The insurance industry in India was nationalised after independence. In 1956 Life Insurance Corporation of India was formed after the nationalisation and merger of 245 insurance companies and other provident societies. In 1972, the General Insurance Corporation and its four subsidiaries were formed by nationalising 55 Indian general insurance companies along with 52 general insurance operations of other companies. The premiums in the Insurance sector have witnessed phenomenal growth. However, a large segment of the population has not been provided insurance cover. The insurance premium collection is 3 % of the GDP of India.
Problems in the Insurance sector
- The insurance cover in India was very low as only 25 % of insurable people came under insurance cover. This was inadequate and reforms were necessary to deal with this issue.
- The public sector insurance companies were operating with lower efficiency and were having lower returns in their Investments.
- The public sector companies enjoyed the monopoly in the insurance market. There was a lack of competition in the Insurance sector in India. Life Insurance Corporation had a monopoly in the Life Insurance sector. The General Insurance Corporation failed to promote competition among its four subsidiaries.
- The insurance premiums were comparatively higher and policyholders got lower saving rates on their Investments.
Malhotra committee on insurance reforms
Due to the above issues in the Insurance sector, the need was felt for reforms in the Insurance sector. This became more important after the economic reforms of 1991. The R.N. Malhotra committee was set up by the government of India to give recommendations on reforms in the Insurance sector to make the Insurance sector more efficient and productive. The committee submitted its report in 1994 and gave the following recommendations.
- The government should bring down its share in the insurance companies to 50%.
- The government of India should take over the holdings of the General Insurance Company and its four subsidiaries. This was essential so that these subsidiaries can act as independent companies.
- The private sector companies having a minimum paid capital of rupees 1 billion should be allowed to enter the insurance sector.
- Another important recommendation of the committee was that no company should be allowed to deal both in the life insurance business and the general insurance business through a single entity.
- The entry of foreign investment should be allowed but foreign companies should only be allowed to enter through the collaboration with an Indian company.
- The committee recommended for setting up an independent regulatory body for the Insurance sector on lines of SEBI. The insurance regulatory Development Authority IRDA was later set up by the government.
- The committee recommended for reducing the mandatory investment limit of the Life Insurance Corporation life fund in the government securities to 50 % from the existing minimum limit of 75 %.
- The Life Insurance Corporation should be converted into a company which is to be registered under the Companies Act and the functioning of The Life Insurance Corporation LIC should be decentralized.
- The committee recommended that the General Insurance Company and four subsidiaries should not hold more than five percent shares in any corporation.
- The committee recommended for computerisation of insurance operations and also gave recommendations on issues related to the long-term insurance plans.
- There should be a specified proportion of business that every company must have in the rural areas.
Steps taken for insurance reforms in India
- The Government of India set up the insurance regulatory and Development Authority IRDA on December 7, 1999. The IRDA had the responsibility to specify rules and regulations about the Insurance sector in India. It was given the responsibility to take care of the interests of the insurance policy holders.
- IRDA decided that the paid up equity capital for the life sector and non-life sector companies would be rupees hundred crores. The paid up capital for the reinsurance business should be 200 crores.
- Now, the insurance companies would be registered under the Companies Act 1956.
- The private sector was now allowed to enter the insurance business.
- Foreign investment was allowed in the Insurance sector. A limit of 26% of foreign investment was specified which has been recently increased to 49%.
- Every Insurance Company had to keep a deposit of rupees 10 crores or a sum equivalent to 1 of the gross premium for life insurance and 3 of the total gross premium in the non-Life Insurance segment with the RBI.
Impact of insurance reforms
- There was a spread and deepening of insurance coverage in India. The number of people covered by insurance increased from 20 million in 2001 to 230 million in 2009. The coverage of insurance in the rural areas improved.
- There were a restructuring and revitalization of public sector insurance companies in India.
- There was rapid growth in the insurance sector due to private sector participation and foreign investment. The compound annual growth rate was around 17 % on insurance premiums in 2017.
- Insurance reforms have led to easing out of policy regulations and has promoted the entry of different insurance products such as health insurance etc.
- The Indian insurance industry is expected to grow to $280 billion by 2020, much larger than $84.72 billion for the financial year 2017.
- The insurance reforms have contributed to the improvements in the savings and investment rates resulting in the improvement of the overall growth of the economy.
- The number of companies in the Insurance sector increased to 52 in which 24 are dealing in the life insurance sector while others are involved in the business of non-life insurance sector.
- In annuity and pension products, private players have captured a market share of 33 %.
- Insurance reforms have promoted the use of new technology, new channels of distribution and new products. Due to the competition with the private sector, public sector insurance companies like LIC have also reformed itself and are now using new channels of bancassurance, direct marketing, insurance advisors along with the traditional agents.
- The biggest beneficiary of all these insurance reforms has been the Indian customers. There has been lowering of insurance premium rates and customers are getting better returns on their Investments.
Challenges and future insurance reforms
- At present, the insurance market is dominated by the product market relationship. Flexible pricing structure, risk management, and investment decision making need to be focused by the insurance companies.
- The expense ratio of the non-life insurance companies is around 33-35 . This needs to be brought down to the international standards of 15-20 % to improve the profitability.
- There is a need to educate the rural customers so that the benefits of insurance reach the remotest parts of India.
- The foreign direct investment in the insurance broking can be increased to 100% under certain conditions. The government is already working on this idea.
- There is a need to deal with the issues of software technology lags, lack of awareness among employees etc to get the real benefits of insurance reforms.
- The issues of overstaffing in the public sector insurance companies such as LIC needs to be tackled to improve its efficiency and productivity.
- There is a need to reduce the amount of investment in the government securities and the public sector insurance companies should invest in the profit making business to increase their profitability.