Over the past century, Indian insurance industry has gone through big changes.

It started as a fully
private system with no restriction on foreign participation. After the independence, the industry
went to the other extreme. It became a state-owned monopoly. In 1991, when rapid changes took
place in many parts of the Indian economy, nothing happened to the institutional structure
of insurance: it remained a monopoly. Only in 1999, a new legislation came into effect
signaling a change in the insurance industry structure. We examine what might happen
in the future when the domestic private insurance companies are allowed to compete with
some foreign participation. Because of the time dependence of insurance contracts, it is
highly unlikely that these erstwhile monopolies are going to disappear.
Introduction
Insurance in India started without any regulation in the Nineteenth Century. It
was a typical story of a colonial era: a few British insurance companies dominating the
market serving mostly large urban centers. After the independence, it took a dramatic
turn. Insurance was nationalized. First, the life insurance companies were nationalized
in 1956, and then the general insurance business was nationalized in 1972. Only in 1999
private insurance companies have been allowed back into the business of insurance with
a maximum of 26% of foreign holding. In what follows, we describe how and why of
regulation and deregulation. The entry of the State Bank of India with its proposal of
bancassurance brings a new dynamics in the game. We study the collective experience of
the other countries in Asia already deregulated their markets and have allowed foreign
companies to participate. If the experience of the other countries is any guide, the
dominance of the Life Insurance Corporation and the General Insurance Corporation is
not going to disappear any time soon.
Insurance under the British Raj
Life insurance in the modern form was first set up in India through a British
company called the Oriental Life Insurance Company in 1818 followed by the Bombay
Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829.
All of these companies operated in India but did not insure the lives of Indians. They
were there insuring the lives of Europeans living in India. Some of the companies that
started later did provide insurance for Indians. But, they were treated as "substandard"
and therefore had to pay an extra premium of 20% or more. The first company that had 3
policies that could be bought by Indians with "fair value" was the Bombay Mutual Life
Assurance Society starting in 1871.
The first general insurance company, Triton Insurance Company Ltd., was
established in 1850. It was owned and operated by the British. The first indigenous
general insurance company was the Indian Mercantile Insurance Company Limited set up
in Bombay in 1907.
By 1938, the insurance market in India was buzzing with 176 companies (both
life and non-life). However, the industry was plagued by fraud. Hence, a comprehensive
set of regulations was put in place to stem this problem (see Table 1). By 1956, there
were 154 Indian insurance companies, 16 non-Indian insurance companies and 75
provident societies that were issuing life insurance policies. Most of these policies were
centered in the cities (especially around big cities like Bombay, Calcutta, Delhi and
Madras). In 1956, the then finance minister S. D. Deshmukh announced nationalization
of the life insurance business.
The Indian insurance industry:
India’s rapid rate of economic growth over the past decade has been one of the more significant
developments in the global economy. This growth has its roots in the introduction of economic
liberalisation in the early 1990s, which has allowed India to exploit its economic potential and raise
the population’s standard of living.
Insurance has a very important role in this process. Health insurance and pension systems are
fundamental to protecting individuals against the hazards of life and India, as the second most
populous nation in the world, offers huge potential for that type of cover. Furthermore, fire and
liability
insurance are essential for corporations to keep investment risks and infrastructure projects under
control. Private insurance systems complement social security systems and add value by matching
risk
with price. Accurate risk pricing is one of the most powerful tools for setting the right incentives for
the
allocation of resources, a feature which is key to a fast developing country like India.
By nature of its business, insurance is closely related to saving and investing. Life insurance, funded
pension systems and (to a lesser extent) non-life insurance, will accumulate huge amounts of capital
over time which can be invested productively in the economy. In developed countries (re)insurers
often own more than 25% of the capital markets. The mutual dependence of insurance and capital
markets can play a powerful role in channeling funds and investment expertise to support the
development of the Indian economy.
In 2003, the Indian insurance market ranked 19th globally and was the fifth largest in Asia.
Although it accounts for only 2.5% of premiums in Asia, it has the potential to become one of the
biggest insurance markets in the region. A combination of factors underpins further strong growth
in the market, including sound economic fundamentals, rising household wealth and a further
improvement in the regulatory framework.
The insurance industry in India has come a long way since the time when businesses were tightly
regulated and concentrated in the hands of a few public sector insurers. Following the passage of
the Insurance Regulatory and Development Authority Act in 1999, India abandoned public sector
exclusivity in the insurance industry in favour of market-driven competition. This shift has brought
about major changes to the industry. The inauguration of a new era of insurance development has
seen the entry of international insurers, the proliferation of innovative products and distribution
channels, and the raising of supervisory standards.
By mid-2004, the number of insurers in India had been augmented by the entry of new privatesector
players to a total of 28, up from five before liberalisation. A range of new products had been
launched to cater to different segments of the market, while traditional agents were supplemented
by other channels including the Internet and bank branches. These developments were instrumental
in propelling business growth, in real terms, of 19% in life premiums and 11.1% in non-life
premiums between 1999 and 2003.
There are good reasons to expect that the growth momentum can be sustained. In particular,
there is huge untapped potential in various segments of the market. While the nation is heavily
exposed to natural catastrophes, insurance to mitigate the negative financial consequences of
these adverse events is underdeveloped. The same is true for both pension and health insurance,
where insurers can play a critical role in bridging demand and supply gaps. Major changes in
both national economic policies and insurance regulations will highlight the prospects of these
segments going forward.