Effect of Liberalisation in Insurance Industry
Introduction
The journey of
insurance liberalization process in India is now over seven years old. The
first major milestone in this journey has been the passing of Insurance
Regulatory and Development Authority Act, 1999. This along with amendments to
the Insurance Act 1983, LIC and GIC Acts paves the way for the entry of private
players and possibly the privatization of the hitherto public monopolies LIC
and GIC. Opening up of insurance to private sector including foreign
participation has resulted into various opportunities and challenges.
Concept of Insurance
In our daily life,
whenever there is uncertainly there is an involvement of risk. The instinct of
security against such risk is one of the basic motivating forces for
determining human attitudes. As a sequel to this quest for security, the
concept of insurance must have been born. The urge to provide insurance or
protection against the loss of life and property must have promoted people to
make some sort of sacrifice willingly in order to achieve security through
collective co-operation. In this sense, the story of insurance is probably as
old as the story of mankind.
Life insurance in
particular provides protection to household against the risk of premature death
of its income earning member. Life insurance in modern times also provides
protection against other life related risks such as that of longevity (i.e.
risk of outliving of source of income) and risk of disabled and sickness
(health insurance). The products provide for longevity are pensions and
annuities (insurance against old age). Non-life insurance provides protection
against accidents, property damage, theft and other liabilities. Non-life
insurance contracts are typically shorter in duration as compared to life
insurance contracts. The bundling together of risk coverage and saving is
peculiar of life insurance. Life insurance provides both protection and
investment.
Insurance is a boon to
business concerns. Insurance provides short range and long range relief. The
short-term relief is aimed at protecting the insured from loss of property and
life by distributing the loss amongst large number of persons through the
medium of professional risk bearers such as insurers. It enables a businessman
to face an unforeseen loss and, therefore, he need not worry about the possible
loss. The long-range object being the economic and industrial growth of the
country by making an investment of huge funds available with insurers in the
organized industry and commerce.
General Insurance
Prior to
nationalizations of General insurance industry in 1973 the GIC Act was passed
in the Parliament in 1971, but it came into effect in 1973. There was 107
General insurance companies including branches of foreign companies operating
in the country upon nationalization, these companies were amalgamated and
grouped into the following four subsidiaries of GIC such as National Insurance
Co.Ltd., Calcutta; The New India Assurance Co. Ltd., Mumbai; The Oriental
Insurance Co. Ltd., New Delhi and United India Insurance Co. Ltd., Chennai and
Now delinked.
General insurance
business in India is broadly divided into fire, marine and miscellaneous GIC
apart from directly handling Aviation and Reinsurance business administers the
Comprehensive Crop Insurance Scheme, Personal Accident Insurance, Social
Security Scheme etc. The GIC and its subsidiaries in keeping with the objective
of nationalization to spread the message of insurance far and wide and to
provide insurance protection to weaker section of the society are making
efforts to design new covers and also to popularize other non-traditional
business.
Liberalization of
Insurance
The comprehensive
regulation of insurance business in India was brought into effect with the
enactment of the Insurance Act, 1983. It tried to create a strong and powerful
supervision and regulatory authority in the Controller of Insurance with powers
to direct, advise, investigate, register and liquidate insurance companies etc.
However, consequent upon the nationalization of insurance business, most of the
regulatory functions were taken away from the Controller of Insurance and
vested in the insurers themselves. The Government of India in 1993 had set up a
high powered committee by R.N.Malhotra, former Governor, Reserve Bank of India,
to examine the structure of the insurance industry and recommend changes to
make it more efficient and competitive keeping in view the structural changes
in other parts of the financial system on the country.
Malhotra Committee's
Recommendations
The committee
submitted its report in January 1994 recommending that private insurers be
allowed to co-exist along with government companies like LIC and GIC companies.
This recommendation had been prompted by several factors such as need for
greater deeper insurance coverage in the economy, and a much a greater scale of
mobilization of funds from the economy, and a much a greater scale of
mobilization of funds from the economy for infrastructural development.
Liberalization of the insurance sector is at least partly driven by fiscal
necessity of tapping the big reserve of savings in the economy. Committee's recommendations
were as follows:
o Raising the capital
base of LIC and GIC up to Rs. 200 crores, half retained by the government and
rest sold to the public at large with suitable reservations for its
employees.
o Private sector is granted to enter insurance industry with a minimum paid up
capital of Rs. 100 crores.
o Foreign insurance be allowed to enter by floating an Indian company
preferably a joint venture with Indian partners.
o Steps are initiated to set up a strong and effective insurance regulatory in
the form of a statutory autonomous board on the lines of SEBI.
o Limited number of private companies to be allowed in the sector. But no firm
is allowed in the sector. But no firm is allowed to operate in both lines of
insurance (life or non-life).
o Tariff Advisory Committee (TAC) is delinked form GIC to function as a
separate statuary body under necessary supervision by the insurance regulatory
authority.
oAll insurance companies be treated on equal footing and governed by the
provisions of insurance Act. No special dispensation is given to government
companies.
oSetting up of a strong and effective regulatory body with independent source
for financing before allowing private companies into sector.
competition to
government sector:
Government companies
have now to face competition to private sector insurance companies not only in
issuing various range of insurance products but also in various aspects in
terms of customer service, channels of distribution, effective techniques of
selling the products etc. privatization of the insurance sector has opened the
doors to innovations in the way business can be transacted.
New age insurance
companies are embarking on new concepts and more cost effective way of
transacting business. The idea is clear to cater to the maximum business at the
lest cost. And slowly with time, the age-old norm prevalent with government
companies to expand by setting up branches seems getting lost. Among the
techniques that seem to catching up fast as an alternative to cater to the
rural and social sector insurance is hub and spoke arrangement. These along
with the participants of NGOs and Self Help Group (SHGs) have done with most of
the selling of the rural and social sector policies.
The main challenges is
from the commercial banks that have vast network of branches. In this regard,
it is important to mention here that LIC has entered into an arrangement with
Mangalore based Corporations Bank to leverage their infrastructure for mutual
benefit with the insurance monolith acquiring a strategic stake 27 per cent,
Corporation Bank has decided to abandon its plans of promoting a life insurance
company. The bank will act as a corporate agent for LIC in future and receive
commission on policies sold through its branches. LIC with its branch network
of close to 2100 offices will allow Corporation Bank to set up extension
centers. ATMs or branches with in its premises. Corporation Bank would in turn
implement an effective Cash Flow Management System for LIC.
IRDA Act, 1999
Preamble of IRDA Act
1999 reads 'An Act to provide for the establishment of an authority to protect
the interests of holders of insurance policies, to regulate, to promote and
ensure orderly growth of the insurance industry and for matters connected
therewith or incidental thereto.
Section 14 of IRDA
Act, lays the duties, powers and functions of the authority. The powers and
functions of the authority. The powers and functions of the Authority shall
include the following.
o Issue to the
applicant a certificate of registration, to renew, modify withdraw, suspend or
cancel such registration.
o To protect the interest of policy holders in all matters concerning
nomination of policy, surrender value f policy, insurable interest, settlement
of insurance claims, other terms and conditions of contract of insurance.
o Specifying requisite qualification and practical training for insurance
intermediates and agents.
o Specifying code of conduct for surveyors and loss assessors.
o Promoting efficiency in the conduct of insurance business
o Promoting and regulating professional regulators connected with the insurance
and reinsurance business.
o Specifying the form and manner in which books of accounts will be maintained
and statement of accounts rendered by insurers and insurance intermediaries.
o Adjudication of disputes between insurers and intermediates.
o Specifying the percentage of life insurance and general and general business
to be undertaken by the insurers in rural or social sectors etc.
Section 25 provides
that Insurance Advisory Committee will be constituted and shall consist of not
more than 25 members.Section 26 provides that Authority may in consultation
with Insurance Advisory Committee make regulations consists with this Act and
the rules made there under to carry the purpose of this Act.Section 29 seeks
amendment in certain provisions of Insurance Act, 1938 in the manner as set out
in First Schedule. The amendments to the Insurance Act are consequential in
order to empower IRDA to effectively regulate, promote, and ensure orderly
growth of the Insurance industry.
Section 30 &
31seek to amend LIC Act 1956 and GIC Act 1972.
Impact of
Liberalization
While nationalized
insurance companies have done a commendable job in extending volume of the
business opening up of insurance sector to private players was a necessity in
the context of liberalization of financial sector. If traditional
infrastructural and semipublic goods industries such as banking, airlines,
telecom, power etc. have significant private sector presence, continuing state
monopoly in provision of insurance was indefensible and therefore, the
privatization of insurance has been done as discussed earlier. Its impact has
to be seen in the form of creating various opportunities and challenges.
Opportunities
1. Privatization if
Insurance was eliminated the monopolistic business of Life Insurance
Corporation of India. It may help to cover the wide range of risk in general
insurance and also in life insurance. It helps to introduce new range of
products.
2. It would also result in better customer services and help improve the
variety and price of insurance products.
3. The entry of new player would speed up the spread of both life and general
insurance. It will increase the insurance penetration and measure of density.
4. Entry of private players will ensure the mobilization of funds that can be
utilized for the purpose of infrastructure development.
5. Allowing of commercial banks into insurance business will help to
mobilization of funds from the rural areas because of the availability of vast
branches of the banks.
6. Most important not the least tremendous employment opportunities will be
created in the field of insurance which is a burning problem of the presence
day today issues.
Current Scenario
After opening up of
insurance in private sector, various leading private companies including joint
ventures have entered the fields of insurance both life and non-life business.
Tata - AIG, Birla Sun life, HDFC standard life Insurance, Reliance General
Insurance, Royal Sundaram Alliance Insurance, Bajaj Auto Alliance, IFFCO Tokio
General Insurance, INA Vysya Life Insurance, SBI Life Insurance, Dabur CJU Life
Insurance and Max New York Life. SBI Life insurance has launched three products
Sanjeevan, Sukhjeevan and Young Sanjeevan so far and it has already sold 320
policies under its plan.
Conclusion
From the above
discussion we can conclude that the entry of private players in insurance
business needful and justifiable in order to enhance the efficiency of
operations, achieving greater density and insurance coverage in the country and
for a greater mobilization of long term savings for long gestation
infrastructure prefects. New players should not be treat as rivalries to
government companies, but they can supplement in achieving the objective of
growth of insurance business in india.
Name: Subbiah.B
E.Mail: suresha15@yahoo.in.
Please with any doubts and reply your suggestions to my e-mail id.
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