Insurance Regulation: Some Issues

Abstract

Prior to 1956 the insurance business in India was owned and managed by private companies. The management of life insurance business was taken over and nationalized by the Government of India in September 1956 by an act of parliament. Later, the General Insurance Corporation (GIC) was set up in 1972 to deal in non-life insurance services like property and casualty insurance and reinsurance. Insurance in India is a Rs 400 billion (approximately US$9 billion) business. Gross premium collection is about 2 per cent of GDP and grew at nearly 20 per cent per annum between 1990 and 1997. India has the highest number of life insurance policies in force in the world and the total investable funds with the Life Insurance Corporation (LIC) is almost 8 per cent of GDP (Ranade and Ahuja, 1999). However about three quarters of India’s insurable population has no life insurance cover. Health insurance of any kind is negligible and other forms of non-life insurance are much below international standards. The potential for growth and spread of life insurance is high in India due to stronger economic growth, rapid aging of population and a weak social security and pension system, which leaves a vast majority of workers with no old age income security. It may call for privatization of the Indian insurance market and foreign participation in it. The Malhotra Committee Report (1994) advocated liberalization of the insurance sector in India. The report made a strong case for activating professional regulation as a matter of priority, almost as a condition precedent to the further opening up of the insurance sector to private participation. It was not until recently (1999) that the Insurance Regulatory and Development Authority (IRDA) was formed with Mr N. Rangachary as its chairman. The role of IRDA is to ensure orderly growth of the insurance market in India. It must ensure financial soundness of the insurance industry and protection of consumer interest 1 through professional regulation. This development came in the wake of the passing of the IRDA Bill in Parliament. The IRDA Bill which was placed before Parliament in October 1999 is an improvement on its predecessor, the Indian Regulatory Authority (IRA) Bill, 1996. The new Bill is broader not only in its title but also in its reach and content (Pant, 1999). The IRDA Act marks the end of the government’s monopoly in the insurance sector because it seeks to promote the private sector (including limited foreign equity) in the insurance sector (Economic Survey of India, 1999‐2000). It covers major amendments to the Insurance Act 1938, the Life Insurance Corporation (LIC) Act 1956, and the General Insurance