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INSURANCE: EVOLUTION AND HISTORICAL BACKGROUND

The concept of insurance has been prevalent in India since ancient times amongst Hindus.

Overseas traders practised 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.

A BRIEF HISTORY OF INSURANCE:

The story of insurance is probably as old as the story of Mankind. Though the concept of

insurance is largely a development of the recent past, particularly after the Industrial Era,

yet its beginnings date back to almost 6000 years.

The Indian life insurance industry has its own origin and history, since its inception. It has

passed through many obstacles, hindrances to attain the present status.

य य ग:| य :| “Apraaptasya praapanam yoga; Praaptsya

rakhanam kshema”- Thus says Shankara in his commentary on Bhagavadgita (Geetha

Bhashyam).

Yoga means getting the things one has not got and Kshema means protection of things one

has got. The sum and substance of the two are the essence of insurance. Life insurance is a

social security tool. This is more pronounced in rural areas that promote and sustain the life

links of the economy.

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.

Insurance owes its existence to 17th

century England. In fact, it took shape in 1688 at a

rather interesting place called Lloyd's Coffee House in London, where merchants, ship-

owners and underwriters met to discuss and transact business. The practice

of underwriting emerged in the same London coffeehouses that operated as the unofficial

stock exchange for the British Empire. In the late 1600s, shipping was just beginning

between the New World and the old as colonies were being established and exotic goods

were ferried back. A coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was

the primary meeting place for merchants, ship owners and others seeking insurance.

In 1666, the great fire of London destroyed around 14,000 buildings. London was still

recovering from the plague had that ravaged it a year earlier, and many survivors found

themselves without homes. As a response to the chaos and outrage that followed the burning

of London, groups of underwriters who had dealt exclusively in marine insurance formed

insurance companies that offered fire insurance.

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The first stock companies to get into the business of insurance were chartered in England in

1720. The year 1735 saw the birth of the first insurance company in the American colonies

in Charleston.

FORMATION OF THE INSURANCE INDUSTRY IN INDIA

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 Life Insurance Society 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. However, till the

establishment of the Bombay Mutual Life Assurance Society in 1871, Indians were charged

an extra premium of up to 20% as compared to the British. 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.

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”) (which was

based on the English Act of 1909). 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 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.

NATIONALIZATION OF THE INSURANCE BUSINESS IN INDIA

On January 19, 1956, the management of life insurance business of two hundred and forty

five 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

Sept ember 1956 by the Life Insurance Corporation Act, 1956 (“LIC Act”) which granted

LIC the exclusive privilege to conduct life insurance business in India. An Ordinance was

issued on 19th January, 1956 nationalizing the life insurance sector and Life Insurance

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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 until the insurance sector was reopened to the private

sector.

The general insurance business was also nationalised with effect from January 1, 1973,

through the introduction of the General Insurance Business (Nationalisation) 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 (“GIC”) to secure the development of the general insurance

business in India and for t he 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 January 1,

1973. Prior to 1973, there were a hundred and seven 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 undertakes mainly re-insurance 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.

ENTRY OF PRIVATE PLAYERS

Since 1956, with the nationalization 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 liberalization of t he Indian economy. It was a matter of time

before this liberalization affected the insurance sector. A huge gap in the funds required for

infrastructure was felt particularly since much of these 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, a former Governor of

India's apex bank, 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

modernizing 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 privatization of the insurance sector by permit ting 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 December 2, 1999 with the aim “to provide for the

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establishment of an Authority, to protect t he 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”.

MAJOR MILESTONES OF INSURANCE REGULATIONS OF THIS CENTURY:

Some of the major regulations of Indian insurance industry are as follows:

1912 – There was a loud demand to regulate the affairs of insurance during the first

decade of the 20th century after five hundred provident fund societies that ought to

cater to the needs of small income groups failed miserably in the task. The

government realized the need of regularization and passed ‗The Indian Life

Insurance Company Act' and 'The Provident Insurance societies' Act to regulate the

affairs of insurance companies and to avoid failures and check malpractices. It

mandated for the companies to submit certain records to the government. As a result

several companies which conducted insurance business on unsound actuarial

principles were closed.

1928- The Indian Insurance Companies Act was enacted to enable the government to

collect statistical information about both life and non life insurance business. The bill

provided that the surplus shall be allocated to shareholders and to policyholders in

certain proportion. Every insurance company has to submit annual statements

showing details of business both in and outside India.

1938 - The Insurance Act: It is a comprehensive act to regulate insurance business in

India. It was due to the strenuous efforts made by J.C. Setelvad who was the founder

president of the Indian insurance companies. This act forms the basis for the most

current insurance laws. This act was passed with a view to establishing closer

supervision and control in matters of investment of funds, expenditure and general

management of insurance companies. The act facilitated for the establishment of the

Department of Insurance under the authority of the Superintendent of Insurance. The

act was amended in 1950 and The Controller of Insurance was held responsible for

the orderly business of insurance in India. An Insurance Year Book (Blue Book) is

published by the Controller of Insurance every year giving information relating to

progress of life and general insurance business in India.

1956 - Nationalization of life insurance business in India. The Executive Committee

of the Insurance Councils that was set up in 1950 by the government of India made

serious efforts to ensure high standard of conduct and sound business practices. The

study conducted by the committee found that the concept of trusteeship which should

be the cornerstone of life insurance seemed entirely lacking and most managements

had no appreciation of the clear and vital distinction that exists between trust monies

and those belonged to joint stock companies owned by the shareholders. The

government of India thought it fit to nationalize the life insurance industry. The

nationalization of the life insurance brought to an end for the private operators and

170 insurance companies and 75 provident societies that were issuing life insurance

policies were amalgamated to form the Life Insurance Corporation of India, with a

capital contribution of Rs 5 crore by the government of India.

1972- Nationalization of general insurance business in India.

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1993- Setting up of Malhotra Committee to suggest structural reforms in insurance

sector with a view to improving the functioning of LIC and GIC and to make

recommendations on regulation and supervision of the insurance sector in India.

1994- Recommendations of Malhotra Committee, recommending for opening up of

insurance sector to private players and for professionalizing of agency force by

compulsory inductive training. The committee insisted that the insurance companies

should pay special attention to the rural insurance business. For entry of private

players, it suggested minimum capital requirement of 100 crore rupees and also

suggested norms relating to promoters' equity and equity capital by foreign

companies. The report suggested that postal life insurance should be allowed to

operate in the rural market. Mandatory investments of LIC Life fund in government

securities to be reduced from 75% to 50%. Government stake in the insurance

companies to be brought down to 50%.

1995- Setting up of Mukharjee Committee to make concrete plans for the

requirements of the newly formed insurance companies.

1996 -Setting up of (Interim) Insurance Regulatory Authority.

1997- Mukharjee Committee Report submitted, but not made public.

1997- Greater autonomy to LIC, GIC and their subsidiaries with regard to the

restructuring of boards and flexibility in investment norms aimed at channelling

funds to the insurance sector.

1999- The standing committee headed by Murali Deora decided that foreign equity in

private insurance should be limited to 26%. The IRA bill was renamed as Insurance

Regulatory and Development Authority (IRDA) bill. On 7th

Dec, 99, the government

passed IRDA act.

2000- President gives his assent to IRDA Bill.

2002 – Banks were allowed to sell insurance plans.

2005- Micro Insurance Regulations notified by the IRDA.

2007- Govardhan Committee was constituted to study the manner in which the

distribution channels are functioning and to recommend changes, if any, for making

them more effective.

2008- Govardhan committee submitted its report in April, 08 and the

recommendations are under consideration of IRDA.

2009- A Government appointed Panel on Investor Protection & Awareness chaired

by D. Swarup, the Chairman of Pension Funds Regulatory & Development Authority

(PFRDA) submitted its report to the Government of India recommending, inter alia,

for phasing out Agents‘commission by April, 2011 for ULIPs and allow investors to

negotiate the fees. The proposal is under the consideration of the Finance Ministry.

2010 – Securities and Exchange Board of India (SEBI) banned the sale of ULIPs by

the life insurance companies without getting its approval and claimed that the ULIPs

are more of mutual fund entities rather than insurance entities. IRDA asserted its own

authority on the governance of ULIPs and permitted the companies to resume selling

the ULIP products. The matter is therefore referred to the Court of Law. Meanwhile

the Finance Ministry has given directions in June, 2010 that they should be regulated

by IRDA only.

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2014 – Central Government approved 49% foreign investment in insurance

companies through the Foreign Investment Promotion Board (FIPB) route ensuring

management control in the hands of Indian promoters.

PRESENT SCENARIO OF INSURANCE IN INDIA

The insurance market has witnessed dynamic changes which includes presence of a fairly

large number of insurers both in life and non-life segment. Most of the private insurance

companies have formed joint venture partnering with well recognized foreign players across

the globe. There are now 29 insurance companies operating in the Indian market – 14

private life insurers, nine private non-life insurers and six public sector companies. There

was pressure from both within the country and outside on the government to increase the

foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV

partners to bring in funds for expansion. Finally, in the year 2014 Central Government

approved 49% foreign investment in insurance companies through the Foreign Investment

Promotion Board (FIPB) route ensuring management control in the hands of Indian

promoters.

India with about 200 million middle class household shows a huge untapped potential for

players in the insurance industry. Saturation of markets in many developed economies has

made the Indian market even more attractive for global players. The insurance sector in

India has come to a position of very high potential and competitiveness. Indians who have

always seen life insurance as a tax saving device, are now suddenly turning to the private

sector that are providing them new products and variety for their choice.

Consumers remain the most important centre of the insurance sector. After the entry of the

foreign players the industry is paying a lot of competition and thus improvement of the

customer is required service in the industry. Computerization of operations and updating of

technology have become imperative in the current scenario. Foreign players are bringing in

international best practices in service through use of latest technologies.

Customers have tremendous choice from a large variety of products from pure term (risk)

insurance to unit-linked investment products. Customers are offered unbundled products

with a variety of benefits. More customers are buying products and services based on their

true needs and not just traditional money back policies, which are not considered very

appropriate for long-term protection and savings. There is lot of saving and investment

plans in the market.

It is suggested to go through class notes also.