PROJECT ON:

Liberalization of Insurance Sector

SUBMITTED TO:
Dr. Dipak Das
FACULTY, Law of Insurance.

SUBMITTED BY:
Anurag Rai, ROLL NO-31
B.A.LL.B (Hons), SEMESTER-VIII, SEC-C.

SUBMITTED ON:
4th April, 2016.

HIDAYATULLAH NATIONAL LAW UNIVERSITY,

RAIPUR, CHHATTISGARH.

TABLE of CONTENTS

Topic

Page No

1. Acknowledgements.

3.

2. Objectives

4.

3. Research Methodology

5.

4. Introduction

6.

5. Chapter 1- History of growth of Insurance Sector

7.

6. Chapter 2- Liberalization of the Insurance Sector.

10.

7. Conclusion

14.

8. Bibliography and Webliography

15.

Acknowledgements
It has been a wonderful experience working on the topic of Liberalization of Insurance
Sector as was assigned by my faculty coordinator. This project has been possible due to the
combined efforts of many people.
Firstly, I would like to thank my faculty coordinator, Dr Dipak Das, who assigned me the topic.
Her valuable suggestions and guidelines helped me in doing extensive research about the topic.
Secondly, I would like to thank my family and friends whose constant support inspired and
motivated me to work hard and excel in the topic.
Lastly, I would take the opportunity to thank our Honble Vice- Chancellor Sir for providing
extensive database in the library and also in the online department of our college.

Anurag Rai
Roll-31, SEM-VIII

. Research Objectives

To study the historical growth of Insurance sector in India.

To analyze the impact of liberalization of insurance sector.

Research Methodology

The method of research adopted is analytical & descriptive in nature. Secondary sources of
information have been used to give the research work a concrete structure. Websites & e-articles
have been extensively referred for relying on the data. Other relevant sources as suggested by the
faculty coordinator have been referred to.
Footnotes have been provided wherever required.

INTRODUCTION

Insurance sector has been one of the most pivotal sectors in Indian economy. Tracing back the
history of insurance, it can be seen that it existed even in ancient times. What has changed during
the course of history is the form and extent to which the sector has grown. From striking
insurance deals in coffee houses to the advent of modern legal insurance system and private
houses, the insurance sector has grown by leaps and bounds in the modern economy.
The base of insurance sector was tested during the recession of 2008 and it proved to be one of
the most sustainable sectors of economy. In all its forms, be it life, marine or fire, insurance as a
sector has been one of the most credible source for the economy to sustain. In the Indian
backdrop too, insurance sector has been one of the most sustainable sources of economy to bank
on.
The liberalization policy of India dating back to 1991 had been crucial in opening up the
economy to world market and every sector had benefitted from it. Entry of private entities in the
Indian market meant strengthening of legal system, regularization of the sector and creating a
framework wherein the sector can more efficiently blend with the customers. The liberalization
of the insurance sector had various impacts on the impact which helped the Indian economy in its
own way.

CHAPTER 1- GROWTH OF INSURANCE SECTOR IN INDIA.

The concept of insurance has been prevalent in India since ancient times amongst Hindus.
Overseas traders practiced 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 nationalization of
the insurance industry to the recent reforms permitting entry of private players and foreign
investment in the insurance industry. The Constitution of India is federal in nature in as much
there is division of powers between the Centre and the States. Insurance is included in the Union
List, wherein the subjects included in this list are of the exclusive legislative competence of the
Centre. The Central Legislature is empowered to regulate the insurance industry in India and
hence the law in this regard is uniform throughout the territories of India. The development and
growth of the insurance industry in India has gone through three distinct stages. 1
Insurance law in India had its origins in the United Kingdom with the establishment of a British
firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life
Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the
Oriental Life Assurance Company in 1874. However, till the establishment of the Bombay
Mutual Life Assurance Society in1871, Indians were charged an extra premium of up to 20 per
cent as compared to the British. 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). 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
1 https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2( as
accessed on 1st April, 2016)

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. 2
Ancient Historical Times:
Insurance is as old as human society itself. The ancient origin of insurance is Emerigon, whose
brilliant and learned Traite des Assurances, first published in 1783, is still read with respect and
admiration. The result shows that insurances were known to the ancients such as Romans,
Phoenicians Rhodians, although the business of underwriting commercial risks was probably not
highly developed.
The histories of Livy and Suetonius show that the contractors who undertook to transport
provisions and military stores to the troops in Spain stipulated that the government should
assume all risk of loss by reason of perils of the sea or capture and this was probably the first
time when insurance process was known. There were friendly societies organised for the purpose
of extending aid to their unfortunate members from a fund made up of contributions from all.
These societies undoubtedly existed in China and India in the earliest times.
The earliest traces of Insurance in the ancient Indian history was in the form of marine trade
loans or carriers contracts, which can be found in Kautilyas Arthashastra, Yajnyavalkyas
Dharmashastra and Manus Smriti. These works show that the system of credit and the law of
interest were well developed in India. They were based on clear appreciation of hazard involved
and the means of safeguarding against it.3
British India Period:
Insurance in India without any regulations started in the nineteenth century. It was a typical story
of a colonial era where a few British insurance companies dominated the market serving mostly
large urban centers. Company started by Europeans in Calcutta was the first life insurance
company on Indian soil. Bombay Mutual Life Assurance Society indicated the birth of first
2 http://shodhganga.inflibnet.ac.in:8080/jspui/bitstream/10603/31158/7/07_chapter%201.pdf(as accessed
on 1st April, 2016)
3 http://ijar.org.in/stuff/issues/v2-i2%283%29/v2-i2%283%29-a018.pdf( as accessed on 1st April, 2016)

Indian life insurance company in the year 1870, and covered Indian lives at normal rates. 1930s
was the last of the old-style crises in the Indian economy because it marked the beginning of the
end of the colonial state and an acceleration of the pace of industrialization as entrepreneurs
moved their capital out of the countryside. Independent Indian reduced its vulnerability to
external economic shocks by close control of foreign exchange and by promoting a massive
change in the export schedule. Till the end of nineteenth century, insurance business was almost
entirely in the hands of overseas companies.
Post Independence Era:
The insurance business grew at a faster pace after independence. Indian companies strengthened
their hold on this business but despite the growth that was witnessed, insurance remained an
urban phenomenon. During Mrs. Gandhis tenure (from 1966-1968), there was a split within the
business community of protectionists and those who wanted more open trade. But what
maintained the momentum was the commitment of two ministers, Ashok Mehta and
Subramaniam towards liberalization of the economy. This was seconded with high hope of
getting increased foreign aid.
Deregulation actually helped the poorest in India as it would eventually create more employment
and faster growth. Yet the intense fears of liberalization in the lower middle class and among
working class employees of the state sector pose serious risks in freeing the economy. It might be
preferable to introduce liberalization during an economic upswing when the risk of switching
jobs is less traumatic. The three liberalization episodes in Indian economic policy have followed
clear cyclical patterns. Economic policy has swung broadly between controls and greater
openness, with a tendency towards decontrolling larger and more important segments of the
economy.4

Liberalization of Insurance Sector.

In 1994, insurance sector invited private participation to induce a spirit of competition amongst
the various insurers and to provide a choice to the consumers.
To set up an independent regulatory body.
To protect the interest of the insurance policy holders.
To end the monopoly of LIC.
4 http://insuranceportalpopo.blogspot.in/2012/08/effect-of-liberalisation-in-insurance.html( as access on
1st April, 2016)

In the first year of insurance market liberalization (2001) as much as 16 private sector companies
including joint ventures with leading foreign insurance companies have entered the Indian
insurance sector. Of this, 10 were under the life insurance category and six under general
insurance. Thus in all there are 25 players (12 life insurance and 13 general insurance) in the
Indian insurance industry till date.

CHAPTER 2: Liberalization of Insurance Sector.

The IRDA opened up the market in August 2000 with the invitation for application for
registrations. The bill allows foreign equity stake in domestic private insurance companies to
maximum of 26% of the total paid-up capital and seeks to provide statutory status to the
insurance regulator.
Foreign companies were allowed ownership of up to 26%. 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 reinsurer. Parliament passed a
bill de-linking the four subsidiaries from GIC in July, 2002. Today there are 45 private
sector insurance companies.
Some positive effects of having FDI in insurance sector are the following:5

Capital for expansion.

Wider scope for growth.
Moving towards global practices.
Provide customers with innovative and competitive products.
Infrastructure facilities.
Boost economic life.
Job opportunities.
Increase level of competition.
Controlled inflation.
New risk management practices.
Availability of new technology.

FDI in Insurance- An impact of Liberalization:6

Insurance in India started without any regulations in the nineteenth century. After the
independence, the Life Insurance Company was nationalized in 1956, and then the general
insurance business was nationalized in 1972. The LIC had monopoly till the late 90swhen the
insurance sector was reopened to the private sector. In 1998 the cabinet decided to allow 40%
foreign equity in private insurance companies and 26% to foreign companies and 14% to nonresident &investors (FIIs) but again in 1999 the committee decides that foreign equity in private
insurance should be limited to 26%.

5 http://www.sumonbhaumik.net/icra_insurance.pdf( as accessed on 1st April, 2016)

6 http://economictimes.indiatimes.com/topic/FDI-in-insurance-sector( as access on 1st April, 2016)

In 1999, the Insurance Regulatory and Development Authority (IRDA) were constituted as an
autonomous body to regulate and develop the insurance industry .Since end of 2000; While Life
insurance has been privatized. Indian Government has opened the entry door for foreign players
with a maximum of 26 per cent of foreign holding and private companies in Life insurance
sector.7
There are 44 private insurance companies authorized by the Insurance Regulatory and
Development Authority (IRDA) operating in the country. These comprise of 23 life insurance, 17
general insurance and four health insurance companies, since the insurance sector was opened
for private sector in the year 2000. These are all joint ventures between the Indian promoters who
hold up to 76% and foreign insurance companies who hold up to 26% as mandated by the law.
Current Status of FDI in Insurance:
The Insurance Amendment Bill to raise FDI cap in the insurance industry from 26 per cent to 49
per cent has been pending in the Rajya Sabha since 2008.India is full of potential but hit by
regulatory hurdles, a sharp dip in GDP growth and uncertain market conditions. Even though
current norms allow FDI up to 26 per cent, several foreign players have quit India. The hike in
FDI cap is subject to parliamentary nod, not an easy task given that the ruling coalition is in a
minority.8

At present foreign investment in private insurance companies is restricted to 26% of their

capital, which is now proposed to be increased to 49% by passing an amendment to the

Insurance Act.
The reform if it gets passed in Parliament will be big boost the industry.
Application needs to be approved by two levels at Automatic Approval -by the country's
Central Bank, the Reserve Bank of India (RBI), Mumbai and subject to obtaining license
from IRDA.

The impact of liberalization in the insurance sector has opened up many facets. Even the micro
insurance at the rural sector has picked up owing to the entry of various insurance companies in

7 https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2( as
accessed on 1st April, 2016)
8 http://www.moneycontrol.com/news-topic/fdi-in-insurance/(as access on 1st April, 2016)

the country. The investment per se increased and it led to the regularization of the sector in a
large way.9
The liberalization in the insurance sector was primarily guided by Malhotra Commission. This
commission was formed to advice the government on the liberalization policy as far as the
insurance sector was concerned. Some of the recommendations were as follows:

Raising the capital base of LIC and GIC up to Rs. 200 crores, half retained by the
government and rest sold to the public at large with suitable reservations for its

employees
Private sector is granted to enter insurance industry with a minimum paid up capital of

Rs. 100 crores.

Foreign insurance be allowed to enter by floating an Indian company preferably a joint

venture with Indian partners.

Steps are initiated to set up a strong and effective insurance regulatory in the form of a

statutory autonomous board on the lines of SEBI.

Limited number of private companies to be allowed in the sector. But no firm is allowed

in the sector. But no firm is allowed to operate in both lines of insurance (life or non-life).
Tariff Advisory Committee (TAC) is delinked form GIC to function as a separate statuary

body under necessary supervision by the insurance regulatory authority.

All insurance companies be treated on equal footing and governed by the provisions of

insurance Act. No special dispensation is given to government companies.

Setting up of a strong and effective regulatory body with independent source for
financing before allowing private companies into sector.

The opportunities which have been provided by the liberalization of the insurance sector or
which can be rightly called the impact of liberalization can be summarized as follows:

Privatization if Insurance was eliminated the monopolistic business of Life Insurance

Corporation of India. It may help to cover the wide range of risk in general insurance and

also in life insurance. It helps to introduce new range of products.

It would also result in better customer services and help improve the variety and price of
insurance products.

9 http://ijar.org.in/stuff/issues/v2-i2%283%29/v2-i2%283%29-a018.pdf( as accessed on 1st April, 2016)

The entry of new player would speed up the spread of both life and general insurance. It

will increase the insurance penetration and measure of density.

Entry of private players will ensure the mobilization of funds that can be utilized for the

purpose of infrastructure development.

Allowing of commercial banks into insurance business will help to mobilization of funds

from the rural areas because of the availability of vast branches of the banks.
Most important not the least tremendous employment opportunities will be created in the
field osf insurance which is a burning problem of the presence day today issues.10

Thus, this has been the impact of liberalization of insurance sector in India. It has benefitted and
impacted India in a positive way and it is to be seen how the Indian economy responds to the
newest and latest changes in FDI regulations.

CONCLUSION
Any decision to open up the Indian economy comes with its share of advantages and
disadvantages. The decision to open up the Indian economy for the insurance sector had its own
pros and cons. However, from the above study, it can be seen that the impact has been positive
and has been crucial to sustain the economy during crisis times.

10 http://www.sumonbhaumik.net/icra_insurance.pdf( as accessed on 1st April, 2016)

At present, the way the insurance sector is performing, it can be said that it is one of the most
reliable sectors. Further, the working of the sector has bolstered the economic growth and
development. To add to it, the legal and regulatory frameworks have been smooth enough and
hassle free to encourage the entry of various players in the sector and make it function in an
efficient way.

BIBLIOGRAPHY AND WEBLIOGRRAPHY

Websites Referred:

www.sumonbhaumik.net
ijar.org.in
www.moneycontrol.com
www.irda.gov.in
www.economictimes.indiatimes.com
www.insuranceportalpopo.blogspot.in

www. shodhganga.inflibnet.ac.in