Liberalisation of insurance services

Presented by,

Vishnu Thankachan

S3, MBA

NO. 029

Meaning of Insurance

Insurance is a policy from a financial institution that offers a person, company, or other entity reimbursement or financial protection against possible future losses or damages.

Precautionary measure against future contingent losses.

Why do we need insurance?

A brief history of the Insurance sector The life insurance business in India

1912: The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.

1928: The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.

1938: Earlier legislation consolidated and amended to by the Insurance Act with the objective of protecting the interests of the insuring public.

1956: 245 Indian and foreign insurers and provident societies taken over by the central government and nationalised.

The general insurance business in India 1907: The Indian Mercantile Insurance Ltd. set up, the first company to

transact all classes of general insurance business.

1957: General Insurance Council, a wing of the Insurance Association of India, frames a code of conduct for ensuring fair conduct and sound business practices.

1968: The Insurance Act amended to regulate investments and set minimum solvency margins and the Tariff Advisory Committee set up.

1972: The General Insurance Business (Nationalisation) Act, 1972 nationalised the general insurance business in India with effect from 1st January 1973.

107 insurers amalgamated and grouped into four companies viz. the National Insurance Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company Ltd. and the United India Insurance Company Ltd. GIC incorporated as a company.

Porter's 5 Forces Analysis

1.Threat of new entrants

2.Power of suppliers

3.power of buyers

4.Availability of substitutes

5.Competitive rivalry

The Need For Raising FDI limit. Higher FDI in insurance sector can give much needed

capital for growth of insurance sector which in turn will help in the long term economic development.

Ambitious infrastructure projects of Government can get stable long term source of funds.

Higher amount of FDI in insurance would increase penetration of insurance in India which is low compared to global average.

An increase in FDI in insurance will benefit the economy as people will invest in long term fund which will increased the growth of economy.

Insurance in India is mainly confined to urban sector Vast potentials are lying untapped

Insurance liberalization process in India

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.

Liberalization of Insurance

The comprehensive regulation of insurance business in India was brought into effect with the enactment of the Insurance Act, 1983.

The Government of India in 1993 had set up a high powered committee by R.N.Malhotra

Malhotra Committee

The Malhotra committee was set up with the objective 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 requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms…"

Structure

Government stake 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.1bn should be allowed to enter the industry.

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.

Regulatory Body

The Insurance Act should be changed. An Insurance Regulatory body should be set up. Controller of Insurance (Currently a part from the

Finance Ministry) should be made independent.

Investments

Mandatory 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).

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.

Computerisation of operations and updating of technology to be carried out in the insurance industry The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.

IRDA Act, 1999

Preamble of IRDA Act 1999 reads 'An Act to provide for the establishment of an authority to protect the interests of holders of insurance policies, to regulate, to promote and ensure orderly growth of the insurance industry and for matters connected therewith or incidental thereto.

Section 14 of IRDA Act, lays the duties, powers and functions of the authority.

The powers and functions of the Authority shall include the following.

Issue to the applicant a certificate of registration, to renew, modify withdraw, suspend or cancel such registration.

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.

Specifying requisite qualification and practical training for insurance intermediates and agents.

Specifying code of conduct for surveyors and loss assessors.

Promoting efficiency in the conduct of insurance business

Promoting and regulating professional regulators connected with the insurance and reinsurance business.

Specifying the form and manner in which books of accounts will be maintained and statement of accounts rendered by insurers and insurance intermediaries.

Adjudication of disputes between insurers and intermediates.

Specifying the percentage of life insurance and general and general business to be undertaken by the insurers in rural or social sectors etc.

Opportunities

Privatization if Insurance was eliminated 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.

It would also result in better customer services and help improve the variety and price of insurance products.

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.

Entry of private players will ensure the mobilization of funds that can be utilized for the purpose of infrastructure development.

Allowing of commercial banks into insurance business will help to mobilization of funds from the rural areas because of the availability of vast branches of the banks.

Most important not the least tremendous employment opportunities will be created in the field of insurance which is a burning problem of the presence day today issues.

Current Scenario

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.