Current Development in the Insurance Sector in india

Current Development in the Insurance Sector in india

The International Journal of Insurance Law, April 1997, journal discontinued October 1999

While direct foreign investment is permitted in several areas of business in India, the insurance industry has been fraught with trouble from the beginning

Insurance has been and continues to be a government monopoly. For instance, section 30 of the Life Insurance Corporation Act 1956 (LIC Act) expressly provides that the Life Insurance Corporation of India (the organisation constituted under the LIC Act) shall have the exclusive privilege of carrying on life insurance business. This monopoly situation also applies to general insurance, although the position is different as regards risk management and reinsurance

The previous government (the Indian National Congress) appointed the Malhotra Committee which presented its Report in 1994, making recommendations for opening up the insurance sector. It recommended infer alia that the private sector be called upon to take some portion of the rural and non-traditional insurance market (a social cause, presently very liberally served by the insurance companies). It also recommended that private foreign companies should enter into Joint ventures, the promoter equity being 40 per cent and the balance held by the public

When the present coalition government, the United Front, came to power, as the Central Government, it introduced its promised Common Minimum Programme. One of the attractions of this programme was the desire to introduce wide ranging changes affecting the insurance sector, on lines similar to the banking sector

Based on this manifesto, the following developments took place in 1996 –

A Bill on the Insurance Regulatory Authority was proposed. It is presently uncertain whether the Authority will be empowered to invite domestic and foreign investment in the insurance sector. Of course, the insurance industry cannot be opened up until the necessary amendments have been made to the LIC Act 1956 and the General Insurance Business (Nationalisation) Act 1972. It was expected that this Bill would be debated in December 1996. However, considering the strength of opposition to the Bill, and the time needed to draft new guidelines and issue licences, it is likely to be at least 18 months before any changes are implemented-something which foreign insurers have already taken into account

The Reserve Bank of India (RBI, the central regulatory bank in India) has in the meantime granted approval to four foreign insurance companies to open liaison offices in India. These will act only as channels of communication between parties in India and their head offices abroad and are not permitted to undertake any insurance business in India. These companies are Allianz Aktiengesellschaft Holding of Germany, Yasuda Fire and Marine Insurance Company of Japan, Zurich Insurance Company of Switzerland and Cigna International Corporation of the USA (something similar was done as a trial measure, in allowing foreign law firms to set up liaison offices in India)

As was expected, the existing insurance companies, both at the managerial and employee level, have strongly opposed and criticised any move to privatise insurance. A lot of criticism has also come from the coalition partners of the United Front government. There seems to be little support for the move to privatise

Informally, and in the belief that change will finally come about, several Indian and foreign insurance companies have been neeotiatinc possible tie-ups in life and general insurance business. So far, nearly 18 global insurance majors have signed memoranda of understanding. It is rumoured in insurance circles that the government is likely to give licences in the initial years only to a handful of companies-possibly only six-three in life and three in general insurance business. A considerable amount of market research and product blue print has already been done

The following proposals were included in the 1997 Finance Bill (announced on 28 February 1997) –

the Life Insurance Corporation of India (LIC) and the General Insurance Corporation of India (GIC) should enjoy substantial autonomy, including the power to make non-scheduled, non-consortium investments

LIC should be permitted to promote joint ventures in pensions fund business

GIC should be permitted to promote joint ventures in health insurance business

selected Indian companies with majority Indian ownership should be allowed to undertake business in the health insurance sector

LIC should continue to enjoy a monopoly in life insurance business and GIC should retain a monopoly in non-life, non-health insurance business

comprehensive regulations relating to prudential, investment and social norms should be made and enforced by the Insurance Regulatory Authority for all service providers in the insurance industry