Dr.
Ram Manohar Lohiya National Law University, Lucknow
2019-20
(Final Draft)
Topic: - Evolution of the Indian Insurance Industry
Submitted To: Submitted By:
Dr. Shashank Shekhar Sarish Tripathi,
Assistant Professor, VI Sеmеstеr,170101121
RMLNLU, Lucknow. B.A. LL.B.(Hons.)
RMLNLU, Lucknow.
- Evolution of the Indian Insurance Industry -
Acknowledgement
I feel highly elated to work on this dynamic and highly important topic that is “Evolution
of the Indian Insurance Industry”. This topic instantly drew my attention and attracted me to
research on it.
So, I hope I have tried my level best to bring in new ideas and thoughts regarding the basics
of this topic. Not to forget the deep sense of regard and gratitude to Assistant Professor, Dr.
Aparna Singh who played the role of a protagonist. Last but not the least; I thank all the
members of the Dr. Ram Manohar Lohiya National Law School and all others who have
helped me in making this project a success.
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- Evolution of the Indian Insurance Industry -
INDEX
INDEX.......................................................................................................................................3
INTRODUCTION......................................................................................................................3
BEGINNING OF THE INSURANCE INDUSTRY IN INDIA................................................4
LEGAL STRUCTURE..............................................................................................................5
History of Insurance...................................................................................................................6
Ancient Historical Times.......................................................................................................6
British-India Period................................................................................................................6
Post-Independence Era of Indian Insurance...........................................................................7
Nationalisation of the Insurance Business in India....................................................................7
Nationalisation was accomplished in two stages;......................................................................8
Liberalisation of Indian Insurance.............................................................................................9
PRIVATISATION OF THE INSURANCE INDUSTRY.........................................................9
The entry of Private Entities:.................................................................................................9
PRIVATISATION...................................................................................................................10
CONCLUSION........................................................................................................................12
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INTRODUCTION
Insurance is primarily collective cooperation to share a particular risk. It is basically a
sharing device. The losses to assets or human asset resulting from natural calamities like,
Fire, Flood, Earthquake, Accidents or Natural death are met out of the common pool
contributed by a large number of persons who are exposed to similar risks. This contribution
of many is used to pay the losses suffered by unfortunate few. The basic principle is that loss
should occur as a result of natural calamities or unexpected events which are beyond human
control. Moreover, the insured person shall not think of undue gains out of insurance. It is
primarily collective cooperation to share a particular risk.
Insurance in India refers to the market for insurance in India which covers both the public
and private sector organisations. It is listed in the Constitution of India in the Seventh
Schedule as a Union List subject, meaning it can be legislated by the Central Government
only.
The concept of insurance has been prevalent in India since ancient times amongst Hindus.
Overseas traders practiced a system of marine insurance. The joint family system, peculiar to
India, was a method of social insurance of every member of the family on his life. The law
relating to insurance has gradually developed, undergoing several phases from nationalisation
of the insurance industry to the recent reforms permitting entry of private players and foreign
investment in the insurance industry. The Constitution of India is federal in nature in as much
there is division of powers between the Centre and the States. Insurance is included in the
Union List, wherein the subjects included in this list are of the exclusive legislative
competence of the Centre. The Central Legislature is empowered to regulate the insurance
industry in India and hence the law in this regard is uniform throughout the territories of
India. The development and growth of the insurance industry in India has gone through three
distinct stages.
BEGINNING OF THE INSURANCE INDUSTRY IN INDIA
The insurance industry is the backbone of country’s Risk Management. The beginning of the
Indian insurance industry dates back to the nineteenth century. In 1818, Europeans started
Oriental Life Insurance Company in Kolkata (Calcutta) to exclusively serve their community.
Colonial masters with racial prejudice unfairly characterised the age and premium for
Indians. The Indian policy holders paid more premium than European counterparts. Indians
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desperately wished for Indian insurance companies to set foot in the market. Insurance in this
current form has its history dating back to 1818 when Oriental Life Insurance Company was
started by Anita Bhavsar in Kolkata to cater to the needs of European community. The pre-
independence era in India saw discrimination between the lives of foreigners (English) and
Indians with higher premiums being charged for the latter. Triton Insurance Company Ltd in
the year 1850 is the first general insurance company. Gradually insurance business fledged
into a huge sector boosting the economy of India. In 1870, Bombay Mutual Life Assurance
Society became the first Indian insurer.Bombay Mutual Life Assurance Society started in
1870 was the first Indian insurance company to cover the lives of the Indians at normal rates.
Evolution of insurance industry has undergone three phases:
Pre-Nationalisation,
Nationalisation
Privatisation
Formation of Insurance Industry in India
Insurance law in India had its origins in the United Kingdom with the establishment of a
British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the
Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in
1829 and the Oriental Life Assurance Company in 1874. However, till the establishment of
the Bombay Mutual Life Assurance Society in 1871, Indians were charged an extra premium
of up to 20 per cent as compared to the British. The first statutory measure in India to
regulate the life insurance business was in 1912 with the passing of the Indian Life Assurance
Companies Act, 1912 (Act of 1912).1 Other classes of insurance business were left out of the
scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and
legislative controls were not considered necessary. General insurance on the other hand also
has its origins in the United Kingdom. The first general insurance company “Triton Insurance
Company Ltd.” was promoted in 1850 by British nationals in Calcutta. The first general
insurance company established by an Indian was “Indian Mercantile Insurance Company
Ltd.” in Bombay in 1907. Eventually, with the growth of fire, accident and marine insurance,
the need was felt to bring such kinds of insurance within the purview of the Act of 1912.
While there were a number of attempts to introduce such legislation over the years, non-life
insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938 (Act
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of 1938). The Act of 1938 along with various amendments over the years continues till date
to be the definitive piece of legislation on insurance and controls both life insurance and
general insurance. General insurance, in turn, has been defined to include “fire insurance
business”, “marine insurance business” and “miscellaneous insurance business”, whether
singly or in combination with any of them.
LEGAL STRUCTURE
The Insurance Act of 1938 was the first legislation governing all forms of insurance to
provide strict state control over insurance business. Life insurance in India was completely
nationalised on 19 January 1956, through the Life Insurance Corporation Act. All 245
insurance companies operating then in the country were merged into one entity, the Life
Insurance Corporation of India.
The General Insurance Business Act of 1972 was enacted to nationalise about 107 general
insurance companies then and subsequently merging them into four companies. All the
companies were amalgamated into National Insurance, New India Assurance, Oriental
Insurance and United India Insurance, which were headquartered in each of the four
metropolitan cities.Until 1999, there were no private insurance companies in India. The
government then introduced the Insurance Regulatory and Development Authority Act in
1999, thereby de-regulating the insurance sector and allowing private companies.
Furthermore, foreign investment was also allowed and capped at 26% holding in the Indian
insurance companies.
In 2006, the Actuaries Act was passed by parliament to give the profession statutory status on
par with Chartered Accountants, Notaries, Cost & Works Accountants, Advocates, Architects
and Company Secretaries.
History of Insurance
Ancient Historical Times
Insurance is as old as human society itself. The ancient origin of insurance is Emerigon,
whose brilliant and learned Traite des Assurances, first published in 1783, is still read with
respect and admiration. The result shows that insurances were known to the ancients such as
Romans, Phoenicians Rhodians, although the business of underwriting commercial risks was
probably not highly developed. The earliest traces of Insurance in the ancient Indian history
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was in the form of marine trade loans or carrier’s contracts, which can be found in Kautilya’s
Arthashastra, Yajnyavalkya’s Dharmashastra and Manu’s Smriti. These works show that the
system of credit and the law of interest were well developed in India. They were based on
clear appreciation of hazard involved
and the means of safeguarding against it.
British-India Period
Insurance in India without any regulations started in the nineteenth century. It was a typical
story of a colonial era where a few British insurance companies dominated the
market serving mostly large urban centres. Company started by Europeans in Calcutta was
the first life insurance company on Indian soil.
Bombay Mutual Life Assurance Society indicated the birth of first Indian life insurance
company in the year 1870, and covered Indian lives at normal rates. 1930s was the last of the
old-style crises in the Indian economy because it marked the beginning of the end of the
colonial state and an acceleration of the pace of industrialisation as entrepreneurs moved their
capital out of the countryside. Independent India reduced its vulnerability to external
economic shocks by close control of foreign exchange and by promoting a massive change in
the export schedule. Till the end of nineteenth century, insurance business was almost
entirely in the hands of overseas companies.
Post-Independence Era of Indian Insurance
The insurance business grew at a faster pace after independence. Indian companies
strengthened their hold on this business but despite the growth that was witnessed, insurance
remained an urban phenomenon. During Mrs. Gandhi’s tenure (from 1966-1968), there was a
split within the business community of protectionists and those who wanted more open trade.
But what maintained the momentum was the commitment of two ministers, Ashok Mehta and
Subramaniam towards liberalisation of the economy. This was seconded with high hope of
getting increased foreign aid.
Deregulation actually helped the poorest in India as it would eventually create more
employment and faster growth. Yet, the intense fears of liberalisation in the lower middle
class and among working class employees of the state sector pose serious risks in freeing the
economy. It might be preferable to introduce liberalisation during an economic upswing
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when the risk of switching jobs is less traumatic. The three liberalisation episodes in Indian
economic policy have followed clear cyclical patterns. Economic policy had swung broadly
between controls and greater openness, with a tendency towards decontrolling larger and
more important segments of the economy.
Nationalisation of the Insurance Business in India
On 19th January, 1956, the management of life insurance business of 245 Indian and foreign
insurers and provident societies then operating in India was taken over by the Central
Government. The Life Insurance Corporation (LIC) was formed in September 1956 by the
Life Insurance Corporation Act, 1956 (LIC Act), which granted LIC the exclusive privilege
to conduct life insurance business in India. However, an exception was made in the case of
company, firm or persons intending to carry on life insurance business in India in respect of
the lives of “persons ordinarily resident outside India” provided the approval of the Central
Government was obtained. The exception was however not absolute and a curious prohibition
existed. Such company, firm or person would not be permitted to insure the life of any
“person ordinarily resident outside India”, during any period of their temporary residence in
India. However, the LIC Act left outside its purview the Post Office Life Insurance Fund, any
Family Pension Scheme framed under the Coal Mines Provident Fund, Family Pension and
Bonus Schemes Act, 1948 or the Employees’ Provident Funds and the Family Pension Fund
Act, 1952. The general insurance business was also nationalised with effect from 1st January,
1973, through the introduction of the General Insurance Business (Nationalization) Act, 1972
(GIC Act). Under the provisions of the GIC Act, the shares of the existing Indian general
insurance companies and undertakings of other existing insurers were transferred to the
General Insurance Corporation to secure the development of the general insurance business in
India and for the regulation and control of such business. The GIC was established by the
Central Government in accordance with the provisions of the Companies Act, 1956
(Companies Act) in November 1972 and it commenced business
on 1st January, 1973. Prior to 1973, there were 107 companies, including foreign companies,
offering general insurance in India. These companies were amalgamated and grouped into
four subsidiary companies of GIC, viz. the National Insurance Company Ltd. (National Co.),
the New India Assurance Company Ltd. (New India Co.), the Oriental Insurance Company
Ltd. (Oriental Co.), and the United India Assurance Company Ltd. (United Co.). GIC
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undertakes mainly reinsurance business apart from aviation insurance. The bulk of the
general insurance business of fire, marine, motor and miscellaneous insurance business is
under taken by the four subsidiaries.
Nationalisation was accomplished in two stages;
Initially the management of the companies was taken over by means of an Ordinance, and
later, the ownership too was taken by means of a comprehensive bill. However, it was only in
1956 LIC was nationalised, with the objective of spreading life insurance much more widely
and in particular to the rural areas with a view to reach all insurable persons in the country,
providing them adequate financial cover at a reasonable cost. As of 2007, LIC is India’s
leading Insurance company, with 2000 branches, which probably is the highest number of
branches across India insurance sector.
Liberalisation of Indian Insurance
In 1994, insurance sector invited private participation to induce a spirit of competition
amongst the various insurers and to provide a choice to the consumers.
In 1997, insurance regulator IRDA was set up as the need was felt:
(a) to set up an independent regulatory body that provides greater autonomy to insurance
companies in order to improve their performance;
(b) toenablethemtoactasindependentcompanieswitheconomicmotives;
(c) to protect the interest of holders of insurance policies;
(d) to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the
General insurance Business (Nationalization) Act, 1972;
(e) to end the monopoly of the Life Insurance Corporation of India and General Insurance
Corporation and its subsidiaries.
In the first year of insurance market liberalisation (2001) as much as 16 private sector
companies including joint ventures with leading foreign insurance companies have entered
the Indian insurance sector. Of this, 10 were under the life insurance category and six under
general insurance. Thus in all there are 25 players (12 life insurance and 13 general
insurance) in the Indian insurance industry till date.
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PRIVATISATION OF THE INSURANCE INDUSTRY
The entry of Private Entities:
Since 1956, with the nationalisation of insurance industry, the LIC held the monopoly in
India’s life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for
general insurance business. Both LIC and GIC have played a significant role in the
development of the insurance market in India and in providing insurance coverage in India
through an extensive network.
For example, currently, the LIC has a network of 7 zones, 100 divisions and over 2,000
branches. LIC has over 550,000 agents and over 100 million lives are covered.
From 1991 onwards, the Indian Government introduced various reforms in the financial
sector paving the way for the liberalisation of the Indian economy.
It was a matter of time before the liberalisation affected the insurance sector. A huge gap in
the funds required for infrastructure was felt particularly since much of the funds could be
filled by life insurance funds, being long tenure funds.
Consequently, in 1993, the Government of India set up an eight-member committee chaired
by Mr. R. N. Malhotra, former Governor of the Reserve Bank of India, to review the
prevailing structure of regulation and supervision of the insurance sector and to make
recommendations for strengthening and modernising the regulatory system. The Committee
submitted its report to the Indian Government in January 1994. Two of the key
recommendations of the Committee included the privatisation of the insurance sector by
permitting the entry of private players to enter the business of life and general insurance and
the establishment of an Insurance Regulatory Authority.
It took a number of years for the Indian Government to implement the recommendations of
the Malhotra Committee. The Indian Parliament passed the Insurance Regulatory and
Development Act, 1999 (IRD Act) on 2nd December, 1999 with the aim “to provide for the
establishment of an Authority, to protect the interests of the policy holders, to regulate,
promote and ensure orderly growth of the insurance industry and to amend the Insurance Act,
1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business
(Nationalization) Act, 1972”.
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PRIVATISATION
The liberalization of the Indian insurance sector has been the subject of much heated debate
for some years. The policy makers on one hand wanted competition, development and growth
of insurance sector, which is extremely essential for channeling the investments in to the
infrastructure sector. At the other end the policy makers had also the fear that the insurance
premium, which are substantial, would seep out of the country; and thus in the nation's
interest, they want to have a cautious approach of opening for foreign participation in this
sector.
After a long discussion, conferences and fraction among some political parties, IRDA
brought consensus among factions of different political parties. Though some changes and
some restrictive clauses as regards to the foreign participation were included the IRDA has
opened the doors for the private entry into insurance.
The insurance sector is open to participation by private insurance entities and
recommendation of the Malhotra Committee. Financial growth process of insurance, more
competitive environment and rapid expansion in insurance sector expected to emerge with
new private participants. The nature and scope of the insurance sector is in fact changed with
the passing of the IRDA Act 1999.
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CONCLUSION
Life insurance in India has a history of more than 100 years. It has grown significantly after
independence under control of Central Government. Various acts were passed to ensure
safety of the insured as well as insurer. LIC has provided with various plans to suit the needs
of each and every individual. Insurance may play a vital role in helping growth of individual
and economy. As there is no guarantee of life, life insurance would provide a moral as well as
financial support for the family.
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