Indian Insurance Sector Development (IC-14 Regulations-5-13 PDF)

2 1. Learn about the development of the Indian insurance sector. [Learning Outcome a] 1.1 Development and Growth of Insurance Industry in India The Constitution of India is federal in nature in as much there is division o...

2 1. Learn about the development of the Indian insurance sector. [Learning Outcome a] 1.1 Development and Growth of Insurance Industry in India The Constitution of India is federal in nature in as much there is division of powers between the Centre and the States. Insurance is included in the Union List, wherein the subjects included in this list are of the exclusive legislative competence of the Centre. The Central Legislature is empowered to regulate the insurance industry in India and hence the law in this regard is uniform throughout the territories of India. 1.2 Stages in the development of life insurance in India The development and growth of the insurance industry in India has gone through three distinct stages. ! Insurance law in India had its origins in the United Kingdom with the establishment of a British firm, the Oriental Life Insurance Company in 1818 in Calcutta. ! This was followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in 1874. ! 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. ! 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. 1.3 Stages in the development of non-life insurance in India ! General insurance 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.  3 ! 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 Insurance Act, 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. 1.4 Nationalisation 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 September 1956 by the Life Insurance Corporation Act, 1956 (“LIC Act”) which granted LIC the exclusive privilege to conduct life insurance business in India. ! However, an exception was made in the case of any company, firm or persons intending to carry on life insurance business in India in respect of the lives of “persons ordinarily resident outside India”. ! 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 the 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.  4 These companies were amalgamated and grouped into four subsidiary companies of GIC viz. " the National Insurance Company Ltd. " the New India Assurance Company Ltd. " the Oriental Insurance Company Ltd. and " the United India Assurance Company Ltd. ! GIC undertakes mainly re-insurance business apart from aviation insurance. 1.5 Insurance Sector Reforms ! In 1993, Govt of India appointed R. N. Malhotra Committee to lay down road map for opening up of the insurance sector to private sector participation. ! While the committee submitted its report in 1994, the enabling legislation was passed in the year 2000, amending the Insurance Act of 1938 and legislating the IRDA Act of 2000. ! The same year the newly appointed insurance regulator IRDA started issuing licenses to private life insurance companies formed and registered under Companies Act 1950 to be set up with sole purpose of carrying out Life Insurance Business, General Insurance Business and Reinsurance Business. ! As per the current FDI norms, foreign participation in an Indian insurance company is restricted to 26% equity/ordinary sharing capital with the balance being funded by Indian promoter entities. 1.6 Insurance Association of India, Councils and Committees Insurance Association of India All insurers and provident societies incorporated or domiciled in India are members of the Insurance Association of India (“Insurance Association”) and all insurers and provident societies incorporated or domiciled elsewhere than in India are associate members of the Insurance Association. There are two councils of the Insurance Association, namely " the Life Insurance Council and " the General Insurance Council Life Insurance Council The Life Insurance Council, through its Executive Committee, conducts examinations for individuals wishing to qualify themselves as insurance agents. It also fixes the limits for actual expenses by which the insurer carrying on life insurance business or any group of insurers can exceed from the prescribed limits under the Insurance Act.  5 General Insurance Council The General Insurance Council, through its Executive Committee, may fix the limits by which the actual expenses of management incurred by an insurer carrying on general insurance business may exceed the limits as prescribed in the Insurance Act. Question 1 As per current FDI norms how much is the FDI limit for insurance sector? A. 26% B. 74% C. 100% D. There is no FDI allowed in insurance sector in India. 2. Explain the provisions of the General Insurance Business (Nationalisation) Act, 1972 (GIBNA). [Learning Outcome b] General Insurance Business (Nationalisation) Act, 1972 (GIBNA) The General Insurance Corporation of India (GIC) was formed as a Government company under sub-section (1) of Section 9 of the General Insurance Business (Nationalisation) Act, 1972 (GIBNA, 1972) and it commenced business from January 1, 1973. The purpose of establishment of GIC as a holding company of the four operating (subsidiary) companies, as stated in the General Insurance Business (Nationalisation) Act, was superintending, controlling and carrying on the business of general insurance. Functions of GIC The functions of GIC as enunciated in the said Act are as follows: a) the carrying on of any part of general insurance business as deemed desirable; b) aiding, assisting and advising the companies in the matter of setting up of standards of conduct and sound practice in general insurance business and in rendering efficient customer service;  6 c) advising the acquiring companies in the matter of controlling their expenses including the payment of commission and other expenses; d) advising the acquiring companies in the matter of the investment of funds; e) issuing directions to acquiring companies in relation to the conduct of general insurance business Provisions of the Act 1. It has also been stated in the General Insurance Business (Nationalisation) Act that GIC shall keep in mind the desirability of encouraging competition among the subsidiary companies as far as possible in order to make their services more efficient. Though the concept of holding company in the public sector was new at that time, the role assigned to GIC and the need for competition among the four subsidiaries was clearly brought out in the Act itself. On the formation of the GIC, the shares of the Indian insurance companies, which vested in the Central Government, were transferred to the GIC and all the Indian insurance companies became the subsidiaries of the Corporation. Under the schemes framed under GIBNA, 1972, the Indian insurance companies got merged into one another and ultimately four Indian companies were left, namely, " the National Insurance Company Limited, " the New India Assurance Company Limited, " the Oriental Insurance Company Limited and " the United India Insurance Company Limited The 4 companies were so situated as to promote competition among them so that effective services in the field of general insurance are rendered by them in all parts of India. 2. The Insurance Regulatory and Development Authority Act (IRDA) Act, 1999 incorporated a new sub-clause in section 2 of the Insurance Act, 1938 under which an Indian Insurance company can carry on life insurance business or general insurance business or re-insurance business. The Insurance Act, 1938 also defines the expression “Indian re-insurer” to mean an insurer, who carries on exclusive re-insurance business and is approved in this behalf by the Central Government. 3. GIC was designated as the Indian reinsurer to which all the domestic insurers were obliged to cede 20% of gross direct premium in India. In order to ensure retention of maximum business in the country and to secure the best terms from foreign reinsurers, GIC and its subsidiaries have common programme for reinsurance cessions. All the four General Insurance companies became independent insurers delinked from GIC.  7 4. At present, the General Insurance Corporation of India is undertaking re- insurance business in India and also underwriting direct general insurance business in civil aviation and crop insurance. In view of the aforesaid provisions in the Insurance Act, 1938 and IRDA Act, 1999, GIC can carry on exclusively reinsurance business or general insurance business. The Central Government therefore, decided to entrust re-insurance business to GIC and de-link the said four subsidiary companies carrying on general insurance business from GIC. While the ceasing of underwriting of civil aviation and crop insurance business by GIC was dealt with administratively, it has delinked GIC from its subsidiaries by making necessary amendments in GIBNA, 1972. 5. With the enactment of GIBNA in the year 1972, the share capital of insurance companies which stood transferred to and vested in the Central Government was immediately transferred to and vested in GIC. The Bill transfers back to the Central Government, the share capital of the subsidiary companies [vested in GIC] by making necessary amendment in GIBNA, 1972 6. The Committee observes that to prevent flight of capital from India in the form of reinsurance premium and to ensure the development of our own strength and resources to retain the risks within the country itself,General Insurance Corporation has been made to operate only in reinsurance arena. Question 2 How many general insurance subsidiaries did GIC have? A. 1 B. 2 C. 3 D. 4 Summary ! The Central Legislature is empowered to regulate the insurance industry in India and hence the law in this regard is uniform throughout the territories of India.  8 ! Oriental Life Insurance Company in 1818 in Calcutta was the first life insurance company to start operations in India. ! 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 ! The first general insurance company established by an Indian was Indian Mercantile Insurance Company Ltd. in Bombay in 1907. ! In 1956 the life insurance business was nationalised and the operations of companies were merged to form the Life Insurance Corporation (LIC) of India. ! With the introduction of the General Insurance Business (Nationalisation) Act, 1972, the general insurance business was nationalised. ! General Insurance Corporation (GIC) was formed in 1972 and was made the holding company of 4 PSU general insurance companies. The operations of all general insurance companies were merged into these 4 companies. ! In the year 2000 reforms were initiated by the Government and the IRDA was formed and the insurance sector was liberalised and opened up to private sector participation. As per current rules Foreign Direct Investment (FDI) upto 26% is allowed in the insurance sector. ! The Insurance Association of India (IAI) has two councils: Life Insurance Council and General Insurance Council. ! As part of the reforms process GIC was delinked from its 4 subsidiaries and was converted into a re-insurance company. The ownership of the 4 subsidiaries was passed on to the Central Government. Answers to Test Yourself Answer to TY 1 The correct option is A. As per current FDI norms the current FDI limit for insurance sector is 26%. Answer to TY 2 The correct option is D. GIC has 4 PSU general insurance companies as its subsidiaries.  9 Self-Examination Questions Question 1 In India the ________ is empowered to regulate the insurance industry. A. Central Legislature B. State Legislature C. State and Central Legislature combine. D. The Supreme Court of India Question 2 ______________ in 1818 in Calcutta was the first life insurance company to start operations in India. A. Bombay Life Assurance Company. B. Oriental Life Insurance Company C. Oriental Life Assurance Company D. Madras Equitable Life Insurance Society Question 3 _______________ in Bombay in 1907 was the first general insurance company established by an Indian. A. Triton Insurance Company Ltd B. India First General Insurance Company Ltd. C. Indian Mercantile Insurance Company Ltd. D. General Insurance Company Ltd. Answers to SEQ Answer to SEQ 1 The correct option is A. In India the Central Legislature is empowered to regulate the insurance industry. Answer to SEQ 2 The correct option is B. Oriental Life Insurance Company in 1818 in Calcutta was the first life insurance company to start operations in India.  10 Answer to SEQ 3 The correct options is C Indian Mercantile Insurance Company Ltd. in Bombay in 1907 was the first general insurance company established by an Indian.