Effect of Liberalisation in Insurance Industry
The journey of insurance liberalization course of action in India is now over seven years old. The first major meaningful development 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 calculating 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 character must have promoted people to make some sort of sacrifice willingly in order to unprotected to security by 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, character damage, theft and other limitations. Non-life insurance contracts are typically shorter in duration as compared to life insurance contracts. The bundling together of risk coverage and saving is disinctive 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 character and life by distributing the loss amongst large number of persons by the medium of specialized risk bearers such as insurers. It enables a businessman to confront an unforeseen loss and, consequently, 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 obtainable with insurers in the organized industry and commerce.
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 except directly handling Aviation and Reinsurance business administers the Comprehensive Crop Insurance Scheme, Personal Accident Insurance, Social Security Scheme etc. The GIC and its subsidiaries consist 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, probe, register and liquidate insurance companies etc. However, consequent upon the nationalization of insurance business, most of the regulatory roles 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, save 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 extent of mobilization of funds from the economy, and a much a greater extent of mobilization of funds from the economy for infrastructural development. Liberalization of the insurance sector is at the minimum partly pushed by fiscal necessity of tapping the big save 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 appropriate reservations for its employees.
o Private sector is granted to go into insurance industry with a minimum paid up capital of Rs. 100 crores.
o Foreign insurance be allowed to go into 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 independent 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 function 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 confront 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 dispensing, 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 common with government companies to expand by setting up branches seems getting lost. Among the techniques that seem to catching up fast as an different to cater to the rural and social sector insurance is center 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 edges that have great 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 assistance 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 by 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 formation of an authority to protect the interests of holders of insurance policies, to control, to promote and ensure orderly growth of the insurance industry and for matters connected therewith or minor point thereto.
Section 14 of IRDA Act, lays the duties, powers and roles of the authority. The powers and roles of the authority. The powers and roles of the Authority shall include the following.
o Issue to the applicant a certificate of registration, to revive, 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 required qualification and functional 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 specialized 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 control, 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 quantity 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, strength etc. have meaningful private sector presence, continuing state monopoly in provision of insurance was indefensible and consequently, 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.
1. Privatization if Insurance was deleted 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 consequence in better customer sets and help enhance 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 edges into insurance business will help to mobilization of funds from the rural areas because of the availability of great branches of the edges.
6. Most important not the least tremendous employment opportunities will be produced in the field of insurance which is a burning problem of the presence day today issues.
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.
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.