Evolution and Development of Life Insurance in India

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 these companies operated in India but did not insure the lives of Indians. They insured the lives of Europeans living in India. Some of the companies that started later did provide insurance for Indians, as they were treated as “substandard”. Substandard in insurance parlance refers to lives with physical disability. Pioneering efforts of reformers and social workers like Raja Rammohan Ray, Dwarakanath Tagore, Ramatam Lahiri, Rustomji Cowasji and others led to entry of Indians in insurance business. The first Indian insurance company under the name “Bombay Life Insurance Society” started its operation in 1870, and started covering Indian lives at standard rates. Later “Oriental Government Security Life Insurance Company”, was established in 1874, with Sir Phirozshah Mehta as one of its founder directors. Insurance in India can be traced back to the Vedas. For instance, yogakshema, the name of Life Insurance Corporation of India’s corporate headquarters, is derived from the Rig Veda. The term suggests that a form of “community insurance‟ was prevalent around 1000 BC and practiced by the Aryans.

Insurance business was conducted in India without any specific regulation for the insurance business. They were subject to Indian Companies Act 1866. After the start of the “Be Indian, Buy Indian Movement” (called Swadeshi Movement) in 1905, indigenous enterprises sprang up in many industries. It was during the swadeshi movement in the early 20th century that insurance witnessed a big  boom in India with several more companies being set up. Not surprisingly, the Movement also touched the insurance industry leading to the formation of dozens of life insurance companies along with provident fund companies (provident fund companies are pension funds). In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There are several striking features of these legislation’s. They were the first legislation’s in India that particularly targeted the insurance sector. They did not include general insurance business. The government did not feel the necessity to regulate general insurance. They restricted activities of the Indian insurers. As these companies grew, the government began to exercise control on them. The Insurance Act was passed in 1912, followed by a detailed and amended Insurance Act of 1938 that looked into investments, expenditure and management of these companies’ funds.

In 1914 there were only 44 companies; by 1940 this number grew to 195. Business in force during this period grew from Rs.22.44 crores to Rs.304.03 crores (1628381 polices). Life fund steadily grew from Rs.6.36 crores to Rs.62.41 crores. In 1938, the insurance business was heavily regulated by enactment of insurance Act 1938 (based on draft bill presented by Sir N.N.Sarcar in Legislative Assembly in January 1937). From here onwards the growth of life insurance was quite steady except for a setback in 1947-48 due to aftermath of partition of India. In 1948, there were 209 insurances, with 712.76 crores business in force under 3,016, 000 policies. The life fund by then grew to 150.39 crores.

By the mid-1950s, there were around 170 insurance companies and 80 provident fund societies in the country’s life insurance scene. However, in the absence of regulatory systems, scams and irregularities were almost a way of life in most of these companies. Despite the mushroom growth of many insurance companies, the per capita insurance in Indian was merely Rs.8.00 in 1944 (against Rs.2,000 in US and Rs.600 in UK), besides some companies were indulging in malpractices, and a number of companies went into  liquidation. Big industry houses were controlling the insurance and banking business resulting in interlocking of funds between banks and insurance companies. This shook the faith of the insuring public in insurance companies who were seen as custodians of their savings and security. The nation under the leadership of Pandit Jawaharlal Nehru was moving towards socialistic pattern of society with the main aim of spreading life insurance to rural areas and to channelize huge funds accumulated by life insurance companies to nation building activities. The Government of India nationalized the life insurance industry in January 1956 by merging about 245 life insurance companies and forming Life Insurance Corporation of India (LIC), which started functioning from 01.09.1956. After completing the arduous task of integration of about 245 life insurance companies, LIC of India gave an exemplary performance in achieving various objectives of nationalization. The non-life insurance business continued to thrive with the private sector till 1972. Their operations were restricted to organized trade and industry in large cities. The general insurance industry was nationalized in 1972. With this, nearly 107 insurers were amalgamated and grouped into four companies- National Insurance Company, New India Assurance Company, Oriental Insurance Company and United India Insurance Company. These were subsidiaries of the General Insurance Company (GIC). For years thereafter, insurance remained a monopoly of the public sector. It was only after seven years of deliberation and debate that R. N. Malhotra Committee report of 1994 became the first serious document calling for the re-opening up of the insurance sector to private players. The sector was finally opened up to private players in 2001. The Insurance Regulatory and Development Authority, an autonomous insurance regulator set up in 2000, has extensive powers to oversee the insurance business and regulate in a manner that will safeguard the interests of the insured. Insurance is a federal subject in India. There are two legislations that govern the sector- The Insurance Act,1938 and the IRDA Act, 1999. The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Tracing the developments in the Indian insurance sector reveals the 360 degree turn witnessed over a period of almost two centuries.

Important Milestones in Life Insurance Regulations In India

  • 1818 – Establishment of the Oriental Life Insurance Company in Kolkata
  • 1912 – The Indian Life Insurance Companies Act enacted as the first statute to regulate the life insurance business.
  • 1928 – The Indian Insurance Companies Act enacted to enable the government to collect statistical information about both life and non-life insurance businesses.
  • 1938 – Earlier legislation consolidated and amended by the Insurance Act with the objective of protecting the interests of the insuring public.
  • 1956 – 245 Indian and foreign insurers and provident societies taken over by the Central government and nationalized. LIC formed by an Act of Parliament, viz. LIC Act,1956, with a capital contribution of Rs. 5 crore from the Government of India.
  • 1972 – Nationalization of general insurance business in India
  • 1993 – Setting up of Malhotra Committee
  • 1994 – Recommendations of Malhotra Committee
  • 1995 – Setting up of Mukherjee Committee
  • 1996 – Setting up of (interim) Insurance Regulatory Authority and Recommendations of the IRA
  • 1997 – Mukherjee Committee Report submitted but not made public
  • 1997 – The Government gives greater autonomy to LIC, GIC and its subsidiaries with regard to the restructuring of boards and flexibility in investment norms aimed at channeling funds to the infrastructure sector
  • 1998 – The cabinet decides to allow 40% foreign equity in private insurance companies-26% to foreign companies and 14% to NRI’s, OCB’s and FII’s.
  • 1999 – The Standing Committee headed by Murali Deora decides that foreign equity in private insurance should be limited to 26%. The IRA bill is renamed the Insurance Regulatory and Development Authority (IRDA) Bill 1999. Cabinet clears IRDA Bill.
  • 2000 – President gives Assent to the IRDA Bill and Monopoly of Public Sector Insurance company marks an end and Private companies make inroad.