7.

Insurance, History, IRDA – Functions &

Powers, Insurance Reforms
• 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.
LIFE INSURANCE
• 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.
• 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 societies—245
Indian and foreign insurers in all.
• The LIC had monopoly till the late 90s when
the Insurance sector was reopened to the
private sector.
GENERAL INSURANCE

• 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 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
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.
• 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 re-insurer.
• Parliament passed a bill de-linking the
four subsidiaries from GIC in July, 2002.
• 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 growing at a
speedy 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.  
Malhotra Committee Report
In view to bring Reforms in Insurance sector to evaluate the Indian
insurance industry and to recommend its future direction the central
government formed Malhotra Committee, Headed by former Finance
Secretary and RBI Governor, R. N. Malhotra in the year 1993.
Purpose
• To suggest the structure of the insurance
industry, to assess strengths and weaknesses
of insurance companies in terms of the
objectives of creating an efficient and viable
insurance industry, which will have a wide
reach of insurance services, a variety of
insurance products with a high quality of
services to the public and servicing as an
effective instrument for mobilization of
financial resources for development.
• To make recommendations for changing
structure of insurance industry, for changing
general policy frame work etc.
• To make specific suggestions regarding LIC and
GIC with a view to improve their functioning.
• To make recommendations on regulation and
supervision of the insurance sector in India.
• To make recommendations on role and
functioning of surveyors, intermediaries like
agents etc in the insurance sector. 
Recommendations
• In 1994, the committee submitted the report and gave
recommendations on the following aspects
• Structure
• Competition
• Investment
• Customer Service
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
 Competition
• Private Companies with a minimum paid up capital of Rs. 1 billion
should be allowed to enter the industry.
• No Company should deal in both Life and General Insurance through in
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. 
• The Insurance Act should be changed. 
• An Insurance Regulatory Body should be set up.
• Controller of Insurance (Currently a part of the Finance Ministry)
should be made independent. 
Investment
• 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 (Their
current holdings to be brought down to
their level over a period of time.)
 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. 
• Computerization of operations and updating of
technology to be carried out in the insurance industry.
• Overall, the committee strongly felt that in order to
improve the customer services and increase the coverage
of the insurance 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.  
IRDA
Insurance Regulatory Development and Authority is the statutory, independent and
apex body that governs and supervise the Insurance Industry in India.
Establishment:
• IRDA Act was passed upon the recommendations of Malhotra
Committee report (7 Jan,1994), headed by Mr R.N. Malhotra (Retired
Governor, RBI)
• Main Recommendations - Entrance of Private Sector Companies and
Foreign promoters & An independent regulatory authority for
Insurance Sector in India                        
• In April,2000, it was set up as statutory body, with its headquarters at
New Delhi.
• The headquarters of the agency were shifted to Hyderabad,
Telangana in 2001.
Objectives of IRDA:
• To promote the interest and rights of policy holders.
• To promote and ensure the growth of Insurance Industry.
• To ensure speedy settlement of genuine claims and to prevent frauds
and malpractices
• To bring transparency and orderly conduct of in financial markets
dealing with insurance.
Organisational Setup of IRDA:
• IRDA is a ten member body consists of :
One Chairman (For 5 Years  & Maximum Age - 60 years )
• Five whole-time Members (For 5 Years and Maximum Age- 62 years)
• Four part-time Members (Not more than 5 years)
• The chairman and members of IRDAI are appointed by Government
of India.
Functions And Duties of IRDA:
• Section 14 of IRDA Act,1999 lays down the duties and functions of
IRDA:
It issues the registration certificates to insurance companies and
regulates them.
• It protects the interest of policy holders.
• It provides license to insurance intermediaries such as agents and
brokers after specifying the required qualifications and set
norms/code of conduct for them.
• It promotes and regulates the professional organisations related with
insurance business to promote efficiency in insurance sector.
• It regulates and supervise the premium rates and terms of insurance
covers.
• It specifies the conditions and manners, according to which the
insurance companies and other intermediaries have to make their
financial reports.
• It regulates the investment of policyholder's funds by insurance
companies.
• It also ensures the maintenance of solvency margin (company's ability
to pay out claims) by insurance companies.