India’s rapid rate of economic growth over the past decade has been one of the most significant developments in the global economy. This growth has its roots in the introduction of economic liberalization in the early 1990s, which has allowed India to exploit its economic potential and raise the population’s standard of living.
Insurance has played very important role in this growth process. Life insurance, health insurance and pension systems are fundamental to protecting individuals against the hazards of life; and India, as the second most populous nation in the world, offers huge potential for that type of cover.
The story of insurance is probably as old as the story of mankind. The same instinct that prompts modern businessmen today to secure themselves against loss and disaster existed in primitive men also. They too sought to avert the evil consequences of fire, flood & loss of life and were willing to make some sort of sacrifice in order to achieve security. Though the concept of insurance is largely a development of the recent past, particularly after the industrial era – past few centuries – yet its beginnings date back almost 6000 years.
History of Insurance
In India, insurance has a deep-rooted history. It finds mention in the writings of Manu (Manusmrithi), Yagnavalkya (Dharmasastra) and Kautilya (Arthasastra). The writings talk in terms of pooling of resources that could be re-distributed in times of calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to modern day insurance. Ancient Indian history has preserved the earliest traces of insurance in the form of marine trade loans and carriers’ contracts. Insurance in India has evolved over time heavily drawing from other countries, England in particular.
History of Insurance in India can be broadly bifurcated into three eras: a) Pre-Nationalization b) Nationalization and c) Post-Nationalization.
The business of life insurance in India in its existing form started in the year 1818 with the establishment of the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834. In 1829, the Madras Equitable had begun transacting life insurance business in the Madras Presidency. All the insurance companies established during that period were brought up with the purpose of looking after the needs of European community and Indian natives were not being insured by these companies. However, later these companies started insuring Indian lives; but Indian lives were being treated as sub-standard lives and heavy extra premiums were being charged on them.
1870 saw the enactment of the British Insurance Act and in the last three decades of the 19th century, the Bombay Mutual (1871), Oriental (1874) and Empire of India (1897) were started in the Bombay Residency. Bombay Mutual Life Assurance Society heralded the birth of first Indian life insurance company and covered Indian lives at normal rates. Starting as Indian enterprise with highly patriotic motives, insurance companies came into existence to carry the message of insurance and social security through insurance to various sectors of society. This era, however, was dominated by foreign insurance offices which did good business in India, namely Albert Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian offices were up for hard competition from the foreign companies.
Prior to 1912 India had no legislation to regulate insurance business. In the year 1912, the Indian Life Assurance Companies Act, 1912 and the Provident Fund Act were passed. The Indian Life Assurance Companies Act, 1912 made it necessary that the premium rate tables and periodical valuations of companies should be certified by an actuary. But the Act discriminated between foreign and Indian companies on many accounts, putting the Indian companies at a disadvantage.
In 1928, the Indian Insurance Companies Act was enacted to enable the Government to collect statistical information about both life and non-life business transacted in India by Indian and foreign insurers including provident insurance societies. In 1938, with a view to protecting the interest of the Insurance public, the earlier legislation was consolidated and amended by the Insurance Act, 1938 with comprehensive provisions for effective control over the activities of insurers.
The demand for nationalization of life insurance industry was made repeatedly in the past but it gathered momentum in 1944 when a bill to amend the Life Insurance Act 1938 was introduced in the Legislative Assembly. There were large number of insurance companies and the level of competition was high. There were also allegations of unfair trade practices. The Government of India, therefore, decided to nationalize insurance business.
However, it was much later on the 19th of January, 1956, that life insurance in India was nationalized. About 154 Indian insurance companies, 16 non-Indian companies and 75 provident funds were operating in India at the time of nationalization. The Parliament of India passed the Life Insurance Corporation Act on the 19th of June 1956, and the Life Insurance Corporation of India was created on 1st September, 1956, with the objective of spreading life insurance much more widely and in particular to the rural areas with a view to reach all insurable persons in the country, providing them adequate financial cover at a reasonable cost.
In 1972, the General Insurance Business (Nationalization) Act was passed by the Indian Parliament, and consequently, general insurance business was nationalized with effect from 1st January, 1973. 107 insurers were amalgamated and grouped into four companies, namely National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971 and it commence business on January 1st 1973.
Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India’s life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance business. In spite of all the growth, nearly 70% of Indian populations are without Life insurance cover and the Health insurance. This is an indicator that growth potential for the insurance sector is immense in India.
From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy and against the background of these Economic Reforms insurance sector was also decided to be opened up. For this purpose Malhotra Committee was formed during 1993 which submitted its report in 1994.
Following the recommendations of the Malhotra Committee report, in 1999, the Insurance Regulatory and Development Authority (IRDA) was constituted as an autonomous body to regulate and develop the insurance industry. The IRDA was incorporated as a statutory body in April, 2000. The IRDA opened up the market in August 2000 with the invitation for application for registrations. Foreign companies were allowed ownership of up to 26%.
Today India insurance is a flourishing industry, with several national and international players competing and growing at rapid rates. There are 24 general insurance companies and 24 life insurance companies apart from one national re-insurer (GIC) are operating in the country.
Indian insurance companies offer a comprehensive range of insurance plans and the most common types include: term life policies, endowment policies, joint life policies, whole life policies, loan cover term assurance policies, unit-linked insurance plans, group insurance policies, pension plans, and annuities. General insurance plans are also available to cover motor insurance, home insurance, travel insurance and health insurance.
With such a large population and the untapped market area of this population Insurance happens to be a very big opportunity in India. Today it stands as a business growing at the rate of 15-20% annually. Together with banking services, insurance services add about 7% to the country’s GDP. At present, India stands 12th among the top global markets for life insurance.
The Road Ahead
The market size> of Indian life insurance industry is expected to touch US$ 111.9 billion in 2015 from US$ 66.5 billion in 2011, at a compounded annual growth rate (CAGR) of 14.1%, according to a report by BRIC data. The report estimates that India would be the third-largest market for life insurance in the world by 2015. Also, the number of policies sold is expected to increase to 85.21 million in 2015 from 53.23 million in 2010.
By nature of its business, insurance is closely related to saving and investing. Life insurance, funded pension systems and non-life insurance, will accumulate huge amounts of capital over time which can be invested productively in the economy. In developed countries (re)insurers often own more than 25% of the capital markets. The mutual dependence of insurance and capital markets can play a powerful role in channeling funds and investment expertise to support the development of the Indian economy.