Dr.

Ram Manohar Lohiya National Law University

Lucknow

Subject: Insurance Law

Topic: A Comparative Analysis of Life Insurance Corporation and

Private Insurance Companies

Submitted to: Submitted by:

Dr. Manoj Kumar Shalini Dwivedi
(Assistant Professor Law) Roll. No. 121
Section - B
Semester- VIIIth

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 ACKNOWLEDGEMENT

I take this opportunity to express my profound gratitude and deep regards to my Assistant

Professor Dr. Manoj Kumar for his exemplary guidance, monitoring and constant

encouragement to give shape to this project. The blessing, help and guidance given by him time

to time shall carry me a long way in the journey of life on which I am about to embark.

I also take this opportunity to express a deep sense of gratitude to my respected seniors who

share their cordial support, valuable information and guidance, which helped me in completing

this task through various stages.

Lastly, I thank the almighty, my parents, brother, sisters and friends for their constant

encouragement without which this assignment would not have been possible.

Shalini

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Table of Content
1. Introduction
2. Concept of Insurance
3. Insurance Act, 1938
4. The Life Insurance Corporation of India: 1956
5. Role and functions of LIC
6. Insurance Sectors Reforms
7. LIC compares with private insurers
8. Conclusion
9. Bibliography

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INTRODUCTION
“India is one of the fastest growing economies of the world. It is now Asia’s third largest
economy. The insurance industry has contributed in India’s growth story in recent years. The
contour of insurance business has been changing across the globe and the rippling effect of the
same can be observed in the Indian market as well as insurance industry is a growth oriented
industry. In India too, the industry has started to reveal the potential after liberalization and
privatization of the sector. The topic basically revolves around the life insurance sector which
has been recently opened for the private players. LIC has for a long period of time has enjoyed a
dominant market of life insurance and the fact cannot be denied that LIC has a pre accomplished
market leadership which makes it difficult for the new players to compete. While the new players
struggle to increase their market in India, LIC continue to leverage advantage of its old
establishment and government support for maintaining its growth. Life Insurance is the fastest
growing sector in India since 2000 as Government allowed Private players and FDI up to 26%.
Life Insurance in India was nationalized by incorporating Life Insurance Corporation (LIC) in
1956. All private life insurance companies at that time were taken over by LIC. In 1993 the
Government of Republic of India appointed RN Malhotra Committee to lay down a road map for
privatization of the life insurance sector. While the committee submitted its report in 1994, it
took another six years before the enabling legislation was passed in the year 2000, legislation
amending the Insurance Act of 1938 and legislating the Insurance Regulatory and Development
Authority Act of 2000. The same year that the newly appointed insurance regulator Insurance
Regulatory and Development Authority IRDA started issuing licenses to private life insurers.
Insurance is an upcoming sector. In India the year 2000 was a landmark year for life insurance
industry, in this year the life insurance industry was liberalized after more than fifty year.
Insurance sector was once a monopoly, with LIC as the only company, a public sector enterprise.
But now a day the market opened up and there many private players competing in the market.
There are twenty four (annual report 2012-13 issued by IRDA) Private life Insurance companies
entered in the industry. After the entry of these private players, the market share of LIC has been
considerably reduced. For the past some year’s private players have launched many innovations
in the industry in terms of products, market channels and advertisement of products, agent
training and customer services etc.”

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CONCEPT OF INSURANCE:

Insurance is a federal subject in India. It is a subject matter of solicitation. The legislations that
deal with insurance business in India are Insurance Act, 1938 and Insurance Regulatory &
Development Authority Act (IRDA), 1999.1

“Too many people in this country are not in employment; and work for too many no longer
guarantees income security. Several millions are part-time, self employed and low-earning
workers living under pitiable circumstances where there is no security cover against risk. Further
the inherent changing employment risks, the prospect of continual change in the work place with
its attendant threats of unemployment and low pay especially after the adoption of New
Economic Policy and the imminent life cycle risks - a new source of insecurity which includes
the changing demands of family life, separation, divorce and elderly dependents are tormenting
the society.”

“Risk has become central to one's life. It is within this background life insurance policy has been
introduced by the insurance companies covering risks at various levels. Life insurance coverage
is against disablement or in the event of death of the insured, economic support for the
dependents. It is a measure of social security to livelihood for the insured or dependents. This is
to make the right to life meaningful, worth living and right to livelihood a means for sustenance.
Therefore, it goes without saying that an appropriate life insurance policy within the paying
capacity and means of the insured to pay premium is one of the social security measures
envisaged under the Indian Constitution. Hence, right to social security, protection of the family,
economic empowerment to the poor and disadvantaged are integral part of the right to life and
dignity of the person guaranteed in the constitution. Man finds his security in income (money)
which enables him to buy food, clothing, shelter and other necessities of life. A person has to
earn income not only for himself but also for his dependents, viz., wife and children. He has to
provide legally for his family needs, and so he has to keep aside something regularly for a rainy
day and for his old age. This fundamental need for security for self and dependents proved to be
the mother of invention of the institution of life insurance.”

1
https://www.medindia.net/patients/insurance/insurance-concepts-and-irda.htm

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What is 'Insurance?'

Insurance is a contract, represented by a policy, in which an individual or entity receives

financial protection or reimbursement against losses from an insurance company. The company
pools clients' risks to make payments more affordable for the insured.

Insurance policies are used to hedge against the risk of financial losses, both big and small, that
may result from damage to the insured or her property, or from liability for damage or injury
caused to a third party.2

INSURANCE ACT, 1938

“The Insurance Act, 1938, was the first comprehensive legislation governing not only life
but also non- life branches of insurance to provide strict state control over insurance
business. In sub- sections to dealt with provident companies, mutual offices and co-
operative societies as well.

The silent features of the Act were as follows: ·

(A) Constitution of a Department of Insurance under a superintendent vested with wide

powers of supervision and control over all kinds of insurance companies. ·

(B) Regulation for the compulsory registration of insurance companies and for filing of
returns of investment and financial conditions. ·

(C) Provisions for deposit, to prevent insurers of inadequate financial resources of

speculative concerns for commencing business. ·

(D) Provisions that 55% of the net life fund of an Indian or non- Indian insurer should
invest in Indian Government and approved securities with at least 25% in Indian
Government Rupee securities. All other companies, i.e., foreign companies must invest

2
https://www.investopedia.com/terms/i/insurance.asp

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100% of their Indian liabilities in Indian Government and approved securities, with at
least 33.3% Indian Government securities. ·

(E) Prohibition of rebating, restriction of commission, licensing of agents etc. Maximum

rates of commission were fixed at 40% of the first premiums and 5% of the renewal
premium in respect of life assurance business. The agent must be licensed, to improve the
status of the profession.”

THE LIFE INSURANCE CORPORATION OF INDIA: 1956

“This was the first step taken towards the nationalization of life insurance business in India. On
20th January, 1956 all life insurance companies were taken over by 43 nominated custodians.
The custodians were experienced senior executives of private insurance companies, reporting
directly to the Finance Ministry. From the word go, the complex task of running the industry on
a permanent basis and continuing the services to policy holders without interruption were their
major concerns. The actual work of integration had to await legislation. The custodians managed
the insurance companies till 1-09-1956, when Life Insurance Corporation was established under
the general direction and control of the Ministry of Finance. The Ordinance provided for the
transfer of the control of 154 Indian insurers, 16 non Indian insurers and 75 provident societies.
These arrangements were designed to ensure that no inconvenience whatsoever was caused to
the policy holders. With the Government take over the management aimed towards the evolution
of a common uniform premium rate, policy conditions and service and working procedures and
above all to help promote team spirit. The corporation, a body corporate shall consist of not more
than 15 members appointed by the Central Government, one of them being appointed by the
government as chairman. The capital of the corporation was at Rs 5 crore provided by the central
government.”

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Role and Functions of LIC3

 “It collects the savings of the people through life policies and invests the fund in a variety
of investments.

 It invests the funds in profitable investments so as to get good return. Hence the policy
holders get benefits in the form of lower rates of premium and increased bonus. In short,
LIC is answerable to the policy holders.

 It subscribes to the shares of companies and corporations. It is a major shareholder in a

large number of blue chip companies.

 It provides direct loans to industries at a lower rate of interest. It is giving loans to

industrial enterprises to the extent of 12% of its total commitment.

 It provides refinancing activities through SFCs in different states and other industrial loan
giving institutions.

 It has provided indirect support to industry through subscriptions to shares and bonds of
financial institutions such as IDBI, IFCI, ICICI, SFCs etc. at the time when they required
initial capital. It also directly subscribed to the shares of Agricultural Refinance
Corporation and SBI.

 It gives loans to those projects which are important for national economic welfare. The
socially oriented projects such as electrification, sewage and water channelizing are given
priority by the LIC.

 It nominates directors on the boards of companies in which it makes its investments.

 It gives housing loans at reasonable rates of interest.

 It acts as a link between the saving and the investing process. It generates the savings of
the small savers, middle income group and the rich through several schemes.

3
Section 6 of Chapter III of life insurance corporation Act, 1956

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Formerly LIC has played a major role in the Indian capital market. To stabilize the capital
market it has underwritten capital issues. But recently it has moved to other avenues of
financing. Now it has become very selective in its underwriting pattern.4”

INSURANCE SECTOR REFORMS

“In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor was
formed to evaluate the Indian insurance industry and give its recommendations. The committee
came up with the following major provisions-:

 Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter
the industry.
 Foreign companies may be allowed to enter the industry in collaboration with the
domestic companies.
 Only one State Level Life Insurance Company should be allowed to operate in each state
it was after this committee came into affect the regulatory body for insurance sector was
formed with the name of IRDA.

IRDA: The IRDA since its incorporation as a statutory body has been framing regulations and
registering the private sector insurance companies. IRDA being an independent statutory body
has put a framework of globally compatible regulations.”

LIBERALIZATION:-

OPENING UP OF INSURANCE SECTOR – 1999 THE INSURANCEREGULATORY

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. 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's online service for issue and renewal of licenses to agents. The approval of institutions for

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http://dailytools.in/InsuranceKnowledge/LICAct

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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, which are expected to be introduced
by early next year. Since being set up as an independent statutory body the IRDA has put in a
frame work of globally compatible regulations. In the private sector 14 life insurance companies
have been registered.

ENTRY OF PRIVATE COMPANIES

Under the IRDA Act, private companies can now operate in India's insurance industry. However,
they must obtain a license from the IRDA before being permitted to write business. To have its
license application considered, a domestic private company must be registered in accordance
with the Companies Act of 1956 and have approximately US$ 20 million of investment capital.
The specific licensing requirements that Private Indian Companies must fulfill are set forth in the
Registration on Indian Insurance Companies Regulations, published by the IRDA 2000.

LIFTING OF BARRIERS TO FOREIGN INVESTMENT

The IRDA Act also lifts certain barriers to foreign direct investment in Indian insurance industry.
Global insurers are now permitted to set up and register a domestic company in order to write
business in India. However, regulations stipulate that they have a capital base of at least US $ 20
million, and their investment in such company is capped at 26 percent. Thus, to participate in the
market, they must form a joint venture with an Indian partner that is able to invest the remaining
funds. The equity investments limit is the same for global reinsures seeking to write business in
India, but they are required to put up a capital of approximately US$ 45million in order to
establish a domestic company.

OVERVIEW OF THE CURRENT INSURANCE MARKET

In the years since the IRDA Act initiated market reforms, the insurance sector has experienced
some remarkable changes. The entry of a large number of Indian and Foreign private companies
in life insurance business has to lead greater choice in terms of products and services. Increased
consumer awareness of the benefits and importance of insurance and reinsurance has generated
many more buyers; and new distribution channels among them brokers, bank assurance, the

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Internet, and corporate agents have provided additional ways of getting products and services
to customers.

Private insurance companies have to date written a small percentage of business in this sector
during the last three years, but they have ushered in a competitive environment that has
accelerated market growth.

State owned insurers still write the bulk of insurance business, and they have the net worth
required to underwrite large corporate risks without depending almost entirely on reinsurance
support. However, their focus on restructuring is beginning to put them at a disadvantage against
private competitors. Over the next few years, the share of the market held by the public insurers
is expected to drop substantially, with private companies assuming a growing percentage of the
business written. At present there are 15 private insurers with two standalone private players and
remaining private-foreign joint venture.

LIC COMPARE WITH PRIVATE INSURANCE

“Life Insurance Corporation (LIC) is often known as the 'lender of the last resort' and a proxy for
the government to bail out state-owned companies. Oil and Natural Gas Corporation's follow-on
offering almost three years ago is a well-known example where the grossly under-subscribed
issue (almost 95 per cent) was lapped up by the insurance giant at the last minute.

Of late, LIC, which enjoyed a monopoly in life insurance till 2000, has been bailing out public
sector banks facing severe pressure on their profitability. Undoubtedly, LIC has emerged as a
proxy to government post the Lehman Brothers' crash when the government's finances (fiscal
deficit) also worsened, leaving little scope to provide capital to these companies. The argument
often put forward by experts is that LIC being a public institution shouldn't be used to park
money in dud assets. In the past, institutions like UTI decayed because of political pressure.
IDBI, which was a developmental financial institution (DFI) and is now a bank, lost out to
market savvy ICICI Bank, which also converted from a DFI to a bank.

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What many experts haven't attempted so far is LIC's comparison with private sector life
insurers in terms of various performance parameters. LIC today operates in a much competitive
environment than a decade and a half years ago when it was the only player insuring the lives of
people.

Today, private players have cornered a market share of 25 per cent. This could have been 30-40
per cent had the private players got the much needed doses of capital after the 2008 global
financial meltdown. The FDI limit of 26 per cent acted as a big stumbling block for growth of
private insurers because Indian players with a majority stake of 74 per cent had limitation of
capital. Now, with the FDI limit being relaxed to 49 per cent through an ordinance by the
government, the road is all clear for the private sector to step on the gas. I think LIC will now
have to face bigger competition than it faced since 2000.

LIC is also operating on a very high commission structure because of dependence on a large
agent network. The commission ratio (gross commission paid to gross premium) at 7.06 per cent
is also high as compared to HDFC Life and ICICI Prudential Life. The two large private sector
companies have a commission ratio in the range of four to five per cent. Over the last four to five
years, the private players have carefully built a strong low-cost banc assurance channel, which is
contributing more than 50 per cent to the new premium.

Similarly, many private players are experimenting with digital channels through online sale of
policies by way of tablets. In fact, the entire sales platform is now on the online platform. That is
one area where LIC should work to reduce its expenses. Surprisingly, LIC's ratio of expenses of
management to gross direct premium at 15.63 per cent is comparable to the private sector.

The private sector, which is known for paying high salaries, is also in the 15-16 per cent range.
But this high management expenses didn't show up in terms of innovation of products or
channels etc. The profit after tax to total income of LIC stood at .004 per cent. HDFC has 4.22
per cent and ICICI Prudential has 7.1 per cent.

The growth in the shareholders' funds, which represents capital invested by shareholders, is also
muted. LIC has seen growth of 4.49 per cent in shareholders' fund whereas HDFC Life has 45.36
per cent and ICICI Prudential Life is at 10.08 per cent. The yield on advances of LIC is at 8.08

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per cent. HDFC and ICICI Prudential Life do slightly better than LIC with yield on advances at
8.72 per cent and 8.5 per cent, respectively.

Lastly, LIC runs a large book of non-performing assets. LIC's gross NPAs are at 2.44 per cent,
which are comparable to not so well run public sector banks. Net NPAs are at 0.89 per cent.
Fourteen years is actually a long-enough periods to create NPAs if you operate a company
recklessly. But despite going through two big economic cycles of early 2000 and late 2008, the
private players have come out unscathed.

ICICI Prudential Life has absolutely nil NPAs, while HDFC Life has net NPAs of 0.9 per cent.
There are some who argue that LIC with a life fund of Rs 16 lakh crore has a larger size, which
makes the ratio incomparable to private players. But what is the use of size when you fare poorly
on some performance ratios?

LIC is surviving on a large fund and also a book renewal premium book that it has built over the
decades. At some stage in future, these advantages will go away and the private players will
catch up. The good example is of UTI, which had near monopoly in the mutual fund business.5”

CONCLUSIONS:

“LIC is the giant of the insurance sector. The overall size of LIC is much more than that of all
private insurance companies. Private insurers are in expansion mode and are increasing their size
but are still much behind LIC. Total premium deposits in LIC are much higher than the private
insurance companies. Total premium of LIC in FY 07-08 was 149789 crores which three times
more than that of private insurance companies. -Income of LIC is much greater than private
insurance companies. Last year total income from investments of LIC was 48244.14 crores
which was nearly equal to the total income of the all private insurance companies. By this we can
imagine how big the LIC is. ·

 Size of balance sheet of private insurance companies is lagging much behind LIC.
Balance sheet of LIC is seven times bigger than that of private insurance companies.

5
https://www.businesstoday.in

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  If we see the total number of policies issued by LIC and private insurance companies, we
find that there is a huge gap between them. No doubt that LIC is a well established player
in the field of insurance and many private companies have just started their business.
Hence it is obvious that LIC is having large number of policyholders.
 Number of branches of private insurance companies is increasing as the new players are
entering in this market. Also the established players are in expansion phase and hence are
expanding their business. There are many private insurance companies and hence there
total number of branches has gone past LIC in the last financial year. But offices of
private insurance companies are mostly in urban areas and still it is LIC which covers
most of the area.”

BIBLIOGRAPGHY

Books

1. Modern law of Insurance by K.S.N. Murthy and Dr. K.V.S. Sharma

2. Principles of insurance law by M.N. Srinivasan
3. Modern Insurance law by Birds

Sites

1. https://www.medindia.net/patients/insurance/insurance-concepts-and-irda.htm
2. http://shodhganga.inflibnet.ac.in
3. https://www.scribd.com/doc
4. http://www.sgrrits.org/
5. http://dailytools.in/InsuranceKnowledge/LICAct

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