insurance Law - An Indian Perspective
Introduction
insurance Law - An Indian Perspective
"Insurance should be bought to protect you against a calamity that would otherwise be financially devastating."
In straightforward terms, assurance allows someone who suffers a loss or emergency to be compensated for the effects of their misfortune. It lets you protect yourself against daily 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 assurance companies dominating the store serving mostly large urban centers. After the independence, it took a theatrical turn. assurance was nationalized. First, the life assurance companies were nationalized in 1956, and then the general assurance enterprise was nationalized in 1972. It was only in 1999 that the secret assurance companies have been allowed back into the enterprise of assurance with a maximum of 26% of foreign holding.
"The assurance business is broad and can be quite intimidating. assurance is being sold for practically whatever and all things you can imagine. Determining what's right for you can be a very daunting task."
Concepts of assurance have been extended beyond the coverage of tangible asset. Now the risk of losses due to sudden changes in currency transfer rates, political disturbance, negligence and liability for the damages can also be covered.
But if a someone thoughtfully invests in assurance for his asset 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 public contact of the other countries in Asia has already deregulated their markets and has allowed foreign companies to participate. If the contact of the other countries is any guide, the dominance of the Life assurance Corporation and the general assurance Corporation is not going to disappear any time soon.
The aim of all assurance is to compensate the owner against loss arising from a variety of risks, which he anticipates, to his life, asset and business. assurance is in general of two types: life assurance and general insurance. general assurance means Fire, marine and Miscellaneous assurance which includes assurance against burglary or theft, fidelity guarantee, assurance for employer's liability, and assurance of motor vehicles, livestock and crops.
Life assurance In India
"Life assurance 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 assurance 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 assurance whereby the insured agrees to pay sure sums called premiums, at specified time, and in notice thereof the insurer agreed to pay sure sums of money on sure condition sand in specified way upon happening of a single event contingent upon the duration of human life.
Life assurance is first-rate to other forms of savings!
"There is no death. Life assurance exalts life and defeats death.
It is the premium we pay for the free time of living after death."
Savings through life assurance guarantee 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 estimate saved (with interest) is payable.
The critical features of life assurance are a) it is a contract relating to human life, which b) provides for cost of lump-sum amount, and c) the estimate is paid after the expiry of sure duration or on the death of the assured. The very purpose and object of the assured in taking policies from life assurance 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 assurance procedure is also ordinarily suitable as security for even a market loan.
Non-Life Insurance
"Every asset has a value and the enterprise of general assurance is related to the security of economic value of assets."
Non-life assurance means assurance other than life assurance such as fire, marine, accident, medical, motor car 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 asset has a bodily shape and consistency, it is subject to many risks fluctuating from fire, allied perils to theft and robbery.
Few of the general assurance policies are:
Property Insurance: The home is most valued possession. The procedure is designed to cover the varied risks under a single policy. It provides security for asset 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 emergency Insurance: This assurance procedure provides recompense for loss of life or injury (partial or permanent) caused by an accident. This includes refund of cost of rehabilitation and the use of hospital facilities for the treatment.
Travel Insurance: The procedure covers the insured against varied eventualities while traveling abroad. It covers the insured against personal accident, medical expenses and repatriation, loss of checked baggage, passport etc.
Liability Insurance: This procedure indemnifies the Directors or Officers or other professionals against loss arising from claims made against them by fancy of any wrongful Act in their legal 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 procedure one covering the act of liability, while other covers insurers all liability and damage caused to one's vehicles.
Journey From An child To Adolescence!
Historical Perspective
The history of life assurance in India dates back to 1818 when it was conceived as a means to supply for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non-Indian lives as Indian lives were carefully more risky for coverage.
The Bombay Mutual Life assurance community started its enterprise in 1870. It was the first enterprise to payment same premium for both Indian and non-Indian lives. The Oriental assurance enterprise was established in 1880. The general assurance enterprise in India, on the other hand, can trace its roots to the Triton (Tital) assurance enterprise Limited, the first general assurance enterprise established in the year 1850 in Calcutta by the British. Till the end of nineteenth century assurance enterprise was practically entirely in the hands of overseas companies.
Insurance regulation formally began in India with the passing of the Life assurance companies Act of 1912 and the Provident Fund Act of 1912. Some frauds during 20's and 30's desecrated assurance enterprise in India. By 1938 there were 176 assurance companies. The first farranging legislation was introduced with the assurance Act of 1938 that in case,granted precise State operate over assurance business. The assurance enterprise grew at a faster pace after independence. Indian companies strengthened their hold on this enterprise but despite the increase that was witnessed, assurance remained an urban phenomenon.
The Government of India in 1956, brought together over 240 secret life insurers and provident societies under one nationalized monopoly corporation and Life assurance Corporation (Lic) was born. Nationalization was justified on the grounds that it would generate 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) assurance enterprise continued to prosper with the secret sector till 1972. Their operations were restricted to organized trade and business in large cities. The general assurance business was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies - National assurance Company, New India assurance Company, Oriental assurance enterprise and United India assurance Company. These were subsidiaries of the general assurance enterprise (Gic).
The life assurance business was nationalized under the Life assurance 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 nearby 250-300 million, the Lic has managed to capture some 30 odd percent of it. nearby 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 modern 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 bodily assets (like asset and gold). nearby twenty three percent are in (low yielding but safe) bank deposits. In addition, some 1.3 percent of the Gdp are in life assurance related savings vehicles. This form has doubled in the middle of 1985 and 1995.
A World viewpoint - Life assurance in India
In many countries, assurance has been a form of savings. In many industrialized countries, a critical fraction of domestic rescue is in the form of donation assurance plans. This is not surprising. The prominence of some developing countries is more surprising. For example, South Africa features at the estimate two spot. India is nestled in the middle of Chile and Italy. This is even more surprising given the levels of economic amelioration in Chile and Italy. Thus, we can terminate that there is an assurance culture in India despite a low per capita income. This promises well for time to come growth. Specifically, when the revenue level improves, assurance (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 estimate of sectors in 1991, assurance remained out of bounds on both counts. The government wanted to walk 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 sustain Bank of India).
Malhotra Committee
Liberalization of the Indian assurance store was recommend in a report released in 1994 by the Malhotra Committee, indicating that the store should be opened to private-sector competition, and eventually, foreign private-sector competition. It also investigated the level of delight of the customers of the Lic. Inquisitively, the level of buyer delight seemed to be high.
In 1993, Malhotra Committee - headed by previous Finance Secretary and Rbi Governor Mr. R. N. Malhotra - was formed to value the Indian assurance business and suggest its time to come 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 law convenient for the needs of the economy retention in mind the structural changes presently happening and recognizing that assurance is an prominent part of the farranging financial law where it was critical 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 assurance 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 assurance 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 enterprise should deal in both Life and general assurance through a single entity. Foreign companies may be allowed to enter the business in collaboration with the domestic companies. Postal Life assurance should be allowed to operate in the rural market. Only one State Level Life assurance enterprise should be allowed to operate in each state.
o Regulatory Body
The assurance Act should be changed. An assurance Regulatory body should be set up. Controller of assurance - 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 enterprise (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. assurance companies must be encouraged to set up unit related pension plans. Computerization of operations and updating of technology to be carried out in the assurance industry. The committee accentuated that in order to improve the buyer services and increase the coverage of assurance policies, business 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 public confidence in the industry. Hence, it was decided to allow competition in a little way by stipulating the minimum capital requirement of Rs.100 crores.
The committee felt the need to supply greater autonomy to assurance companies in order to improve their doing and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body - The assurance Regulatory and amelioration Authority.
Reforms in the assurance 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 secret sector assurance 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 supply the supporting systems to the assurance sector and in single the life assurance companies was the originate of the Irda online service for issue and renovation of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the assurance companies would have a trained workforce of assurance agents in place to sell their products.
The Government of India liberalized the assurance sector in March 2000 with the tube of the assurance Regulatory and amelioration Authority (Irda) Bill, lifting all entry restrictions for secret players and allowing foreign players to enter the store with some limits on direct foreign ownership. Under the current guidelines, there is a 26 percent equity lid for foreign partners in an assurance company. There is a proposal to increase this limit to 49 percent.
The occasion up of the sector is likely to lead to greater spread and deepening of assurance in India and this may also contain restructuring and revitalizing of the public sector companies. In the secret sector 12 life assurance and 8 general assurance companies have been registered. A host of secret assurance companies operating in both life and non-life segments have started selling their assurance 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 assurance companies. Recommendations of the Mukherjee Committee were never disclosed to the public. But, from the data that filtered out it became clear that the committee recommended the inclusion of sure ratios in assurance enterprise balance sheets to ensure transparency in accounting. But the Finance minister objected to it and it was argued by him, probably on the guidance of some of the possible competitors, that it could work on the prospects of a developing assurance company.
Law Commission Of India On revision Of The assurance Act 1938 - 190th Law Commission Report
The Law Commission on 16th June 2003 released a Consultation Paper on the revision of the assurance Act, 1938. The previous practice to amend the assurance Act, 1938 was undertaken in 1999 at the time of enactment of the assurance Regulatory amelioration Authority Act, 1999 (Irda Act).
The Commission undertook the present practice in the context of the changed procedure that has permitted secret assurance 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 modern changes.
Among the major areas of changes, the Consultation paper recommend the following:
a. Merging of the provisions of the Irda Act with the assurance Act to avoid multiplicity of legislations;
b. Deletion of redundant and transitory provisions in the assurance Act, 1938;
c. Amendments reflect the changed procedure of permitting secret assurance companies and strengthening the regulatory mechanism;
d. Providing for stringent norms regarding maintenance of 'solvency margin' and investments by both public sector and secret sector assurance 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 law of insurer appointed Ombudsman);
o Appointment of adjudicating officers by the Irda to settle and levy penalties on defaulting insurers, assurance intermediaries and assurance agents;
o Providing for an request for retrial against the decisions of the Irda, Gras and adjudicating officers to an assurance 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 adequate contact in assurance matters;
o Providing for a statutory request for retrial to the consummate Court against the decisions of the Iat.
Life & Non-Life assurance - amelioration and Growth!
The year 2006 turned out to be a momentous year for the assurance sector as regulator the assurance Regulatory amelioration Authority Act, laid the foundation for free pricing general assurance from 2007, while many companies announced plans to assault into the sector.
Both domestic and foreign players robustly pursued their long-pending ask 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 farranging assurance Bill to Group of Ministers for notice amid strong reservation from Left parties. The Bill is likely to be taken up in the allocation session of Parliament.
The infiltration rates of condition and other non-life insurances in India are well below the international level. These facts indicate massive increase possible of the assurance 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 occasion up of the assurance sector in 1999, foreign investments of Rs. 8.7 billion have tipped into the Indian store and 21 secret companies have been granted licenses.
The involvement of the secret insurers in varied business segments has increased on inventory of both their capturing a part of the enterprise which was earlier underwritten by the public sector insurers and also creating additional enterprise boulevards. To this effect, the public sector insurers have been unable to draw upon their possible strengths to capture additional premium. Of the increase in premium in 2004-05, 66.27 per cent has been captured by the secret insurers despite having 20 per cent store share.
The life assurance business recorded a premium revenue of Rs.82854.80 crore during 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, single premium and renovation 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 business was opened up to the secret players, the life assurance premium was Rs.34,898.48 crore which constituted of Rs. 6996.95 crore of first year premium, Rs. 25191.07 crore of renovation premium and Rs. 2740.45 crore of single premium. Post occasion 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 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 critical shift with the single premium revenue rising to Rs. 10336.30 crore showing 74.11 per cent increase over 2003-04.
The size of life assurance store increased on the drive of increase in the economy and concomitant increase in per capita income. This resulted in a favourable increase in total premium 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 store 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 increase of (-)1.43 per cent, 1.81 per cent and 6.58 per cent. The public sector insurers reported increase in Motor and condition segments (9 and 24 per cent). These segments accounted for 45 and 10 per cent of the enterprise 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 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 store share in the life segment and about 20 per cent in the general assurance segment. The share of foreign insurers in other competitive Asian markets is not more than 5 to 10 per cent.
The life assurance sector grew new premium at a rate not seen before while the general assurance sector grew at a faster rate. Two new players entered into life assurance - Shriram Life and Bharti Axa Life - taking the total estimate of life players to 16. There was one new entrant to the non-life sector in the form of a standalone condition assurance enterprise - Star condition and Allied Insurance, taking the non-life players to 14.
A large estimate of companies, mostly nationalized banks (about 14) such as Bank of India and Punjab National Bank, have announced plans to enter the assurance sector and some of them have also formed joint ventures.
The proposed convert in Fdi cap is part of the farranging amendments to assurance laws - The assurance Act of 1999, Lic Act, 1956 and Irda Act, 1999. After the proposed amendments in the assurance laws Lic would be able to articulate reserves while assurance companies would be able to raise resources other than equity.
About 14 banks are in queue to enter assurance sector and the year 2006 saw Some joint speculation announcements while others scout partners. Bank of India has teamed up with Union Bank and Japanese assurance major Dai-ichi Mutual Life while Pnb tied up with Vijaya Bank and critical for foraying into life insurance. Allahabad Bank, Karnataka Bank, Indian Overseas Bank, Dabur speculation Corporation and Sompo Japan assurance Inc have tied up for forming a non-life assurance enterprise while Bank of Maharashtra has tied up with Shriram Group and South Africa's Sanlam group for non-life assurance 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 precise standards for all aspects of the assurance enterprise (with the probable exception of the disclosure requirements). The regulators all the time 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 assurance enterprise has been opened up to foreign competitors.
The assurance enterprise is at a critical stage in India. Over the next consolidate of decades we are likely to contemplate high increase in the assurance sector for two reasons namely; financial deregulation all the time speeds up the amelioration of the assurance sector and increase in per capita Gdp also helps the assurance enterprise to grow.
