Indian Economy, 5th edition (65 page)

Definition

In economic terms, anything used to cut down the risk is known as
insurance
. But in familiar terms, insurance is provided by an insurance company which covers a person’s life (called life segment) or covers loss of assets, property (called non-life or general segment). The insurance policies are purchased at fixed premiums.

Insurance Industry

LIC

The life insurance business/industry in the country was nationalised by the Government of India in 1956 and a fully government-owned company, the
l
ife Insurance Corporation of India (LIC) was set up (at that time 245 Indian and foreign companies were playing in the life segment of insurance). Opening of private life insurance companies was prohibited at the same that time. The LIC was called an investment institution by the government.

The nationalisation was motivated by twin objectives—
first
, to spread the message of life insurance for greater social security and
secondly,
to mobilise people’s savings (collected as premiums) for nation building. The LIC had been the biggest investor in the government’s procces of planned development purchasing government securities (G-Secs.) and equities of the big asset public sector undertaking (PSUs).

The market share of these insurers was 68.84 per cent and 31.16 per cent respectively in the corresponding period of 2010-11
(Economic Survey 2012-13)
.

GIC

In 1971, the Government nationalised the private sector companies (107 Indian and foreign companies) playing in the general insurance segment and a government company the General Insurance Corporation of India (GIC) was formed in 1972. The GIC started operation on January 1, 1973 with its four holding companies
:

1.
National Insurance Company Ltd.

2.
New India Assurance Company Ltd.

3.
Oriental Fire and Insurance Comany Ltd.

4.
United India Insurance Company Ltd.

In the era of economic reforms, two major changes took place in this area—

(i)
In
n
ovember 2000 the GIC was notified as the Indian Reinsurer
1

(ii)
In March 2002 the GIC was withdrawn from holding company status of the four public sector general insurance companies. Now these four companies are directly owned by the Government of India
2
.

The market shares of the public and private insurers are 57.80 and 42.20 per cent in 2011-12 as against 59.07 and 40.93 in the previous year (Economic Survey 2010).

Insurance Reforms

Under the process of economic reforms an Insurance Reforms Committee (IRC) was set up in April 1993 under the chairmanship of the ex-RBI Governor R N Malhotra. The committee handed over its report (January 1994) with the following major suggestions:
3

(i)
Decontrolling insurance sector i.e. allowing Indian as well as foreign private sector insurance companies to enter the sector (the Government did it in 1999 passing the
IRDA Act
).

(ii)
Restructuring the LIC and the GIC and cutting down the government’s holding in them to 50 per cent (no follow up still but the private insurance companies demanding it anxiously. The NDA government had taken steps in this area but the UPA government has no such plans.) Late 2012, the government started sale of the LIC shares but to public sector undertakings - seen as a welcome move.

(iii)
Delinking GIC and its four subsidiaries (which was done in 2000).

(iv)
Discarding the system of licensing of surveyors by the controller of Insurance.

(v)
Restructuring the Tariff Advisory Committee.

(vi)
Setting up a regulatory anthority for the insurance industry (the IRDA set up in 2000).

IRDA

The Insurance Regulatory and Development Authority (IRDA) was set up in 2000 (the Act was passed in 1999) with one chairman and five members (two as wholetime and three as part-time members) appointed and nominated by the Government. The authority is responsible for the regulation, development and supervision of the Indian insurance industry.

There are 29 insurance companies in India (15 in life segment and 14 in the non-life segment) which have been able to cover 40 million lives in the country. Out of the local life and non-life segment, insurance coverage in the rural areas have a share of 17 per cent and 14 per cent respectively, still too much needs to be done for the development of insurance in the country. (See the Select Model Answers on the topic.)

AICIL

The Agricultural Insurance Company of India Ltd. (AICIL) was set up in 2002 in the public sector to look after the National Agricultural Insurance

Schemes (NAIS) of 1999
4
. Till its arrival the responsibility was on the GIC whose losses were supposed to be reimbursed by the Central Government. Now the GIC does not play this role.

Public Sector Insurance Companies

There are six public sector insurance companies operating in the country—one in life segment (LIC), four in the non-life segment and one in the agriculture sector (AICIL).

Reinsurance

w
hen an insurance company gets insurance coverage on its insurance policies, it is considered a case of reinsurance. For the development of insurance in an economy the presence of reinsurance companies is a precondition. It becomes an essential precondition if the economy is trying to develop and expand insurance with the active participation of the private sector insurance companies. This made the Government convert the GIC into a re-insurance company in 2000—this is the sole re-insurer in India, that too in the public sector. (Nobody can be a better insurer or reinsurer than the Government itself!).

Deposit Insurance and Credit Guarantee Corporation (DICGC)

DICGC was set up by merging the Deposit Insurance Corporation (1962) and the Credit Guarantee Corporation (1971) in 1978. While Deposit Insurance had been introduced in India out of concerns to protect depositors, ensure financial stability, instill confidence in the banking system and help mobilise deposits, the establishment of the Credit Guarantee Corporation was essentially in the realm of affirmative action to ensure that the credit needs of the hitherto neglected sectors and weaker sections were met. The essential concern was to persuade banks to make available credit to not so creditworthy clients. After the merger, the focus of the DICGC had shifted onto credit guarantees. This owed in part to the fact that most large banks were nationalised. With the financial sector reforms undertaken in the 1990s, credit guarantees have been gradually phased out and the focus of the Corporation is veering back to its core function of Deposit Insurance with the objective of averting panics, reducing systemic risk, and ensuring financial stability.

Export Credit guarantee
Corporation (ECGC)

The overseas projects undertaken by the Indian companies face many
political
and
commercial risks
in the importing countries. To provide adequate credit insurance cover to such firms, the government has set up the Export Credit Guarantee Corporation of India Ltd. (ECGC) under the Ministry of Commerce and Industry, for medium and long term exports. But owing to its own limitations, at times it is difficult for ECGC to cover pure commercial risks in issues like long repayment period, the large value of contracts, difficult economic and political conditions of the importing country, together with the fact that
reinsurance
cover is generally not available for such projects.
5
Many times such projects look necessary considering the economic and political relationship of India with the proposed importing country. It means that in the absence of credit insurance cover, the ability of Indian exporters to go for such export projects is hampered. It should be noted that in many developed economies such projects are covered and underwritten on government account
6
.

National Export Insurance
Account (NEIA)

For facilitating the service of the ECGC (discussed above) the Government of India did set up the National Export Insurance Account (NEIA) in March 2006 to promote medium and long term export by providing credit insurance support in the cases where ECGC was not able to provide credit cover on its own because of purely commercial reasons
7
:

(i)
The corpus given to the account was
`
66 crore, raised to
`
246 crore by 2007–08 and will be enhanced to
`
2000 crore in the Eleventh Plan (2007–12).

(ii)
Resources of the NEIA will be the corpus, the premium income, interest income and recovery of all the claims paid.

(iii)
As per the provision, an exposure equal to ten times corpus can be taken by the NEIA.

The NEIA can cover projects which fulfill the following criteria
8
:

(i)
The project by itself should be commercially viable;

(ii)
The project should be strategically important for India, with regard to economic and political relationship of India with the importing country; and

(iii)
The exporter should be capable of executing the contract, as evident from his previous track record.

The use and benefits of the NEIA need to be publicised among its beneficiaries. Meanwhile, many export projects pertaining to Indonesia, Vietnam, Iran, Sudan, etc. are under way. The NEIA will facilitate potential project exporters to enter the international trade area, as it is expected
9
to
be so. In the era of globalisation it has been praised as a welcome development by the experts and the trade people alike.

The Challenge Ahead

Since the opening up of the insurance sector, the number of participants in the insurance industry has gone up from seven insurers (including the Life Insurance Corporation of India [LIC], four public-sector general insurers, one specialized insurer, and the General Insurance Corporation as the national re-insurer) in 2000 to 52 insurers as on 30 September 2012 operating in the life, non-life, and re-insurance segments (including specialized insurers, namely the Export Credit Guarantee Corporation and Agricultural Insurance Company [AIC]). Four of the general insurance companies, viz. Star Health and Alliance Insurance Company, Apollo Munich Health Insurance Company, Max BUPA Health Insurance Company, and Religare Health Insurance Company function as standalone health insurance companies. Of the 23 insurance companies that have set up operations in the life segment post opening up of the sector, 21 are in joint ventures with foreign partners. Of the 21private insurers who have commenced operations in the nonlife segment, 18 are in collaboration with foreign partners.

After the state monopoly in the insurance sector was dismantled and private players’ entry allowed, the IRDA has played a crucial role in the development and expansion of the sector, there is no doubt in it. But still the sector faces many challenges which, if only tackled well may one say that insurance is serving the interests of the insuring companies and the covered alike. As per the concerned experts, the major challenges Indian insurance is facing today may be seen as given below:

1.
As per various estimates, only 20 per cent of the insurable Indian population is life-insured; the share of India in global life insurance is just 0.66 per cent; and life insurance penetration is at present 2.53 per cent (2004) in the country.
10

The message of life insurance needs to be publicised among the population, specially in the rural areas. Moreover, social security schemes should be expanded to cover the poor masses who lack the premium-paying capacity.

2.
Experts suggest that health insurance could emerge among the most important factors of improving human development in the country if expanded in a focussed way and via an
action plan.
It is estimated that around 15 per cent of the Indian population is covered under some form of pre-payment on healthcare which includes employees and beneficiaries covered under ESIS, CGHS, Armed forces, Central Police organisations, Railways, employer self-funded schemes, the PSUs and pensions covered under health insurance.
11
The health insurance penetration is at present at 1.536 per cent only (2005–06). Besides the LIC, the private players should be promoted to enter the foray, specially in the rural areas.

3.
After the general insurance industry was opened up (2000) for the private sector participation, the experience has been positive
12
. Its growth compares favourably with that of many other emerging markets and is in line with global benchmark of two to three times the growth in GDP
13
. As the economy is on a strong growth path and the capital expenditure planned across industries is estimated to be over
`
9,00,000 crore over the next four to five years, a better scope for the general insurance expansion is probable
14
. The growth in both commercial and personal lines of general insurance business reflects positive trends. Over 70 per cent of India’s population lives in rural areas and along with organised financial services, general insurance companies are also expanding into these sectors.

4.
People in their lives experience financial difficulties that can affect the entire family negatively, this is more true about the poor masses in India.

This is why the experts suggested for the provision of
micro insurance.
A relatively new concept, micro insurance is today provided to the beneficiaries of the micro finance covering the finance amount, reducing the risk of the clients as well as the micro finance institutions (MFIs)
15
. The concept of micro insurance has been developed by the private insurance company Aviva Life Insurance (in partnership with MFIs) which has forged alliances with banks like Canara Bank, P&SB, RRBs, 23 cooperatives, etc. to promote micro finance.