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INSURANCE: EVOLUTION AND HISTORICAL BACKGROUND

The concept of insurance has been prevalent in India since ancient times amongst Hindus.
Overseas traders practised a system of marine insurance. The joint family system, peculiar
to India, was a method of social insurance of every member of the family on his life. The
law relating to insurance has gradually developed, undergoing several phases from
nationalisation of the insurance industry to the recent reforms permitting entry of private
players and foreign investment in the insurance industry.
A BRIEF HISTORY OF INSURANCE:
The story of insurance is probably as old as the story of Mankind. Though the concept of
insurance is largely a development of the recent past, particularly after the Industrial Era,
yet its beginnings date back to almost 6000 years.
The Indian life insurance industry has its own origin and history, since its inception. It has
passed through many obstacles, hindrances to attain the present status.

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:| Apraaptasya praapanam yoga; Praaptsya


rakhanam kshema- Thus says Shankara in his commentary on Bhagavadgita (Geetha
Bhashyam).
Yoga means getting the things one has not got and Kshema means protection of things one
has got. The sum and substance of the two are the essence of insurance. Life insurance is a
social security tool. This is more pronounced in rural areas that promote and sustain the life
links of the economy.
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.
Insurance owes its existence to 17th century England. In fact, it took shape in 1688 at a
rather interesting place called Lloyd's Coffee House in London, where merchants, shipowners and underwriters met to discuss and transact business. The practice
of underwriting emerged in the same London coffeehouses that operated as the unofficial
stock exchange for the British Empire. In the late 1600s, shipping was just beginning
between the New World and the old as colonies were being established and exotic goods
were ferried back. A coffeehouse owned by Edward Lloyd, later of Lloyd's of London, was
the primary meeting place for merchants, ship owners and others seeking insurance.
In 1666, the great fire of London destroyed around 14,000 buildings. London was still
recovering from the plague had that ravaged it a year earlier, and many survivors found
themselves without homes. As a response to the chaos and outrage that followed the burning
of London, groups of underwriters who had dealt exclusively in marine insurance formed
insurance companies that offered fire insurance.
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The first stock companies to get into the business of insurance were chartered in England in
1720. The year 1735 saw the birth of the first insurance company in the American colonies
in Charleston.
FORMATION OF THE INSURANCE INDUSTRY IN INDIA
1818 saw 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 Life Insurance Society had begun transacting life insurance
business in the Madras Presidency. 1870 saw 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. However, till the
establishment of the Bombay Mutual Life Assurance Society in 1871, Indians were charged
an extra premium of up to 20% as compared to the British. 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.
The first statutory measure in India to regulate the life insurance business was in 1912 with
the passing of the Indian Life Assurance Companies Act, 1912 (Act of 1912) (which was
based on the English Act of 1909). Other classes of insurance business were left out of the
scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and
legislative controls were not considered necessary.
General insurance on the other hand also has its origins in the United Kingdom. The first
general insurance company Triton Insurance Company Ltd. was promoted in 1850 by
British nationals in Calcutta. The first general insurance company established by an Indian
was Indian Mercantile Insurance Company Ltd. in Bombay in 1907. Eventually, with the
growth of fire, accident and marine insurance, the need was felt to bring such kinds of
insurance within the purview of the Act of 1912.
While there were a number of attempts to introduce such legislation over the years, non-life
insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938
(Act of 1938). The Act of 1938 along with various amendments over the years continues
till date to be the definitive piece of legislation on insurance and controls both life insurance
and general insurance. General insurance, in turn, has been defined to include fire
insurance business, marine insurance business and miscellaneous insurance business,
whether singly or in combination with any of them.
NATIONALIZATION OF THE INSURANCE BUSINESS IN INDIA
On January 19, 1956, the management of life insurance business of two hundred and forty
five Indian and foreign insurers and provident societies then operating in India was taken
over by the Central Government. The Life Insurance Corporation (LIC) was formed in
Sept ember 1956 by the Life Insurance Corporation Act, 1956 (LIC Act) which granted
LIC the exclusive privilege to conduct life insurance business in India. An Ordinance was
issued on 19th January, 1956 nationalizing the life insurance sector and Life Insurance
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Corporation came into existence in the same year. The LIC absorbed 154 Indian, 16 nonIndian insurers as also 75 provident societies245 Indian and foreign insurers in all. The
LIC had monopoly till the late 90s until the insurance sector was reopened to the private
sector.
The general insurance business was also nationalised with effect from January 1, 1973,
through the introduction of the General Insurance Business (Nationalisation) Act, 1972
(GIC Act). Under the provisions of the GIC Act, the shares of the existing Indian general
insurance companies and undertakings of other existing insurers were transferred to the
General Insurance Corporation (GIC) to secure the development of the general insurance
business in India and for t he regulation and control of such business. The GIC was
established by the Central Government in accordance with the provisions of the Companies
Act, 1956 (Companies Act) in November 1972 and it commenced business on January 1,
1973. Prior to 1973, there were a hundred and seven companies, including foreign
companies, offering general insurance in India. These companies were amalgamated and
grouped into four subsidiary companies of GIC viz. the National Insurance Company Ltd.
(National Co.), the New India Assurance Company Ltd. (New India Co.), the Oriental
Insurance Company Ltd. (Oriental Co.), and the United India Assurance Company Ltd.
(United Co.). GIC undertakes mainly re-insurance business apart from aviation insurance.
The bulk of the general insurance business of fire, marine, motor and miscellaneous
insurance business is under taken by the four subsidiaries.
ENTRY OF PRIVATE PLAYERS
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. Both LIC and GIC have played a significant role in the
development of the insurance market in India and in providing insurance coverage in India
through an extensive network. For example, currently, the LIC has a network of 7 zones,
100 divisions and over 2,000 branches. LIC has over 550,000 agents and over 100 million
lives are covered.
From 1991 onwards, the Indian Government introduced various reforms in the financial
sector paving the way for the liberalization of t he Indian economy. It was a matter of time
before this liberalization affected the insurance sector. A huge gap in the funds required for
infrastructure was felt particularly since much of these funds could be filled by life
insurance funds, being long tenure funds. Consequently, in 1993, the Government of India
set up an eight-member committee chaired by Mr. R. N. Malhotra, a former Governor of
India's apex bank, the Reserve Bank of India to review the prevailing structure of regulation
and supervision of the insurance sector and to make recommendations for strengthening and
modernizing the regulatory system. The Committee submitted its report to the Indian
Government in January 1994. Two of the key recommendations of the Committee included
the privatization of the insurance sector by permit ting the entry of private players to enter
the business of life and general insurance and the establishment of an Insurance Regulatory
Authority.
It took a number of years for the Indian Government to implement the recommendations of
the Malhotra Committee. The Indian Parliament passed the Insurance Regulatory and
Development Act, 1999 (IRD Act) on December 2, 1999 with the aim to provide for the
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establishment of an Authority, to protect t he interests of the policy holders, to regulate,


promote and ensure orderly growth of the insurance industry and to amend the Insurance
Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business
(Nationalization) Act, 1972.
MAJOR MILESTONES OF INSURANCE REGULATIONS OF THIS CENTURY:

Some of the major regulations of Indian insurance industry are as follows:


1912 There was a loud demand to regulate the affairs of insurance during the first
decade of the 20th century after five hundred provident fund societies that ought to
cater to the needs of small income groups failed miserably in the task. The
government realized the need of regularization and passed The Indian Life
Insurance Company Act' and 'The Provident Insurance societies' Act to regulate the
affairs of insurance companies and to avoid failures and check malpractices. It
mandated for the companies to submit certain records to the government. As a result
several companies which conducted insurance business on unsound actuarial
principles were closed.
1928- The Indian Insurance Companies Act was enacted to enable the government to
collect statistical information about both life and non life insurance business. The bill
provided that the surplus shall be allocated to shareholders and to policyholders in
certain proportion. Every insurance company has to submit annual statements
showing details of business both in and outside India.
1938 - The Insurance Act: It is a comprehensive act to regulate insurance business in
India. It was due to the strenuous efforts made by J.C. Setelvad who was the founder
president of the Indian insurance companies. This act forms the basis for the most
current insurance laws. This act was passed with a view to establishing closer
supervision and control in matters of investment of funds, expenditure and general
management of insurance companies. The act facilitated for the establishment of the
Department of Insurance under the authority of the Superintendent of Insurance. The
act was amended in 1950 and The Controller of Insurance was held responsible for
the orderly business of insurance in India. An Insurance Year Book (Blue Book) is
published by the Controller of Insurance every year giving information relating to
progress of life and general insurance business in India.
1956 - Nationalization of life insurance business in India. The Executive Committee
of the Insurance Councils that was set up in 1950 by the government of India made
serious efforts to ensure high standard of conduct and sound business practices. The
study conducted by the committee found that the concept of trusteeship which should
be the cornerstone of life insurance seemed entirely lacking and most managements
had no appreciation of the clear and vital distinction that exists between trust monies
and those belonged to joint stock companies owned by the shareholders. The
government of India thought it fit to nationalize the life insurance industry. The
nationalization of the life insurance brought to an end for the private operators and
170 insurance companies and 75 provident societies that were issuing life insurance
policies were amalgamated to form the Life Insurance Corporation of India, with a
capital contribution of Rs 5 crore by the government of India.
1972- Nationalization of general insurance business in India.
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1993- Setting up of Malhotra Committee to suggest structural reforms in insurance


sector with a view to improving the functioning of LIC and GIC and to make
recommendations on regulation and supervision of the insurance sector in India.
1994- Recommendations of Malhotra Committee, recommending for opening up of
insurance sector to private players and for professionalizing of agency force by
compulsory inductive training. The committee insisted that the insurance companies
should pay special attention to the rural insurance business. For entry of private
players, it suggested minimum capital requirement of 100 crore rupees and also
suggested norms relating to promoters' equity and equity capital by foreign
companies. The report suggested that postal life insurance should be allowed to
operate in the rural market. Mandatory investments of LIC Life fund in government
securities to be reduced from 75% to 50%. Government stake in the insurance
companies to be brought down to 50%.
1995- Setting up of Mukharjee Committee to make concrete plans for the
requirements of the newly formed insurance companies.
1996 -Setting up of (Interim) Insurance Regulatory Authority.
1997- Mukharjee Committee Report submitted, but not made public.
1997- Greater autonomy to LIC, GIC and their subsidiaries with regard to the
restructuring of boards and flexibility in investment norms aimed at channelling
funds to the insurance sector.
1999- The standing committee headed by Murali Deora decided that foreign equity in
private insurance should be limited to 26%. The IRA bill was renamed as Insurance
Regulatory and Development Authority (IRDA) bill. On 7th Dec, 99, the government
passed IRDA act.
2000- President gives his assent to IRDA Bill.
2002 Banks were allowed to sell insurance plans.
2005- Micro Insurance Regulations notified by the IRDA.
2007- Govardhan Committee was constituted to study the manner in which the
distribution channels are functioning and to recommend changes, if any, for making
them more effective.
2008- Govardhan committee submitted its report in April, 08 and the
recommendations are under consideration of IRDA.
2009- A Government appointed Panel on Investor Protection & Awareness chaired
by D. Swarup, the Chairman of Pension Funds Regulatory & Development Authority
(PFRDA) submitted its report to the Government of India recommending, inter alia,
for phasing out Agentscommission by April, 2011 for ULIPs and allow investors to
negotiate the fees. The proposal is under the consideration of the Finance Ministry.
2010 Securities and Exchange Board of India (SEBI) banned the sale of ULIPs by
the life insurance companies without getting its approval and claimed that the ULIPs
are more of mutual fund entities rather than insurance entities. IRDA asserted its own
authority on the governance of ULIPs and permitted the companies to resume selling
the ULIP products. The matter is therefore referred to the Court of Law. Meanwhile
the Finance Ministry has given directions in June, 2010 that they should be regulated
by IRDA only.
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2014 Central Government approved 49% foreign investment in insurance


companies through the Foreign Investment Promotion Board (FIPB) route ensuring
management control in the hands of Indian promoters.
PRESENT SCENARIO OF INSURANCE IN INDIA
The insurance market has witnessed dynamic changes which includes presence of a fairly
large number of insurers both in life and non-life segment. Most of the private insurance
companies have formed joint venture partnering with well recognized foreign players across
the globe. There are now 29 insurance companies operating in the Indian market 14
private life insurers, nine private non-life insurers and six public sector companies. There
was pressure from both within the country and outside on the government to increase the
foreign direct investment (FDI) limit from the current 26% to 49%, which would help JV
partners to bring in funds for expansion. Finally, in the year 2014 Central Government
approved 49% foreign investment in insurance companies through the Foreign Investment
Promotion Board (FIPB) route ensuring management control in the hands of Indian
promoters.
India with about 200 million middle class household shows a huge untapped potential for
players in the insurance industry. Saturation of markets in many developed economies has
made the Indian market even more attractive for global players. The insurance sector in
India has come to a position of very high potential and competitiveness. Indians who have
always seen life insurance as a tax saving device, are now suddenly turning to the private
sector that are providing them new products and variety for their choice.
Consumers remain the most important centre of the insurance sector. After the entry of the
foreign players the industry is paying a lot of competition and thus improvement of the
customer is required service in the industry. Computerization of operations and updating of
technology have become imperative in the current scenario. Foreign players are bringing in
international best practices in service through use of latest technologies.
Customers have tremendous choice from a large variety of products from pure term (risk)
insurance to unit-linked investment products. Customers are offered unbundled products
with a variety of benefits. More customers are buying products and services based on their
true needs and not just traditional money back policies, which are not considered very
appropriate for long-term protection and savings. There is lot of saving and investment
plans in the market.

It is suggested to go through class notes also.

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