Insurance Law : An Indian Perspective
INTRODUCTION
"Insurance should
be bought to protect you against a calamity that would otherwise be financially
devastating."
In simple terms,
insurance allows someone who suffers a loss or accident to be compensated for
the effects of their misfortune. It lets you protect yourself against everyday
risks to your health, home and financial situation.
Insurance in India
started without any regulation in the Nineteenth Century. It was a typical
story of a colonial epoch: few British insurance companies dominating the
market serving mostly large urban centers. After the independence, it took a
theatrical turn. Insurance was nationalized. First, the life insurance
companies were nationalized in 1956, and then the general insurance business
was nationalized in 1972. It was only in 1999 that the private insurance
companies have been allowed back into the business of insurance with a maximum
of 26% of foreign holding.
"The insurance
industry is enormous and can be quite intimidating. Insurance is being sold for
almost anything and everything you can imagine. Determining what's right for
you can be a very daunting task."
Concepts of insurance
have been extended beyond the coverage of tangible asset. Now the risk of
losses due to sudden changes in currency exchange rates, political disturbance,
negligence and liability for the damages can also be covered.
But if a person
thoughtfully invests in insurance for his property prior to any unexpected
contingency then he will be suitably compensated for his loss as soon as the
extent of damage is ascertained.
The entry of the State
Bank of India with its proposal of bank assurance brings a new dynamics in the
game. The collective experience of the other countries in Asia has already
deregulated their markets and has allowed foreign companies to participate. If
the experience of the other countries is any guide, the dominance of the Life
Insurance Corporation and the General Insurance Corporation is not going to
disappear any time soon.
The aim of all insurance is to compensate the owner against loss arising from a
variety of risks, which he anticipates, to his life, property and business.
Insurance is mainly of two types: life insurance and general insurance. General
insurance means Fire, Marine and Miscellaneous insurance which includes
insurance against burglary or theft, fidelity guarantee, insurance for
employer's liability, and insurance of motor vehicles, livestock and crops.
LIFE INSURANCE IN
INDIA
"Life insurance
is the heartfelt love letter ever written.
It calms down the
crying of a hungry baby at night. It relieves the heart of a bereaved widow.
It is the comforting
whisper in the dark silent hours of the night."
Life insurance made
its debut in India well over 100 years ago. Its salient features are not as
widely understood in our country as they ought to be. There is no statutory
definition of life insurance, but it has been defined as a contract of
insurance whereby the insured agrees to pay certain sums called premiums, at
specified time, and in consideration thereof the insurer agreed to pay certain
sums of money on certain condition sand in specified way upon happening of a
particular event contingent upon the duration of human life.
Life insurance is
superior to other forms of savings!
"There is no
death. Life Insurance exalts life and defeats death.
It is the premium we
pay for the freedom of living after death."
Savings through life
insurance guarantee full protection against risk of death of the saver. In life
insurance, on death, the full sum assured is payable (with bonuses wherever
applicable) whereas in other savings schemes, only the amount saved (with
interest) is payable.
The essential features
of life insurance are a) it is a contract relating to human life, which b)
provides for payment of lump-sum amount, and c) the amount is paid after the
expiry of certain period or on the death of the assured. The very purpose and
object of the assured in taking policies from life insurance companies is to
safeguard the interest of his dependents viz., wife and children as the case
may be, in the even of premature death of the assured as a result of the
happening in any contingency. A life insurance policy is also generally
accepted as security for even a commercial loan.
NON-LIFE INSURANCE
"Every asset has
a value and the business of general insurance is related to the protection of
economic value of assets."
Non-life insurance
means insurance other than life insurance such as fire, marine, accident,
medical, motor vehicle and household insurance. Assets would have been created
through the efforts of owner, which can be in the form of building, vehicles,
machinery and other tangible properties. Since tangible property has a physical
shape and consistency, it is subject to many risks ranging from fire, allied
perils to theft and robbery.
Few of the General Insurance policies are:
Property Insurance:
The home is most valued possession. The policy is designed to cover the various
risks under a single policy. It provides protection for property and interest
of the insured and family.
Health Insurance: It
provides cover, which takes care of medical expenses following hospitalization
from sudden illness or accident.
Personal Accident Insurance: This insurance policy provides compensation for
loss of life or injury (partial or permanent) caused by an accident. This
includes reimbursement of cost of treatment and the use of hospital facilities
for the treatment.
Travel Insurance: The
policy covers the insured against various eventualities while traveling abroad.
It covers the insured against personal accident, medical expenses and
repatriation, loss of checked baggage, passport etc.
Liability Insurance: This
policy indemnifies the Directors or Officers or other professionals against
loss arising from claims made against them by reason of any wrongful Act in
their Official capacity.
Motor Insurance: Motor
Vehicles Act states that every motor vehicle plying on the road has to be
insured, with at least Liability only policy. There are two types of policy one
covering the act of liability, while other covers insurers all liability and
damage caused to one's vehicles.
JOURNEY FROM AN INFANT
TO ADOLESCENCE!
Historical Perspective
The history of life
insurance in India dates back to 1818 when it was conceived as a means to
provide for English Widows. Interestingly in those days a higher premium was
charged for Indian lives than the non-Indian lives as Indian lives were
considered more risky for coverage.
The Bombay Mutual Life
Insurance Society started its business in 1870. It was the first company to
charge same premium for both Indian and non-Indian lives. The Oriental
Assurance Company was established in 1880. The General insurance business in
India, on the other hand, can trace its roots to the Triton (Tital) Insurance
Company Limited, the first general insurance company established in the year
1850 in Calcutta by the British. Till the end of nineteenth century insurance
business was almost entirely in the hands of overseas companies.
Insurance regulation
formally began in India with the passing of the Life Insurance Companies Act of
1912 and the Provident Fund Act of 1912. Several frauds during 20's and 30's
desecrated insurance business in India. By 1938 there were 176 insurance
companies. The first comprehensive legislation was introduced with the
Insurance Act of 1938 that provided strict State Control over insurance
business. The insurance business grew at a faster pace after independence.
Indian companies strengthened their hold on this business but despite the
growth that was witnessed, insurance remained an urban phenomenon.
The Government of
India in 1956, brought together over 240 private life insurers and provident
societies under one nationalized monopoly corporation and Life Insurance
Corporation (LIC) was born. Nationalization was justified on the grounds that
it would create much needed funds for rapid industrialization. This was in
conformity with the Government's chosen path of State lead planning and
development.
The (non-life)
insurance business continued to prosper with the private sector till 1972.
Their operations were restricted to organized trade and industry in large
cities. The general insurance industry was nationalized in 1972. With this,
nearly 107 insurers were amalgamated and grouped into four companies - National
Insurance Company, New India Assurance Company, Oriental Insurance Company and
United India Insurance Company. These were subsidiaries of the General
Insurance Company (GIC).
The life insurance
industry was nationalized under the Life Insurance Corporation (LIC) Act of
India. In some ways, the LIC has become very flourishing. Regardless of being a
monopoly, it has some 60-70 million policyholders. Given that the Indian
middle-class is around 250-300 million, the LIC has managed to capture some 30
odd percent of it. Around 48% of the customers of the LIC are from rural and
semi-urban areas. This probably would not have happened had the charter of the
LIC not specifically set out the goal of serving the rural areas. A high saving
rate in India is one of the exogenous factors that have helped the LIC to grow
rapidly in recent years. Despite the saving rate being high in India (compared
with other countries with a similar level of development), Indians display high
degree of risk aversion. Thus, nearly half of the investments are in physical
assets (like property and gold). Around twenty three percent are in (low
yielding but safe) bank deposits. In addition, some 1.3 percent of the GDP are
in life insurance related savings vehicles. This figure has doubled between
1985 and 1995.
A World viewpoint -
Life Insurance in India
In many countries,
insurance has been a form of savings. In many developed countries, a
significant fraction of domestic saving is in the form of donation insurance
plans. This is not surprising. The prominence of some developing countries is
more surprising. For example, South Africa features at the number two spot.
India is nestled between Chile and Italy. This is even more surprising given
the levels of economic development in Chile and Italy. Thus, we can conclude
that there is an insurance culture in India despite a low per capita income.
This promises well for future growth. Specifically, when the income level
improves, insurance (especially life) is likely to grow rapidly.
INSURANCE SECTOR
REFORM:
Committee Reports: One
Known, One Anonymous!
Although Indian
markets were privatized and opened up to foreign companies in a number of sectors
in 1991, insurance remained out of bounds on both counts. The government wanted
to proceed with caution. With pressure from the opposition, the government (at
the time, dominated by the Congress Party) decided to set up a committee headed
by Mr. R. N. Malhotra (the then Governor of the Reserve Bank of India).
Malhotra Committee
Liberalization of the
Indian insurance market was suggested in a report released in 1994 by the
Malhotra Committee, indicating that the market should be opened to
private-sector competition, and eventually, foreign private-sector competition.
It also investigated the level of satisfaction of the customers of the LIC.
Inquisitively, the level of customer satisfaction seemed to be high.
In 1993, Malhotra
Committee - headed by former Finance Secretary and RBI Governor Mr. R. N.
Malhotra - was formed to evaluate the Indian insurance industry and recommend
its future course. The Malhotra committee was set up with the aim of
complementing the reforms initiated in the financial sector. The reforms were
aimed at creating a more efficient and competitive financial system suitable
for the needs of the economy keeping in mind the structural changes presently
happening and recognizing that insurance is an important part of the overall
financial system where it was necessary to address the need for similar
reforms. In 1994, the committee submitted the report and some of the key
recommendations included:
o Structure
Government bet 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
sector. No Company should deal in both Life and General Insurance through 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.
o Regulatory Body
The Insurance Act
should be changed. An Insurance Regulatory body should be set up. Controller of
Insurance - a part of the Finance Ministry- should be made Independent.
o Investments
Compulsory 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 (there current
holdings to be brought down to this level over a period of time).
o 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. The
committee accentuated that in order to improve the customer services and
increase the coverage of insurance policies, 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 competitors could ruin the public
confidence in the industry. Hence, it was decided to allow competition in a
limited way by stipulating the minimum capital requirement of Rs.100 crores.
The committee felt the
need to provide greater autonomy to insurance companies in order to improve
their performance and enable them to act as independent companies with economic
motives. For this purpose, it had proposed setting up an independent regulatory
body - The Insurance Regulatory and Development Authority.
Reforms in the
Insurance sector were initiated with the passage of the IRDA Bill in Parliament
in December 1999. The IRDA since its incorporation as a statutory body in April
2000 has meticulously stuck to its schedule of framing regulations and
registering the private sector insurance companies.
Since being set up as
an independent statutory body the IRDA has put in a framework of globally
compatible regulations. The other decision taken at the same time to provide
the supporting systems to the insurance sector and in particular the life
insurance companies was the launch of the IRDA online service for issue and
renewal of licenses to agents. The approval of institutions for imparting
training to agents has also ensured that the insurance companies would have a
trained workforce of insurance agents in place to sell their products.
The Government of
India liberalized the insurance sector in March 2000 with the passage of the
Insurance Regulatory and Development Authority (IRDA) Bill, lifting all entry
restrictions for private players and allowing foreign players to enter the
market with some limits on direct foreign ownership. Under the current
guidelines, there is a 26 percent equity lid for foreign partners in an
insurance company. There is a proposal to increase this limit to 49 percent.
The opening up of the
sector is likely to lead to greater spread and deepening of insurance in India
and this may also include restructuring and revitalizing of the public sector
companies. In the private sector 12 life insurance and 8 general insurance companies
have been registered. A host of private Insurance companies operating in both
life and non-life segments have started selling their insurance policies since
2001
Mukherjee Committee
Immediately after the
publication of the Malhotra Committee Report, a new committee, Mukherjee
Committee was set up to make concrete plans for the requirements of the newly
formed insurance companies. Recommendations of the Mukherjee Committee were
never disclosed to the public. But, from the information that filtered out it
became clear that the committee recommended the inclusion of certain ratios in
insurance company balance sheets to ensure transparency in accounting. But the
Finance Minister objected to it and it was argued by him, probably on the
advice of some of the potential competitors, that it could affect the prospects
of a developing insurance company.
LAW COMMISSION OF
INDIA ON REVISION OF THE INSURANCE ACT 1938 - 190th Law Commission Report
The Law Commission on
16th June 2003 released a Consultation Paper on the Revision of the Insurance
Act, 1938. The previous exercise to amend the Insurance Act, 1938 was
undertaken in 1999 at the time of enactment of the Insurance Regulatory
Development Authority Act, 1999 (IRDA Act).
The Commission
undertook the present exercise in the context of the changed policy that has
permitted private insurance companies both in the life and non-life sectors. A
need has been felt to toughen the regulatory mechanism even while streamlining
the existing legislation with a view to removing portions that have become
superfluous as a consequence of the recent changes.
Among the major areas
of changes, the Consultation paper suggested the following:
a. merging of the
provisions of the IRDA Act with the Insurance Act to avoid multiplicity of
legislations;
b. deletion of
redundant and transitory provisions in the Insurance Act, 1938;
c. Amendments reflect
the changed policy of permitting private insurance companies and strengthening
the regulatory mechanism;
d. Providing for
stringent norms regarding maintenance of 'solvency margin' and investments by
both public sector and private sector insurance companies;
e. Providing for a
full-fledged grievance redressal mechanism that includes:
o The constitution of
Grievance Redressal Authorities (GRAs) comprising one judicial and two
technical members to deal with complaints/claims of policyholders against
insurers (the GRAs are expected to replace the present system of insurer
appointed Ombudsman);
o Appointment of
adjudicating officers by the IRDA to determine and levy penalties on defaulting
insurers, insurance intermediaries and insurance agents;
o Providing for an
appeal against the decisions of the IRDA, GRAs and adjudicating officers to an
Insurance Appellate Tribunal (IAT) comprising a judge (sitting or retired) of
the Supreme Court/Chief Justice of a High Court as presiding officer and two
other members having sufficient experience in insurance matters;
o Providing for a
statutory appeal to the Supreme Court against the decisions of the IAT.
LIFE & NON-LIFE
INSURANCE - Development and Growth!
The year 2006 turned
out to be a momentous year for the insurance sector as regulator the Insurance
Regulatory Development Authority Act, laid the foundation for free pricing
general insurance from 2007, while many companies announced plans to attack
into the sector.
Both domestic and
foreign players robustly pursued their long-pending demand for increasing the
FDI limit from 26 per cent to 49 per cent and toward the fag end of the year,
the Government sent the Comprehensive Insurance Bill to Group of Ministers for
consideration amid strong reservation from Left parties. The Bill is likely to
be taken up in the Budget session of Parliament.
The infiltration rates
of health and other non-life insurances in India are well below the
international level. These facts indicate immense growth potential of the
insurance sector. The hike in FDI limit to 49 per cent was proposed by the
Government last year. This has not been operationalized as legislative changes
are required for such hike. Since opening up of the insurance sector in 1999,
foreign investments of Rs. 8.7 billion have tipped into the Indian market and
21 private companies have been granted licenses.
The involvement of the
private insurers in various industry segments has increased on account of both
their capturing a part of the business which was earlier underwritten by the
public sector insurers and also creating additional business boulevards. To
this effect, the public sector insurers have been unable to draw upon their
inherent strengths to capture additional premium. Of the growth in premium in
2004-05, 66.27 per cent has been captured by the private insurers despite
having 20 per cent market share.
The life insurance
industry recorded a premium income of Rs.82854.80 crore during the financial
year 2004-05 as against Rs.66653.75 crore in the previous financial year,
recording a growth of 24.31 per cent. The contribution of first year premium,
single premium and renewal premium to the total premium was Rs.15881.33 crore
(19.16 per cent); Rs.10336.30 crore (12.47 per cent); and Rs.56637.16 crore
(68.36 per cent), respectively. In the year 2000-01, when the industry was
opened up to the private players, the life insurance premium was Rs.34,898.48
crore which constituted of Rs. 6996.95 crore of first year premium, Rs.
25191.07 crore of renewal premium and Rs. 2740.45 crore of single premium. Post
opening up, single premium had declined from Rs.9, 194.07 crore in the year
2001-02 to Rs.5674.14 crore in 2002-03 with the withdrawal of the guaranteed
return policies. Though it went up marginally in 2003-04 to Rs.5936.50 crore
(4.62 per cent growth) 2004-05, however, witnessed a significant shift with the
single premium income rising to Rs. 10336.30 crore showing 74.11 per cent
growth over 2003-04.
The size of life
insurance market increased on the strength of growth in the economy and
concomitant increase in per capita income. This resulted in a favourable growth
in total premium both for LIC (18.25 per cent) and to the new insurers (147.65
per cent) in 2004-05. The higher growth for the new insurers is to be viewed in
the context of a low base in 2003- 04. However, the new insurers have improved
their market share from 4.68 in 2003-04 to 9.33 in 2004-05.
The segment wise break
up of fire, marine and miscellaneous segments in case of the public sector
insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59 crore, i.e., a
growth of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The public sector
insurers reported growth in Motor and Health segments (9 and 24 per cent).
These segments accounted for 45 and 10 per cent of the business underwritten by
the public sector insurers. Fire and "Others" accounted for 17.26 and
11 per cent of the premium underwritten. Aviation, Liability,
"Others" and Fire recorded negative growth of 29, 21, 3.58 and 1.43
per cent. In no other country that opened at the same time as India have
foreign companies been able to grab a 22 per cent market share in the life
segment and about 20 per cent in the general insurance segment. The share of
foreign insurers in other competing Asian markets is not more than 5 to 10 per
cent.
The life insurance
sector grew new premium at a rate not seen before while the general insurance
sector grew at a faster rate. Two new players entered into life insurance -
Shriram Life and Bharti Axa Life - taking the total number of life players to
16. There was one new entrant to the non-life sector in the form of a
standalone health insurance company - Star Health and Allied Insurance, taking
the non-life players to 14.
A large number of
companies, mostly nationalized banks (about 14) such as Bank of India and
Punjab National Bank, have announced plans to enter the insurance sector and
some of them have also formed joint ventures.
The proposed change in
FDI cap is part of the comprehensive amendments to insurance laws - The
Insurance Act of 1999, LIC Act, 1956 and IRDA Act, 1999. After the proposed
amendments in the insurance laws LIC would be able to maintain reserves while
insurance companies would be able to raise resources other than equity.
About 14 banks are in
queue to enter insurance sector and the year 2006 saw several joint venture
announcements while others scout partners. Bank of India has teamed up with
Union Bank and Japanese insurance major Dai-ichi Mutual Life while PNB tied up
with Vijaya Bank and Principal for foraying into life insurance. Allahabad
Bank, Karnataka Bank, Indian Overseas Bank, Dabur Investment Corporation and
Sompo Japan Insurance Inc have tied up for forming a non-life insurance company
while Bank of Maharashtra has tied up with Shriram Group and South Africa's
Sanlam group for non-life insurance venture.
CONCLUSION
It seems cynical that
the LIC and the GIC will wither and die within the next decade or two. The IRDA
has taken "at a snail's pace" approach. It has been very cautious in
granting licenses. It has set up fairly strict standards for all aspects of the
insurance business (with the probable exception of the disclosure
requirements). The regulators always walk a fine line. Too many regulations
kill the motivation of the newcomers; too relaxed regulations may induce
failure and fraud that led to nationalization in the first place. India is not
unique among the developing countries where the insurance business has been
opened up to foreign competitors.
The insurance business
is at a critical stage in India. Over the next couple of decades we are likely
to witness high growth in the insurance sector for two reasons namely;
financial deregulation always speeds up the development of the insurance sector
and growth in per capita GDP also helps the insurance business to grow.
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