HISTORY AND

DEVELOPMENT OF
INSURANCE IN INDIA
(Insurance Law Project)

Submitted To : Ms. Astha Srivastava

Submitted By : Shreya
BBALLB(H)
8th Semester
A3221511076

CONTENT

S.NO.

TOPIC

PAGE NO.

ACKNOWLEDGEMENT

I am hereby submitting my Insurance Law project titled History and Development

of Insurance in India.

Any attempt at any level cant be satisfactorily completed without the support and
guidance of learned people.

It gives me immense pleasure to acknowledge all those who have rendered

encouragement and support for the successful completion of this work.

I am grateful to my teacher Ms. Astha Srivastava. She gave me moral support and
guided me in different matters regarding the topic and very kindly suggested the
outlines of this project and gave different ideas in making it. I thank her for her
overall supports.

THANKING YOU
SHREYA
BBA LLB(H)

INTRODUCTION

WHAT IS INSURANCE:

Insurance may be described as a social device to reduce or eliminate risk of life and
property. Under the plan of insurance, a large number of people associate themselves
by sharing risk, attached to individual. The risk, which can be insured against include
fire, the peril of sea, death, incident, & burglary. Any risk contingent upon these may
be insured against at a premium commensurate with the risk involved.

Insurance is actually a contract between 2 parties whereby one party called insurer
undertakes in exchange for a fixed sum called premium to pay the other party ON
happening of a certain event.

Insurance is a contract whereby, in return for the payment of premium by the insured,
the insurers pay the financial losses suffered by the insured as a result of the
occurrence of unforeseen events. With the help of Insurance, large number of people
exposed to similar risks makes contributions to a common fund out of which the
losses suffered by the unfortunate few, due to accidental events, are made good.

An insurer is a company selling the insurance; an insured or policyholder is the

person or entity buying the insurance. The insurance rate is a factor used to determine
the amount to be charged for a certain amount of insurance coverage, called the
premium.

According to J.B. Maclean, Insurance is a method of spreading over a large

number of persons a possible financial loss too serious to be conveniently borne by
an individual.

India had the nineteenth largest insurance market in the world in 2003. Strong
economic growth in the last decade combined with a population of over one billion
makes it one of the potentially largest markets in the future. Insurance in India has
gone through two radical transformations. Before 1956, insurance was private with
minimal government intervention. In 1956, life insurance was nationalized and a
monopoly was created. In 1972, general insurance was nationalized as well.256

But, unlike life insurance, a different structure was created for the industry. One
holding company was formed with four subsidiaries. As a part of the general opening
up of the economy after 1992, a government-appointed committee recommended that
private companies should be allowed to operate. It took six years to implement the
recommendation. The private sector was allowed into the insurance business in 2000.
However, foreign ownership was restricted. No more than 26 percent of any company
can be foreign-owned.

THE IMPORTANCE OF INSURANCE

Insurance benefits society by allowing individuals to share the risks faced by

many people. But it also serves many other important economic and societal
functions. Because insurance is available and affordable, banks can make loans with
the assurance that the loans collateral (property that can be taken as payment if a loan
goes unpaid) is covered against damage. This increased availability of credit helps
people buy homes and cars. Insurance also provides the capital that communities need
to quickly rebuild and recover economically from natural disasters, such as tornadoes
or hurricanes.

Insurance itself has become a significant economic force in most industrialized

countries. Employers buy insurance to cover their employees against work-related
injuries and health problems. Businesses also insure their property, including
technology used in production, against damage and theft. Because it makes business
operations safer, insurance encourages businesses to make economic transactions,
which benefits the economies of countries. In addition, millions of people work for
insurance companies and related businesses. In 1996 more than 2.4 million people
worked in the insurance industry in the United States and Canada.

Insurance as an investment that offers a lot more interms of returns, risk cover & as
also that tax concessions & added bonuses Not all effects of insurance are positive
ones. The possibility of earning insurance payments motivates some people to attempt
to cause damage or losses. Without the possibility of collecting insurance benefits, for
instance, no one would think of arson, the willful destruction of property by fire, as a
potential source of money.

HISTORICAL BACKGROUND OF INSURANCE IN INDIA

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 Nationalisation

b) Nationalisation
c) Post Nationalisation.

1818 was the advent of life insurance business in India 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. 1870 was the enactment of the British Insurance Act and in
the last three decades of the nineteenth century, the Bombay Mutual (1871), Oriental
(1874) and Empire of India (1897) were started in the Bombay Residency. 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.

In 1914, the Government of India started publishing returns of Insurance Companies

in India. The Indian Life Assurance Companies Act, 1912 was the first statutory
measure to regulate life business. 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.

An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245
Indian and foreign insurers in all. The LIC had monopoly till the late 90s when the
Insurance sector was reopened to the private sector.

Nationalization of General Insurance:

In 1972 the General Insurance Business (Nationalization) Act was passed.
Consequently, General Insurance business was nationalized with effect from 1
January 1973. 107 insurers were amalgamated and grouped into four companies,
namely 1. National Insurance Company Ltd. 2. The New India Assurance Company
Ltd., 3. The Oriental Insurance Company Ltd and 4. The United India Insurance
Company Ltd. General Insurance Corporation of India was set up as the controlling
body of above four companies.

REGULATION OF INSURANCE BUSINESS IN INDIA

This millennium has seen insurance come a full circle in a journey extending to nearly
200 years. The process of re-opening of the sector had begun in the early 1990s and
the last decade and more has seen it been opened up substantially.

In 1993, the Government set up a committee under the chairmanship of RN Malhotra,

former Governor of RBI, to propose recommendations for reforms in the insurance
sector. The objective was to complement the reforms initiated in the financial sector.
The committee submitted its report in 1994 wherein, among other things, it
recommended that the private sector be permitted to enter the insurance industry.
They stated that foreign companies be allowed to enter by floating Indian companies,
preferably a joint venture with Indian partners.

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 key objectives of the IRDA
include promotion of competition so as to enhance customer satisfaction through
increased consumer choice and lower premiums, while ensuring the financial security
of the insurance market. 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%. The Authority has the power to frame regulations under
Section 114A of the Insurance Act, 1938 and has from 2000 onwards framed various
regulations ranging from registration of companies for carrying on insurance business
to protection of policyholders interests. In December, 2000, the subsidiaries of the
General Insurance Corporation of India were restructured as independent companies
and at the same time GIC was converted into a national re-insurer. Parliament passed
a bill de-linking the four subsidiaries from GIC in July, 2002.

Today there are 24 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 23 life insurance companies operating in the
country. Beside IRDA Act and Insurance Act, 1938, there are some common
Act/Regulation to the General and Life Insurance Business in India and some Acts
have been made for specific requirement of Life Insurance/General Insurance

INSURANCE SECTOR REFORMS

In 1993, Malhotra Committee- headed by former Finance Secretary and RBI

Governor R.N. Malhotra- was formed to evaluate the Indian insurance industry and
recommend its future direction.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 recognising that insurance is an important part of the overall financial
system where it was necessary to address the need for similar reforms.
In 1994, the committee submitted the report and some of the key recommendations
included:
i)

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.

ii)

Competition:
Private Companies with a minimum paid up capital of Rs.1bn should be
allowed to enter the sector. 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.

iii)

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.
iv)

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)

v)

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 emphasised that in order to improve the customer 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 exercise caution as
any failure on the part of new players could ruin the public confidence in the
industry. Hence, it was decided to allow competition in a limited way by stipulating
the minimum capital requirement of Rs.100 crores.

The committee felt the need to provide greater autonomy to insurance companies in
order to improve their performance 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 Development
Authority.

Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in
Parliament in December 1999. The IRDA since its incorporation as a statutory body
in April 2000 has fastidiously stuck to its schedule of framing regulations and
registering the private 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 simultaneously to provide the supporting
systems to the insurance sector and in particular the life insurance companies was
the launch of the IRDA online service 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.

PRESENT SCENARIO

The Government of India liberalised the insurance sector in March 2000 with the
passage of the Insurance Regulatory and Development Authority (IRDA) Bill, lifting
all entry restrictions for private players and allowing foreign players to enter the

market with some limits on direct foreign ownership. Under the current guidelines,
there is a 26 percent equity cap for foreign partners in an insurance company. There is
a proposal to increase this limit to 49 percent.

The opening up of the sector is likely to lead to greater spread and deepening of
insurance in India and this may also include restructuring and revitalizing of the
public sector companies. In the private sector 12 life insurance and 8 general
insurance companies have been registered. A host of private Insurance companies
operating in both life and non-life segments have started selling their insurance
policies since 2001.

REASONS FOR FAILURE IN INSURANCE SECTOR IN INDIA

1.

In India many people were illiterates so they dont know about insurance benefits and
they dont know what are the existing insurance policies which were giving more
benefits.

2.

In India more than 45% people were living below poverty line and they could not even
thing about the insurances.

3.

In the initial stages there was a rumor that insurance is a death policy and it can be
claimed only after the death so no one showed interest in insurance.

4.

In the beginning stages of insurance there was less awareness about insurance policies.

5. Because of less disaster in India compared to japan, so it can be the reason why people
showed less interest to insure their life and properties
6.

India is developing country so if compared to Japan, USA, and UK we have less density
in insurance sector.

7. The insurance agents are not succeeding to that extent in motiving the people about
insurances and insurance policies.

8. Still many business organizations and manufacture organizations are not showing interest
to insure their property.
9. Claim settlement is also one of the back drop (late process in climes).

ROLE OF INSURANCE IN INDIAS FUTURE

Insurance would assist business to operate with less volatility and risk of failure and
provide for greater financial and societal stability from the growth pangs of an
estimated growth rate over 8% in GDP.

Government has arranged for disaster management and for funds. NGOs and public
institution assists with fund raising and relief assistance. Beside government provides
for social security programs. There is considerable impact upon government in these
respects. Insurance substantially steps in to provide these services. The effect would
be to reduce the strain on the tax payers and assist in efficient allocation of societal
resources.

Facilitates track, business and commerce by flexible adaptation to changing risk

needs particularly of the burgeoning services sector.
Like any other financial institution insurance companies generate saving from the
insurance sector. Within the economy and make available the same in well directed
areas of the economy deserving investment, a sector with potential for business as is
the case with Indian insurance provides incentive to develop it all the more faster.

It enable risk to be managed more efficiently through risk pricing and risk transfer
and this is an area which provides unlimited opportunities in the Indian context for
consulting, broking and education in the post privatization phase with newer
employment opportunities.

The insurance industry on its own accord is interested in loss minimization. Its
expertise in understanding losses assists it to share the experience across the economy
thus enabling better loss control and preservation of national assets.

In its risk pricing and investment decisions the insurance industry sets the tone for
investment by others in the economy. Informed assessment by the insurance
companies thus, signals allocation of resources by others contributing to efficiency in
allocation. In India visibility of L.I.C. and G.I.C. has been dwarfed by governments
actions and other high profile institutions like I.C.I.C.I., I.D.B.I., and U.T.I. Of late
A.I.G. is visible in the media and its investment announcements are being followed
keenly by institutional investors in India. I.N.G. saving trust and Zurich are active in
asset management and are being keenly followed by retail investors.

CONCLUSION

In this study we can conclude that Indian insurance sector is having increasing
growth rate. From the above trend analysis we can observe that trend percentages are
increasing, so we can conclude it is improving year to year and it is so sad to say that
still India has less density percentage in the world wide when compared, it might be
the reasons we discuss above. Now India is also improving it density percentages
year to year. So let us hope better that India can also improve in insurance sector.

Indian federal government considers insurance as one of major sources of funds for
infrastructure development. The government has identified the following as major thrust
areas:
* Timely and reliable statistical data and information about policies and markets to instill
a degree of credibility;
* A code of good practices based on international best practices to raise the standard of
Indian insurance sector;
* Strengthening of supervision and regulation;
* Market participation in decision-making;
* High solvency standard' and Developing alternative channels.

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