For nearly four and a half decades after India’s independence, the insurance sector was monopolized by the state. Life insurance was nationalized in 1956 and the Life Insurance Corporation of India was set up by the government.
Subsequently, general insurance was nationalized. In 1991, there was a turn in economic policy which led the government to usher in economic reforms.
The government’s early reform plans were based on the realization that market dynamics should be the decisive factor in determining economic policies.
India soon joined the World Trade Organization which propelled the country’s entry into international commitments.
This of course meant that India would have to open up various sectors including the insurance sector. The ultimate goal of these reforms was to promote greater global competition which would result in improved options for the benefit of customers.
Liberalization of FDI policy
At present, foreign investors are permitted to invest up to 26% in insurance companies under the automatic route. This is subject to foreign investors obtaining a licence from the Insurance Regulatory & Development Authority (IRDA).
Foreign joint venture partners have consistently approached the government to raise the ceiling beyond this level and it is expected that the IRDA will not oppose the lifting of such caps.
The government is expected to finally increase the limit on FDI to 49% for private sector insurance players in the country.
Regulators and operators
The government sought to provide better insurance coverage for Indian citizens and also to augment the flow of long-term resources for the financing of infrastructure in the insurance sector.
The sector was thus opened to private participation with the enactment of the Insurance Regulatory and Development Authority Act, 1999. The IRDA was set up pursuant to the act.
The core functions of the IRDA include handling the licensing of insurers and insurance intermediaries, financial and regulatory supervision, the control and regulation of premium rates and protection of the interests of policyholders.
In deciding whether to grant insurance companies a licence, the IRDA assesses a number of qualifications.
These qualifications are outlined in the act and deal mainly with the performance of the promoters of an insurance company and the capital structure of the applicant company.
The IRDA (Protection of Policyholders Interests) Regulations, 2002, govern the protection of policyholder interests and apply to all insurers, insurance agents, insurance intermediaries and policyholders.
The regulations contain procedures to be followed by insurers when making a proposal of insurance to policyholders. The proposal should include a proper procedure for grievance redressal, matters to be stated in life insurance policies, matters to be stated in general insurance policies, claim procedures and policyholders servicing.
The Insurance Redressal of Public Grievance Rules, 1998, outline the appointment of an ombudsman. The objective of these rules is to resolve all complaints relating to settlement of claims on the part of insurance companies in a cost-effective, efficient and impartial manner through the ombudsman.
The life insurance industry has been growing at a much faster pace, rising by as much as 46% for the first nine months of the current fiscal year. This high average has, however, been driven largely by unit-linked policy growth that is treated as capital efficient, since the investment risks are held by policyholders.
Private sector players in the insurance sector are, nevertheless, also beginning to look at the savings-linked and pure-risk policies to power rural forays that tend to be capital-intensive.
The proposed changes in insurance policy are aimed at enhancing the role of the private sector in improving the efficiency of the insurance sector in the country.
These government-led initiatives will help in achieving a total estimated investment opportunity of US$14-15 billion, enhancing the value of the Indian Insurance market to around US$52 billion by 2010.
Ravi Singhania is the managing partner at Singhania & Partners. The firm is headquartered in Noida and has offices in New Delhi, Mumbai, Bangalore and Hyderabad.
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