Evolution of Insurance in India

Insurance in India

Ancient Times Modern Era

Life Insurance General Insurance Post-Liberalisation

Manusmrithi Business Business Period

Dominance of The Pioneering Malhotra Committee

Dharmashastra Foreign Insurers Stage Report

Enactment of Regulatory and Constitution of

Arthashastra Various Legislations Structural Reforms IRDA

Nationalisation of Nationalisation of
Life Insurance General Insurance Current Scenario
Business Business
I. INSURANCE SINCE ANCIENT TIMES
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. Ancient Indian history has preserved the earliest traces of insurance
in the form of marine trade loans and carriers’ contracts.

II. INSURANCE IN MODERN ERA

Insurance in India has evolved over time heavily drawing from other
countries, England in particular.

1. HISTORY OF LIFE INSURANCE BUSINESS IN INDIA

1.1 Dominance of Foreign Insurers
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. 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.

1.2 Enactment of Various Legislations

The Indian Life Assurance Companies Act, 1912 was the first statutory
measure to regulate life business. In 1914, the Government of India started
publishing returns of Insurance Companies in India.
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. The Insurance Amendment Act of 1950 abolished
Principal Agencies.

1.3 Nationalisation of Life Insurance Business

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 societies—245 Indian and foreign insurers in all.
The LIC had monopoly till the late 1990s when the Insurance sector was
reopened to the private sector.

2. HISTORY OF GENERAL INSURANCE BUSINESS IN INDIA

2.1 The Pioneering Stage
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., 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.

2.2 Regulatory and Structural Reforms

1957 saw the formation of the General Insurance Council, a wing of the
Insurance Association 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.

2.3 Nationalisation of General Insurance Business

In 1972 with the passing of the General Insurance Business
(Nationalisation) Act, general insurance business was nationalised with
effect from 1st January, 1973. The General Insurance Corporation of
 India commenced business on January 1st, 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.
This millennium has seen insurance come a full circle in a journey
extending to nearly 200 years.

3. POST-LIBERALISATION PERIOD
3.1 Malhotra Committee Report
The process of re-opening of the insurance sector had begun in the early
1990s and the last decade and more has seen it been opened up
substantially.
In 1993, the Government of India 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.

3.2 Constitution of IRDA

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 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.
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.
IRDA opened up the market in August 2000 with the invitation for
application for registrations. Foreign companies were allowed ownership
of up to 26%.
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 re-insurer. Parliament passed a bill de-
linking the four subsidiaries from GIC in July, 2002.

3.3 Current Scenario

Today there are 31 general insurance companies including the ECGC and
Agriculture Insurance Corporation of India and 24 life insurance
companies operating in the country.
The insurance sector is a colossal one and is witnessing a speedy growth
rate of 15-20%. Together with banking services, insurance services add
about 7% to the country’s 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.