured public, thereby spreading both the message and the associated benefits of 22 P a g e

Leela Ram Newar insurance across a wider cross section of population. It was also expected to improve the levels of customer satisfaction. New products were also expected to be introduced to take care of the unattended risk exposures. The demographic and socio-economic environment in the Indian context has been changing as the economy moves from an emerging market to a developed market. With emerging smaller family units, the joint-familysecurity-net set-up has weakened. Simultaneously, the increased longevity has raised the need for adequate provision of security for the aged. The growing needs of the population for housing and health have become important. Travel and communication industries are also witnessing a growing trend. International experience reveals that in such a scenario, insurance penetration in terms of home, health and travel insurance is high. As against this, the Indian industry is still significantly influenced by the tax savings component than risk components in the life segment. The penetration is low in personal lines of non-life insurance business. As the economy grows both these segments should offer tremendous opportunities on account of the demographic changes and changing life styles. Strategies need to be evolved to exploit these opportunities. REFERENCES 1. Ahuja R., (2004): Insurance: Over the Transition, Economic and Political Weekly, Aug, 1 2004 2. Henneberger Fred and Alexandre Ziegler, (2006): Employment Effects of Foreign Direct Investment in the Service Sector: A Systematic Approach, Research Institute for Labor Economics and Labor Law, University of St. Gallen, Guisanstrasse 92, CH-9010 St. Gallen. 3. Motihar, M (2010): Principles and Practice of Insurance, Sharda Pustak Bhawan, Allahabad. 4. Ranade, A. and Rajeev Ahuja, (1999): Life Insurance in India Emerging Issues, Economic and Political Weekly, January 16-23, 1999. 5. Rastogi, S. and Runa Shankar, (2007): Enhancing Competitiveness: The Case of the Indian Life Insurance Company, Indian Institute of Management, Kozhikode. 6. Vijayakumar, A., (2001): Globalization of Indian Insurance Sector - Issues and Challenges, Insurance. 7. www.irda.gov.in, 8. www.irdaindia.org, 9. www.licindia.com, 10. www.dipp.nic.in, 11. www.iic.nic.in 23 P a g e