PROJECT TOPIC IRDA and Insurance Administration in India

Submitted Submitted By:Satya Narayan Jena Faculty of Public Administration

To:-

Sneha(983061) LAW SCHOOL

KIIT B.A.LL.B(4th Sem)

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ACKNOWLEDGEMENT

This project is an individual effort. I acknowledge my gratitude to our public administration faculty Satya Narayan Jena who helped with his constructive criticism and guidance and encouraged us on this project. I would show my immense gratitude for his guidance in selecting the material and its proper usage. Finally, I wish to express our gratitude to all those people whose thoughts and insights helped us understand the subject.I would like to show our immense thankfulness to my friends without whose help the successful completion of this module would not have been possible.

Thank you all once again. Sneha (983061) B.A.LLB( 4th Sem) KIIT LAW SCHOOL

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CONTENTS
1. Overview4 2. History 3.

of insurance in India5 - 7

Important milestones in the life insurance business in India8 Insurance Sector Reforms.9-10

4.

5. IRDA11

6. Duties,Powers and Functions of IRDA12-13

7

Advisory Committee13

8.Chairman Selection Process.....14 9.IndianInsurancePolicies .15-16

10. Conclusion...17 11. References18

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OVERVIEW
With largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India. Its a business growing at the rate of 15-20 per cent annually and presently is of the order of Rs 450 billion. Together with banking services, it adds about 7 per cent to the countrys GDP. Gross premium collection is nearly 2 per cent of GDP and funds available with LIC for investments are 8 per cent of GDP. Yet, nearly 80 per cent of Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. And this part of the population is also subject to weak social security and pension systems with hardly any old age income security. This itself is an indicator that growth potential for the insurance sector is immense. A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and at the same time strengthens the risk taking ability. It is estimated that over the next ten years India would require investments of the order of one trillion US dollar. The Insurance sector, to some extent, can enable investments in infrastructure development to sustain economic growth of the country. Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act- 1938 and the IRDA Act- 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalisation and back to a liberalised market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.1

http://www.indiacore.com/insurance.html

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HISTORY OF INSURANCE IN INDIA

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. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular. 1818 saw the advent of life insurance business in India with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies. In 1914, the Government of India started publishing returns of Insurance Companies in India. The Indian Life Assurance Companies Act, 1912 was the first statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.2
2

http://irda.gov.in/

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The Insurance Amendment Act of 1950 abolished Principal Agencies. However, there were a large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business. An Ordinance was issued on 19th January, 1956 nationalising the Life Insurance sector and Life Insurance Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance sector was reopened to the private sector. The history of general insurance dates back to the Industrial Revolution in the west and the consequent growth of sea-faring trade and commerce in the 17th century. It came to India as a legacy of British occupation. General Insurance in India has its roots in the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the British. In 1907, the Indian Mercantile Insurance Ltd, was set up. This was the first company to transact all classes of general insurance business. 1957 saw the formation of the General Insurance Council, a wing of the Insurance Associaton of India. The General Insurance Council framed a code of conduct for ensuring fair conduct and sound business practices. In 1968, the Insurance Act was amended to regulate investments and set minimum solvency margins. The Tariff Advisory Committee was also set up then. In 1972 with the passing of the General Insurance Business (Nationalisation) Act, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1sst 1973.

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This millennium has seen insurance come a full circle in a journey extending to nearly 200 years. The process of re-opening of the sector had begun in the early 1990s and the last decade and more has seen it been opened up substantially. In 1993, the Government set up a committee under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector.The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994 wherein , among other things, it recommended that the private sector be permitted to enter the insurance industry. They stated that foreign companies be allowed to enter by floating Indian companies, preferably a joint venture with Indian partners. Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The key objectives of the IRDA include promotion of competition so as to enhance customer satisfaction through increased consumer choice and lower premiums, while ensuring the financial security of the insurance market. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%. 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. In December, 2000, the subsidiaries of the General Insurance Corporation of India were restructured as independent companies and at the same time GIC was converted into a national reinsurer. Parliament passed a bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 24 general insurance companies including the ECGC and Agriculture Insurance Corporation of India and 23 life insurance companies operating in the country.

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The insurance sector is a colossal one and is growing at a speedy rate of 15-20%. Together with banking services, insurance services add about 7% to the countrys GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk taking ability of the country.

Important milestones in the life insurance business in India:

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business. 1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses. 1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public. 1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised. LIC formed by an Act of Parliament- LIC Act 1956- with a capital contribution of Rs. 5 crore from the Government of India.

Important milestones in the general insurance business in India are:

1907: The Indian Mercantile Insurance Ltd. set up- the first company to transact all classes of general insurance business. 1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices. 1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up. 1972: The general insurance business in India nationalised through The General Insurance Business (Nationalisation) Act, 1972 with effect from 1st January 1973. 107 insurers amalgamated
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and grouped into four companies- the National Insurance Company Limited, the New India Assurance Company Limited, the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.3

INSURANCE SECTOR REFORMS

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 currently underway and recognising that insurance is 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 some of the key recommendations included:

i) Structure
Government stake in the insurance Companies to be brought down to 50%. Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations. All the insurance companies should be given greater freedom to operate.

ii) Competition
Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the sector. No Company should deal in both Life and General Insurance through a single entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life Insurance should be allowed to operate in the rural market. Only one State Level Life Insurance Company should be allowed to operate in each state.

iii) Regulatory Body

The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance- a part of the Finance Ministry- should be made independent
3

http://www.indiacore.com/insurance.html

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iv) Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%. GIC and its subsidiaries are not to hold more than 5% in any company (there current holdings to be brought down to this level over a period of time)

v) Customer Service
LIC should pay interest on delays in payments beyond 30 days. Insurance companies must be encouraged to set up unit linked pension plans. Computerisation of operations and updating of technology to be carried out in the insurance industry. The committee emphasised that in order to improve the customer services and increase the coverage of insurance policies, industry should be opened up to competition. 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 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.

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IRDA (The Insurance Regulatory and Development Authority)

The Insurance Regulatory and Development Authority (IRDA) is a national agency of the Government of India, based in Hyderabad. It was formed by an act of Indian Parliament known as IRDA Act 1999, which was amended in 2002 to incorporate some emerging requirements. Mission of IRDA as stated in the act is "to protect the interests of the policyholders, to regulate, promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto." In 2010, the Government of India ruled that the Unit Linked Insurance Plans (ULIPs) will be governed by IRDA, and not the market regulator Securities and Exchange Board of India

Expectations
The law of India has following expectations from IRDA... 1. To protect the interest of and secure fair treatment to policyholders. 2. To bring about speedy and orderly growth of the insurance industry (including annuity and superannuation payments), for the benefit of the common man, and to provide long term funds for accelerating growth of the economy. 3. To set, promote, monitor and enforce high standards of integrity, financial soundness, fair dealing and competence of those it regulates. 4. To ensure that insurance customers receive precise, clear and correct information about products and services and make them aware of their responsibilities and duties in this regard. 5. To ensure speedy settlement of genuine claims, to prevent insurance frauds and other malpractices and put in place effective grievance redressal machinery. 6. 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.
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7. To take action where such standards are inadequate or ineffectively enforced.

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

consistent with the requirements of prudential regulation.4

Duties,Powers and Functions of IRDA

Section 14 of IRDA Act, 1999 laysdown the duties,powers and functions of IRDA 1. Subject to the provisions of this Act and any other law for the time being in force, the Authority shall have the duty to regulate, promote and ensure orderly growth of the insurance business and re-insurance business. 2. Without prejudice to the generality of the provisions contained in sub-section (1), the powers and functions of the Authority shall include, 1. issue to the applicant a certificate of registration, renew, modify, withdraw, suspend or cancel such registration; 2. protection of the interests of the policy holders in matters concerning assigning of policy, nomination by policy holders, insurable interest, settlement of insurance claim, surrender value of policy and other terms and conditions of contracts of insurance; 3. specifying requisite qualifications, code of conduct and practical training for intermediary or insurance intermediaries and agents; 4. specifying the code of conduct for surveyors and loss assessors; 5. promoting efficiency in the conduct of insurance business; 6. promoting and regulating professional organisations connected with the insurance and re-insurance business; 7. levying fees and other charges for carrying out the purposes of this Act; 8. calling for information from, undertaking inspection of, conducting enquiries and investigations including audit of the insurers, intermediaries, insurance intermediaries and other organisations connected with the insurance business;

http://www.citizendia.org/Insurance_Regulatory_and_Development_Authority

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9. control and regulation of the rates, advantages, terms and conditions that may be offered by insurers in respect of general insurance business not so controlled and regulated by the Tariff Advisory Committee under section 64U of the Insurance Act, 1938 (4 of 1938); 10. specifying the form and manner in which books of account shall be maintained and statement of accounts shall be rendered by insurers and other insurance intermediaries; 11. regulating investment of funds by insurance companies; 12. regulating maintenance of margin of solvency; 13. adjudication of disputes between insurers and intermediaries or insurance intermediaries; 14. supervising the functioning of the Tariff Advisory Committee; 15. specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organisations referred to in clause (f); 16. specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector; and 17. exercising such other powers as may be prescribed from time to time,

ADVISORY COMMITTEE
IRDA consists of a Chairman and some permanent as well as part time members. The regulations, however, are enacted under the guidance of a statutory advisory committee. The advisory committee consists of following individuals and ex-officio authorities:

Chairman: Hari Narayana is the current Chairman of IRDA. Full-time Members: Currently, they are Mr K K Srinivasan (Nonlife Member), Sri G Prabhakara (Life Member), Dr R Kannan(Member, Actuary) and Sri R.K. Nair (Member, F & I). There is provision for a panel of other members and part time members. IRDA formed a high powered Insurance Law Reforms Committee known as KPN Committee with important insurance advisors like Mr N Govardhan and Dr K C Mishra as its members. There were also a few non-advisory committee members like Mr Liaquat Khan and Mr T Viswanathan etc.

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Full force and utility of various institutions like Advisory Committee and self-regulatory organizations are not yet realized as the regulator seems to be in a long learning mode. Due to over delegations, Individual incumbents decide the pace and extent of utilization of prudential and statutory bodies. Research is limited to opinion seeking through legacy channels. Market waits for revision of insurance act and establishment meaningfully functioning regulatory organs devoid of excess delegation and subjective localization of development agencies. IRDA Journal is available as soft copy in its website. Unlike other Indian administrative Regulatory Agencies IRDA is perceived as a silent regulator with activities confined to its local existence.

CHAIRMAN SELECTION PROCESS

Government of India has circulated to broadbase IRDA chairman selection process. It is felt in the market that placing of retired civil servants as IRDA Chairman has served the purpose of administrative fiefdom of the regulator. Mostly, the regulator has become passive to market realities and most of the original public policy intentions have been systematically replaced by personal preferences. There seems to be no oversight of public policy erosions. Taking advantage of the completion of term of current incumbent, there seem to be an attempt to correct the future course but people do not perceive any outcome to result as the market does not seem to throw up candidates of the stature of Howard Davies for Indian market. But a right leadership is the solution to the requirement of this booming market.

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Indian Insurance Policies

The insurance industry in 2010 in India has flourished and is offering more and more options to the citizens of the country. Some of the insurance policy options, requirements for policy coverage, date of commencement of the policy and their adopting organizations are as follows:

1. Social Security Group Scheme

This scheme is administered by Life Insurance Corporation of India for fulfilling the requirement of the weaker section in the society. This scheme covers the peoples in the age group of 18-60 years and an insurance of Rs.5000 for natural death and of Rs.25000 on due to accidental death.

2. Shiksha Sahyog Yojana

This scheme is working since December 31,2001. Under this scheme an educational scholarship of Rs.300 per quarter per child is given for a period of four years.

3. Jan Arogya Bima Policy

Generally this scheme covers a special group of population who are unable to pay for high cost of medical treatments. The premium collection for the adults upto the age of 45 years is Rs. 70 and for children it is Rs. 50. The limit coverage is fixed at Rs.5000 per annum.

4. Mediclaim Insurance Policy

This policy helps in reimbursing the medical expenses. The age coverage is from 5-80 years. Here there is a tax benefit of upto Rs 10,000.

5. Jana Shree Bima Yojana

In this insurance policy, a minimum membership of the group should be 25. There is an insurance coverage of Rs 2,000 on natural death and Rs 50,000 for accidental death. The premium amount is fixed at Rs. 200 for single member. This scheme is working since August 10,2000.
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6. Videsh Yatra Mitra Policy

It is for providing benefits for medical expenses during the period of overseas travel. This policy was started in the year 1998 by four General Insurance Companies.

7. Bhagya Shree Child Welfare Bima Yojana

This policy covers one girl child in a family upto the age of 18 whose parents age does not exceed 60 years. This policy is working since October 19,1998 with a premium of Rs.15 per annum.

8. Raj Rajeshwari Mahila Kalyan Yojana

This scheme provides protection to woman in the age group of 10 to 75 years with an insurance of Rs. 25,000 and premium Rs.15 per annum. This scheme is working since October 19,1998.

9. Ashray Bima Yojana

The policy is covering workers in case of loss of jobs since October 10,2001. Here a maximum amount of Rs.3000 assistance is given to the workers till he/she gets an alternative opportunity.

10. Personal Accident Insurance Scheme for Kissan Credit Card

This scheme is working since 2001. Under this scheme all the KCC holders are covered up to an age of 70 years. Insurance coverage includes 50,000 for accidental death and 25,000 for partial disability.5

CONCLUSION

http://www.economywatch.com/indianeconomy/insurance-policy.html

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It seems unlikely that the LIC and the GIC will shrivel up and die within the next decade or two. The IRDA has taken a "slowly slowly" approach. It has been very cautious in granting licenses. It has set up fairly strict standards for all aspects of the insurance business (with the probable exception of the disclosure requirements). The regulators always walk a fine line. Too many regulations kill the incentive for the newcomers; too relaxed regulations may induce failure and fraud that led to nationalization in the first place.6 India is not unique among the developing countries where the insurance business has been opened up to foreign competitors. Thus, it is unlikely that the same will happen in India, especially when the foreign insurers cannot have a majority shareholding in any company. The insurance business is at a critical stage in India. Over the next couple of decades we are likely to witness high growth in the insurance sector for two reasons. Financial deregulation always speeds up the development of the insurance sector. Growth in per capita GDP also helps the insurance business to grow.

http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023811.pdf

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REFERENCES: http://www.economywatch.com/indianeconomy/insurance-policy.html (visited on 25-032011 at 8.30 pm) http://www.indiacore.com/insurance.html (visited on 25-03-2011 at 8.50 pm) http://www.irdaindia.org (visited on 26-03-2011 at 12.07 am) http://unpan1.un.org/intradoc/groups/public/documents/apcity/unpan023811.pdf (visited on 26-03-2011 at 1.46 am)

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