INDIAN FINANCIAL SYSTEM REFORMS IN INSURANCE SECTOR

Saturday, April 13, 2013

INTRODUCTION
The governments policies since July 2004 have been to develop and reform the financial sector; regulate markets and upgrade their organizational and legislative structures, strengthen capital structures of financial institutions and protect investors' rights. The non-bank financial sector reform program consists of two phases; the first phase (2005-2008) and the second phase (2009-2012). The first phase aimed at building financial institutions, ensuring they are soundly structured and subjucted to strict supervision in order to enhance the financial sector's efficiency and ensure its stability and liquidity.

Saturday, April 13, 2013

CONT
As for the insurance sector, this phase aimed at restructuring the insurance companies by adopting a set of goals as follows: First: Restructuring State-held Insurance Companies. Second: Strengthening Legislative Structure of the Insurance Sector. Third: Increasing the Sector's Contribution to Economic Activity:

Saturday, April 13, 2013

REFORMS IN INSURANCE SECTOR

The insurance sector was working with low efficiency, low productivity, with limited products and poor quality insurance services. The R.N.Malhotra Committee had made several recommendations. As a result the Insurance Regulatory Development Act(IRDA) was passed in 1999.Insurance was opened upto private companies. The IRDA made several reforms on regulation of investment funds, adjudication of disputes between the insurers and intermediaries.
4 Saturday, April 13, 2013

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.

Saturday, April 13, 2013

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.

Saturday, April 13, 2013

 Structure

Government should take over the holdings of GIC and its subsidiaries.
All the insurance companies should be given greater freedom to operate.
Competition

Private Companies with a min 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.

Saturday, April 13, 2013

 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.
Investments

Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to50%. GIC and its subsidiaries are not to hold more than 5%in any company Customer Service

LIC should pay interest on delays in payments beyond 30 days.

Must be encouraged to set up unit linked pension plans. Computerization of operations and updating
8 Saturday, April 13, 2013

The committee
Emphasized that in order to improve the customer services and

increase the coverage of insurance policies, industry should be opened up to competition. Felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. 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. Proposed setting up an independent regulatory body- The Insurance Regulatory and Development Authority - The Indian Life Assurance Companies Act enacted as the first statute to regulate the life insurance business.
9 Saturday, April 13, 2013

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 nationalized. LIC formed by an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.

10

Saturday, April 13, 2013

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 setup. 1972 - The General Insurance Business(Nationalization) Act, 1972 nationalized the general insurance business in India with effect from 1st January 1973.
11 Saturday, April 13, 2013

INSURANCE REGULATORY AND DEVELOPMENT AUTHORITY

The IRDA was constituted as an autonomous body to

regulate and develop the business and re-insurance in India. IRDA was set up in 1996 but it was formally constituted as a regulator of the insurance industry in April 2000. To regulate, promote and ensure growth of insurance and re-insurance business.

12

Saturday, April 13, 2013

With The Liberal Process The Following New Aspects Were Brought About.
Customer Friendly Service Marketing Of Products Health Insurance Pension Schemes United Linked Products

Service To Customers
Entry Of Banks In Insurance Business Entry Of Co-operative Credit Institutions In Insurance

Business Rural Regional Banks In Insurance Business Non -Bank Financial Companies In Insurance Business Foreign Direct Investment In Insurance Business.
13 Saturday, April 13, 2013

EXPOSURE NORMS
TYPE OF INVESTMENT LIMIT FOR INVESTEE COMPANY LIMIT FOR THE ENTIRE GROUP TO WHICH THE INVESTMENT COMPANY BELONGS
As on any date-not exceeding 15%of the total capital employed of the group companies Not exceeding 15% of the total capital employed in all such companies

LIMIT FOR THE INDUSTRY SECTOR TO WHICH THE INVESTEE COMPANY BELONGS

(A)Equity or Preference Shares

As on any date-not exceeding 20%of the total capital employed

(B)Debentures

14

Short/Medium/Lo During the year-not During the year-not ng Term Loans exceeding 5% of exceeding 10% of annual accretion of estimated annual funds accretion of funds

EXPOSURE NORMS FOR INVESTMENT IN PUBLIC FINANCIAL INSTITUTIONS

(A)Equity or Preference Shares (At their face value) Not exceeding 15% in general of the paid-up equity/preference capital of the institution or the existing holding level ,if higher Not exceeding 10% of the capital employed by an institution as per the last audited balance sheet Not exceeding 60% of the net worth of the institution. 75%of annual accretions. Annual aggregate financial assistance to all Development Financial Institutions put together in a single year shall not exceed 20% of the estimated annual accretions for the year.
Saturday, April 13, 2013

(B)Investment in Equity Capital, Bonds, Debentures, Term Loans Total Investment vis--vis Net Worth of the company Total investment in a financial year Total investments in all the Financial Institutions

15

PRUDENTIAL NORMS
DEBENTURES Norms for fully convertible debentures and partially convertible debentures: Investment decisions are related to attractiveness of equity shares to be received as a result of conversion. Due consideration is also given to the factors, namely, and dividend income to be received from the equity shares. Similar conditions also apply for non-convertible debentures with detachable warrants attached to it.
16 Saturday, April 13, 2013

 Working Capital Debentures:20% of the current assets,

loans and advance minus outstanding amount of existing working capital non-convertible debentures. Project Finance: As appraised by the Investment Committee Normal Capital Expenditure: As accessed by the investment committee.

17

Saturday, April 13, 2013

CURRENT REFORMS
After a long wait and prolonged consultation with

stakeholders, the Insurance Regulatory and Development Authority (IRDA) finally came out with guidelines on initial public offers (IPOs) during the year 2011. This development will see private insurers hitting capital market in the coming years. The IPO notification came in December, enabling private sector life insurers, such as HDFC Standard Life, ICICI Prudential and SBI Life, to tap the capital market for funds.

18

Saturday, April 13, 2013

 According to the guidelines issued by the IRDA, life

insurance companies which have been in business for over 10 years would be eligible to come out with IPOs. Besides, the promoters of insurance companies would be permitted to offload their stake in the company. However, the size of the public issue by life insurance companies will be decided by IRDA. The IPO guidelines for the sector had been hanging fire for three years. According to Ernst & Young partner Ashvin Parekh, the first major change in the sector was a complete change in the product composition. We almost saw the death of Ulip products and an emergence of traditional products in the life insurance business. Life insurance had to be sold by insurers with assured returns. The Life Insurance Industry is groping to find products which would sell in the market place, he said.
19 Saturday, April 13, 2013

 Health insurance portability is another long-pending reform fructified

during the year. If not satisfied with the services of the existing health insurer, you can change the company without losing policy benefits. The policy will also help people shifting from one part of the country to another. For want of such a facility they were put to disadvantage due to lack of their insurers' offices at new locations. There was cheer for general insurance companies as IRDA decided to scrap the common pool (Indian Motor Third Party Pool System) used by insurers to settle accident claims, from April 1. The dismantling is being done as part of reforms and the scrapping of the fund pool system will lead to a rise in motor insurance premium. The pool was formed in early 2007 to ensure availability of cover for commercial vehicles that had been refused third-party insurance. Third-party insurance cover protects the vehicle owner from any financial liability in case of damage to life or property in an accident to the third person. Major public and private sector insurance players have been demanding abolition of the third party insurance pool, saying that the arrangement for sharing claims was denting their profits.
20 Saturday, April 13, 2013

 Another prominent highlight was issuance of norms for

bank assurance. The draft guidelines have suggested that banks continue to tie up with one insurance company in the life, non-life and health insurance spaces but only in a specified number of states. Under this, insurance companies will be allowed to partner with different banks and NBFCs in different states for selling their products. However, according to the draft norms, banks and nonbanking finance companies (NBFCs) will not be allowed to sell products of competing insurers in a particular state.

21

Saturday, April 13, 2013

Indias Insurance Sector Positions Itself as the Next Arena for Reform
Speedier clearance of products.

Fewer restrictions on distribution.

Tax benefits for individuals who take insurance cover. The channelizing of more insurance money into

infrastructure projects.

22

Saturday, April 13, 2013

SMALL STEPS; THE BIG MOVES ARE YET TO COME.

23

Saturday, April 13, 2013

REFERENCES
Services-M Y Khan:6th edition,Tata McGrawHill Education Private Ltd. Dynamics of Indian Financial System-Preeti Singh:Anes Student Edition World Wide Web
Financial

24

Saturday, April 13, 2013

THANK YOU

25

Saturday, April 13, 2013