“Insurance should not be purchased to protect you from calamities that could prove financially devastating.”
Insurance is, in simple terms, a way for someone to get compensation for their loss or accident. It protects you against everyday risks to your finances and health.
India was the first country to introduce insurance. It began without any regulations in the Nineteenth century. It was a typical colonial story: only a few British insurers dominated the market which served large urban centres. After independence, things took a dramatic turn. Insurance was finally nationalized. The first was the 1956 nationalization of the life insurance businesses, followed by the 1972 nationalization and reorganization of the general insurance business. Private insurance companies were allowed back in the insurance industry with a maximum foreign holding of 26%, but this was only in 1999.
The insurance industry is huge and intimidating. Insurance can be purchased for anything and everything. Finding the right insurance policy for you can be daunting.
The definition of insurance has expanded beyond just covering tangible assets. The risk of losing money due to sudden movements in currency exchange rates or political disturbances, negligence, liability, and damages can all be covered.
A person who invests thoughtfully in property insurance will be adequately compensated for any damage he suffers as soon as the extent is known.
With its offer of bank guarantee, the State Bank of India enters the game with a new dynamic. The experience of Asia’s countries has already helped to deregulate their markets, allowing foreign companies to take part. If the experience from other countries is any indication, the dominance in Asia of the Life Insurance Corporation or the General Insurance Corporation won’t disappear anytime soon.
All insurance is meant to cover the owner for loss that could result from any of the risks he anticipates. Insurance can be divided into two categories: life insurance or general insurance. General insurance is Fire, Marine, Miscellaneous, which covers insurance against theft, fidelity, insurance for the employer’s responsibility, and insurance on motor vehicles, livestock, crops, and other related items.
LIFE INSURANCE IN INDIA
“Life insurance, it’s the most heartfelt letter of love ever written.
It helps to calm a child’s night-time crying. It eases the pain of a widow in mourning.
It is the comforting whisper that soothes the soul in the quiet hours of the night.
India saw the birth of life insurance over 100 years ago. These are its main features that are not so well understood in India. It is not a statutory term, but life insurance can be defined as an agreement to pay certain premiums at a certain time. The insurer will then pay the sums in exchange for the agreed-upon condition that the insured will pay the money in a certain manner on the day of an event that is dependent upon the duration and severity of human life.
Life insurance offers more savings than other types of savings.
“There is never death. Life Insurance exalts life, defeats death
It is the cost of living in freedom after death.
Savings made through life insurance provide complete protection against death risk. On death, life insurance pays the full amount guaranteed (with any bonuses if applicable) while other savings programs only pay interest.
The key features of life insurance are that it is a contract relating to human life. b) It pays a lump sum amount. c) The amount is paid after certain periods or upon the death of the insured. The sole purpose and objective of the assured when he takes out life insurance policies is to protect the interests of his dependents, such as his wife and children. A life insurance plan is generally accepted as security to secure a commercial loan.
NON LIFE INSURANCE
“Every asset has an intrinsic value. The business of general insurance is concerned with the protection of that economic value.”
Non-life Insurance is insurance other than life insurance. This includes household, medical, motor, vehicle, and fire insurance. If the owner had not worked hard, assets would have been created. They could include building, machinery, or vehicles. It is vulnerable to fire, allied perils, and theft as well as robbery because the tangible property is physical.
Very few General Insurance policies include:
Property insurance: Your most prized possession is your house. The policy covers multiple risks and is intended to be combined into one policy. It protects the property and interest of both the insured person and his family.
Health insurance: This covers medical expenses incurred after an accident or sudden illness.
Personal Accident Insurance: This insurance policy pays for the loss of life or injury (partial and permanent) that results from an accident. This insurance policy provides reimbursement for treatment costs and hospital expenses.
Travel Insurance: This policy protects you against all possible situations while on vacation abroad. It protects you from personal injuries, medical expenses, repatriation costs, loss of checked baggage, passport, and other unforeseen circumstances.
Liability insurance: This policy covers Directors, Officers, and other professionals against any claims arising from any wrongful Act that they may have committed in their official capacity.
Motor Insurance: Motor Vehicles Act says that every motor vehicle used on the road must have insurance. There are two types: one covers the act of liability, and one covers all liability and damages to one’s vehicle.
Under the Life Insurance Corporation Act of India, the Indian life insurance industry was made national. The LIC has seen some success. Despite being a monopoly, the LIC has around a 60-70million policyholders. The LIC managed to capture 30 odd percent of the Indian middle class, which is between 250-300million and 300 million. About 48% are rural or semi-urban residents. This wouldn’t have been possible if the LIC charter had not explicitly stated that the LIC was to be primarily serving rural areas. India’s high savings rate has been one of the key factors in the rapid growth of the LIC in recent years. Indians are more risk-averse than other countries, even though the savings rate is high. About half of the investments are made in physical assets such as gold and property. Around 23 percent are invested in bank deposits. These are safe and low-yielding but reliable. A little over 1.3 percent of GDP is also in life insurance savings vehicles. This figure has risen by a whopping 80% between 1985-1995.
Life Insurance in India from a Global Perspective
In many countries, insurance is an option for saving. Many developed countries have significant amounts of domestic saving that is made through donation insurance plans. This is not surprising. More surprising is the prominence of certain developing countries. South Africa, for instance, ranks at the number 2 spot. India is located between Chile and Italy. This is not surprising, given the level of economic development in Italy (Chile) and Chile (India). We can therefore conclude that India has an insurance culture, even though it has a low per capita household income. This bodes well for future growth. In particular, insurance (especially for life) is more likely to grow rapidly if income levels rise.
With the passing of the IRDA Bill into Parliament in December 1999, reforms in the Insurance industry were initiated. Since its incorporation as a statutory organization in April 2000, IRDA has faithfully followed its schedule for registering private-sector insurers and framing regulations.
Since its establishment as an independent statutory entity, the IRDA has developed a system of globally compatible regulations. The IRDA also launched an online service to renew and issue licenses to agents. This was in addition to providing support systems for the insurance sector and life insurance companies. It was also possible for insurance companies to have an approved training institution to train agents.
In March 2000 the Government of India liberalized India’s insurance sector with the passing of the Insurance Regulatory Development Authority Bill. This Bill lifted all entry restrictions and allowed foreign players into the market, with some restrictions on direct foreign ownership. Current guidelines stipulate that foreign partners must have a minimum of 26 percent equity in the company. This limit could be raised to 49 percent.
The sector will likely be more open to the market, which could lead to a greater spread and depth of insurance in India. This may also include restructuring and revitalizing the public sector. Twelve life insurance companies and eight general insurance companies were registered in India’s private sector. Since 2001, there have been a variety of private insurance companies selling their insurance policies in non-life and life segments.
LAW COMMISSION INDIA ABOUT THE REVISION TO THE INSURANCE ACT 1937 – 190th Law Commission Report
The Law Commission issued a Consultation Paper on the Revision of the Insurance Act (1938) on 16 June 2003. The previous attempt at amending the Insurance Act, 1938 was completed in 1999, when the Insurance Regulatory Development Authority Act, 99 (IRDA Act) was enacted.
In the context of the revised policy that allows private insurance companies to operate in both the life- and non-life sector, the Commission conducted the current exercise. There was a need to tighten the regulation mechanism while streamlining existing legislation to eliminate portions that were redundant as a result of recent changes.
The Consultation Paper suggested that the following were the main areas of change.
a. Combining the provisions of IRDA Act and Insurance Act to avoid multiplication of legislations
b. Delete redundant and transitory provisions of the Insurance Act 1938
c. These amendments reflect changes in the policy of allowing private insurers and strengthening the regulatory structure;
d. Requires strict regulations regarding the maintenance of solvency margin and investments by private and public insurance companies.
e. This provides for a full-fledged grievance remedy mechanism that includes:
o Establishment of Grievance Redressal Authorities (GRAs), comprising one judicial, two technical members to resolve complaints/claims of policyholders towards insurers (the GRAs will replace the existing system where an insurer appointed Ombudsman is employed);
o Appointment by the IRDA of adjudicating Officers to determine and levy penalty on defaulting insurance companies, insurance intermediaries, or insurance agents.
o Providing for an appeal against the decisions from the IRDA, GRAs, and adjudicating officials to an Insurance Appellate Tribunal. (IAT) consists of a Supreme Court/Chief Judge of a High Court judge serving as presiding officers and two members who have sufficient experience in the area of insurance matters.
o Provision for a statutory appeal to the Supreme Court in opposition to the IAT’s decisions.
LIFE and Non-LIFE Insurance – Development and Growth
2006 was a pivotal year in the history of the insurance sector. The Insurance Regulatory Development Authority Act (or the Insurance Regulatory Development Authority Act) laid the foundations for free pricing general insurance starting in 2007. Numerous companies also announced plans for an attack on the sector.
Both domestic and international players persistently pursued the long-pending demand that the FDI limit is increased from 26 to 49 percent. The Comprehensive Insurance Bill was sent to the Group Of Ministers by the Government toward the end of the Year, despite strong reservations from Left Parties. The Bill is likely that it will be heard in the Budget session.
India’s infiltration rates in health and other nonlife insurances are well below international standards. These figures show the huge growth potential of insurance. The Government proposed a rise in FDI limits to 49 percent. This was not implemented as legislative changes were required to allow for such a hike. The foreign investment in India has reached Rs. 8.7 Billion have been deposited in the Indian market. 21 private companies also have been granted licenses.
The growth of premiums in the life insurance market was at an unprecedented rate. However, general insurance saw a faster increase. Shriram Life Insurance was joined by Bharti Axa Life. This brought the total number to 16 players. Star Health and Allied Insurance – a standalone company in the insurance industry – is the new non-life player. It brings the total non-life market players to 14.
Many companies, mainly nationalized banks (about 14, including Bank of India and Punjab National Bank), have announced plans and have even formed joint ventures.
The comprehensive amendments made to insurance laws – the Insurance Act of 1999 (LIC Act, 1956) and IRDA Act (1999) – include the proposed change in FDI limit. After the amendments to the insurance laws, LIC will be able to maintain reserves and insurance companies will be able to increase resources other than equity.
Around 14 banks are waiting in line to enter the insurance industry. There were many joint venture announcements during 2006 while other banks scouted partners. Bank of India teamed up with Union Bank and Japanese Insurance Major Daichi Mutual Life. PNB joined Vijaya Bank as well as Principal to expand into life insurance. Allahabad Bank is partnering with Karnataka Bank as well as Indian Overseas Bank, Dabur Investment Corporation, Dabur Insurance Corporation, and Sampo Japan Insurance Inc to create a nonlife insurance company. Bank of Maharashtra is partnering up with Shriram Group and South Africa’s Sanlam Group for a non-life insurance venture.
CONCLUSION
It seems cynical for the GIC to wither and die within the next ten years or so, according to the LIC. The IRDA is moving “at a snail’s pace”. It has been cautious when granting licenses. It has established strict standards in all areas of the insurance business, possibly except for disclosure requirements. Regulators are careful. Too many regulations will discourage the newcomers’ motivation. But too loose regulations may lead to fraud or failure, which could ultimately lead to nationalization. India is not the only country in the world where insurance has been open to foreign competitors.
India’s insurance sector is in an important stage. The next couple of decades will witness high growth in insurance. These are due to two factors. First, financial deregulation is a great way to speed up the development of the insurance sector. Second, per capita GDP growth also aids in insurance business growth.
