insurance Law - An Indian Perspective

Law Of Diminishing Returns Business Definition - insurance Law - An Indian Perspective

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Introduction

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Law Of Diminishing Returns Business Definition

"Insurance should be bought to protect you against a calamity that would otherwise be financially devastating."

In easy terms, insurance allows man who suffers a loss or urgency 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 shop 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 firm was nationalized in 1972. It was only in 1999 that the underground insurance companies have been allowed back into the firm of insurance with a maximum of 26% of foreign holding.

"The insurance industry is huge and can be quite intimidating. insurance is being sold for roughly anyone and all things 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 man 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 insurance brings a new dynamics in the game. The communal caress of the other countries in Asia has already deregulated their markets and has allowed foreign companies to participate. If the caress 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 collection 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, maritime 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 definite sums called premiums, at specified time, and in observation thereof the insurer agreed to pay definite sums of money on definite health sand in specified way upon happening of a particular event contingent upon the duration of human life.

Life insurance is excellent to other forms of savings!

"There is no death. Life insurance exalts life and defeats death.

It is the selected we pay for the free time of living after death."

Savings straight through life insurance warrant full security 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 whole saved (with interest) is payable.

The valuable features of life insurance are a) it is a contract relating to human life, which b) provides for cost of lump-sum amount, and c) the whole is paid after the expiry of definite duration 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 ensue of the happening in any contingency. A life insurance course is also commonly approved as security for even a commercial loan.

Non-Life Insurance

"Every asset has a value and the firm of general insurance is related to the security of economic value of assets."

Non-life insurance means insurance other than life insurance such as fire, marine, accident, medical, motor car and household insurance. Assets would have been created straight 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 branch to many risks fluctuating from fire, allied perils to theft and robbery.
Few of the general insurance policies are:

Property Insurance: The home is most valued possession. The course is designed to cover the various risks under a particular policy. It provides security 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 urgency Insurance: This insurance course provides compensation for loss of life or injury (partial or permanent) caused by an accident. This includes refund of cost of treatment and the use of hospital facilities for the treatment.

Travel Insurance: The course 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 course indemnifies the Directors or Officers or other professionals against loss arising from claims made against them by imagine of any wrongful Act in their lawful capacity.

Motor Insurance: Motor Vehicles Act states that every motor car plying on the road has to be insured, with at least Liability only policy. There are two types of course one outside 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 contribute for English Widows. Interestingly in those days a higher selected was expensed for Indian lives than the non-Indian lives as Indian lives were considered more risky for coverage.

The Bombay Mutual Life insurance community started its firm in 1870. It was the first firm to fee same selected for both Indian and non-Indian lives. The Oriental insurance firm was established in 1880. The general insurance firm in India, on the other hand, can trace its roots to the Triton (Tital) insurance firm Limited, the first general insurance firm established in the year 1850 in Calcutta by the British. Till the end of nineteenth century insurance firm was roughly 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. Any frauds while 20's and 30's desecrated insurance firm in India. By 1938 there were 176 insurance companies. The first allinclusive legislation was introduced with the insurance Act of 1938 that provided accurate State control over insurance business. The insurance firm grew at a faster pace after independence. Indian companies strengthened their hold on this firm but despite the increase that was witnessed, insurance remained an urban phenomenon.

The Government of India in 1956, brought together over 240 underground 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 firm continued to prosper with the underground 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 insurance Company, Oriental insurance firm and United India insurance Company. These were subsidiaries of the general insurance firm (Gic).

The life insurance industry was nationalized under the Life insurance Corporation (Lic) Act of India. In some ways, the Lic has come to be very flourishing. Regardless of being a monopoly, it has some 60-70 million policyholders. Given that the Indian middle-class is colse to 250-300 million, the Lic has managed to capture some 30 odd percent of it. colse to 48% of the customers of the Lic are from rural and semi-urban areas. This probably would not have happened had the hire of the Lic not specifically set out the goal of serving the rural areas. A high rescue rate in India is one of the exogenous factors that have helped the Lic to grow rapidly in up-to-date years. Despite the rescue 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). colse to twenty three percent are in (low compliancy but safe) bank deposits. In addition, some 1.3 percent of the Gdp are in life insurance related savings vehicles. This form has doubled in the middle of 1985 and 1995.

A World viewpoint - Life insurance in India

In many countries, insurance has been a form of savings. In many advanced countries, a valuable fraction of domestic rescue 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 whole two spot. India is nestled in the middle of Chile and Italy. This is even more surprising given the levels of economic improvement in Chile and Italy. Thus, we can halt that there is an insurance culture in India despite a low per capita income. This promises well for hereafter growth. Specifically, when the revenue 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 whole 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 keep Bank of India).

Malhotra Committee

Liberalization of the Indian insurance shop was suggested in a article released in 1994 by the Malhotra Committee, indicating that the shop should be opened to private-sector competition, and eventually, foreign private-sector competition. It also investigated the level of pleasure of the customers of the Lic. Inquisitively, the level of buyer pleasure seemed to be high.

In 1993, Malhotra Committee - headed by previous Finance Secretary and Rbi Governor Mr. R. N. Malhotra - was formed to rate the Indian insurance industry and suggest its hereafter 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 effective and competing financial ideas convenient for the needs of the economy retention in mind the structural changes presently happening and recognizing that insurance is an prominent part of the allinclusive financial ideas where it was valuable to address the need for similar reforms. In 1994, the committee submitted the article 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 free time to operate.
Competition

Private companies with a minimum paid up capital of Rs.1 billion should be allowed to enter the sector. No firm should deal in both Life and general insurance straight through a particular entity. Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. Postal Life insurance should be allowed to control in the rural market. Only one State Level Life insurance firm should be allowed to control 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 firm (there current holdings to be brought down to this level over a duration 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 related 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 buyer 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 practice caution as any failure on the part of new competitors could ruin the communal belief in the industry. Hence, it was decided to allow competition in a microscopic way by stipulating the minimum capital requirement of Rs.100 crores.

The committee felt the need to contribute greater autonomy to insurance companies in order to improve their operation 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 improvement Authority.

Reforms in the insurance sector were initiated with the tube 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 underground 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 contribute the supporting systems to the insurance sector and in particular the life insurance companies was the initiate of the Irda online aid 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 tube of the insurance Regulatory and improvement Authority (Irda) Bill, lifting all entry restrictions for underground players and allowing foreign players to enter the shop 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 opportunity up of the sector is likely to lead to greater spread and deepening of insurance in India and this may also contain restructuring and revitalizing of the communal sector companies. In the underground sector 12 life insurance and 8 general insurance companies have been registered. A host of underground 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 facts that filtered out it became clear that the committee recommended the inclusion of definite ratios in insurance firm balance sheets to ensure transparency in accounting. But the Finance clergyman objected to it and it was argued by him, probably on the guidance of some of the inherent competitors, that it could influence 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 practice to amend the insurance Act, 1938 was undertaken in 1999 at the time of enactment of the insurance Regulatory improvement Authority Act, 1999 (Irda Act).

The Commission undertook the present practice in the context of the changed course that has permitted underground 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 come to be superfluous as a consequence of the up-to-date 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 course of permitting underground insurance companies and strengthening the regulatory mechanism;

d. Providing for stringent norms with regard to maintenance of 'solvency margin' and investments by both communal sector and underground 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 imaginable to replace the present ideas of insurer appointed Ombudsman);

o Appointment of adjudicating officers by the Irda to settle 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 consummate Court/Chief Justice of a High Court as presiding officer and two other members having enough caress in insurance matters;

o Providing for a statutory appeal to the consummate Court against the decisions of the Iat.

Life & Non-Life insurance - improvement and Growth!

The year 2006 turned out to be a momentous year for the insurance sector as regulator the insurance Regulatory improvement Authority Act, laid the foundation for free pricing general insurance from 2007, while many companies announced plans to assault into the sector.

Both domestic and foreign players robustly pursued their long-pending quiz, for addition the Fdi limit from 26 per cent to 49 per cent and toward the fag end of the year, the Government sent the allinclusive insurance Bill to Group of Ministers for observation 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 gigantic increase inherent 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 opportunity up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have tipped into the Indian shop and 21 underground companies have been granted licenses.

The involvement of the underground insurers in various industry segments has increased on list of both their capturing a part of the firm which was earlier underwritten by the communal sector insurers and also creating supplementary firm boulevards. To this effect, the communal sector insurers have been unable to draw upon their inherent strengths to capture supplementary premium. Of the increase in selected in 2004-05, 66.27 per cent has been captured by the underground insurers despite having 20 per cent shop share.

The life insurance industry recorded a selected revenue of Rs.82854.80 crore while the financial year 2004-05 as against Rs.66653.75 crore in the previous financial year, recording a increase of 24.31 per cent. The gift of first year premium, particular selected and renewal selected to the total selected 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 underground players, the life insurance selected was Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium, Rs. 25191.07 crore of renewal selected and Rs. 2740.45 crore of particular premium. Post opportunity up, particular selected had declined from Rs.9, 194.07 crore in the year 2001-02 to Rs.5674.14 crore in 2002-03 with the seclusion 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 valuable shift with the particular selected revenue rising to Rs. 10336.30 crore showing 74.11 per cent increase over 2003-04.

The size of life insurance shop increased on the power of increase in the economy and concomitant increase in per capita income. This resulted in a favourable increase in total selected both for Lic (18.25 per cent) and to the new insurers (147.65 per cent) in 2004-05. The higher increase 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 shop share from 4.68 in 2003-04 to 9.33 in 2004-05.

The segment wise break up of fire, maritime and miscellaneous segments in case of the communal sector insurers was Rs.2411.38 crore, Rs.982.99 crore and Rs.10578.59 crore, i.e., a increase of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The communal sector insurers reported increase in Motor and health segments (9 and 24 per cent). These segments accounted for 45 and 10 per cent of the firm underwritten by the communal sector insurers. Fire and "Others" accounted for 17.26 and 11 per cent of the selected underwritten. Aviation, Liability, "Others" and Fire recorded negative increase 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 shop 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 selected 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 whole of life players to 16. There was one new entrant to the non-life sector in the form of a standalone health insurance firm - Star health and Allied Insurance, taking the non-life players to 14.

A large whole 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 turn in Fdi cap is part of the allinclusive 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 say 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 Any joint investment 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 valuable 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 firm 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 accurate standards for all aspects of the insurance firm (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 firm has been opened up to foreign competitors.

The insurance firm is at a valuable stage in India. Over the next integrate of decades we are likely to inspect high increase in the insurance sector for two reasons namely; financial deregulation always speeds up the improvement of the insurance sector and increase in per capita Gdp also helps the insurance firm to grow.

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