The first General Insurance Company in India – Triton Insurance Company Limited – was set up in 1850 under the control of the British. Its first Indian counterpart, the Indian Mercantile Insurance Company Limited, launched its operations in Bombay in 1907. Although the general insurance business was not nationalised along with life insurance, a code of conduct for fair and sound business practices was framed in 1957 by the General Insurance Council (a wing of the Insurance Association of India). In 1968, the Insurance Act was amended to provide for greater control over the General insurance business. In 1971, the management of non-life insurers was taken over by the Government of India (GoI).
In 1972, it was announced that the Indian Non-life insurance sector was to be nationalised with effect from 1 January 1973. At that time there were 107 general insurance companies within the country. They were mainly large city-oriented companies of different sizes catering to the organised sector (trade and industry). Upon nationalisation, these businesses were assigned to the four subsidiaries of the General Insurance Corporation (GIC) of India namely – the New India Assurance Co Ltd (NIACL), Oriental Insurance Company Ltd (OIC), United India Insurance Co Ltd (UIIC) and the National Insurance Company Ltd (NIC). The goals behind this structure were:
- The subsidiary companies were expected to set up standards of conduct, sound practices and provision of efficient customer service in the general insurance business
- The GIC was to help control the expenses of the subsidiaries
- It was to help with the investment of funds for its four subsidiaries
- It was to bring general insurance to the rural areas of the country, by distributing business to the four subsidiaries, each operating in different areas in India
- The GIC was also the designated national reinsurer. By law, all domestic insurers were to yield 20% of their gross direct premium in India to the GIC
- All four subsidiaries were to compete with one another.
The risks underwritten by an insurance company in the Non-life segment are usually covered under fire, motor and miscellaneous insurance segments. The miscellaneous portfolio covers engineering, aviation, health, and other retail classes of risk. The rates, terms, and conditions that insurers could offer for their products were governed by the Tariff Advisory Committee (TAC), a statutory body created under the Insurance Act of 1938, the main insurance legislation in effect during the pre-liberalization period. Under this tariff system, premiums were fixed at the same rate for all companies, products were undifferentiated and coverage was limited in almost every segment. Non-life products were classified by whether they were regulated by tariffs: fire, insurance, motor vehicle insurance, engineering insurance and workers’ compensation, among others that came under tariff; and burglary insurance, mediclaim, personal accident insurance, among others that did not. In addition, specialised insurance (eg racehorse insurance) did not fall under tariff regulations. Further, the monopoly structure and the closing of the market to foreign and domestic private companies enabled domestic public insurers to freely conduct business without having to face any competitive challenges. Under this market structure, there was no need for brokers. Besides, brokers were effectively kept out of the country by regulations that prevented them from charging fees or commissions for their services.
Just as in the case of the life insurance sector, policy makers also had to consider bringing about policy reforms in the general insurance sector once the new industrial policy was introduced by the government of India in 1991. Moreover, the level of penetration in the general insurance segment was below even the level of penetration in the life insurance segment. As a result, the need for liberalisation of the general insurance sector was also emphasized upon. Just like the life insurance sector, there was a need to offer wider range of innovative products to suit specific customer needs and to change people’s attitude towards general insurance. Thus the general insurance industry along with the life insurance industry was liberalised by the year FY00.
The passage of the Insurance Regulatory and Development Authority (IRDA) Act of 1999 liberalised the India insurance market. The Act represents the Indian Government’s unanimous agreement, after years of deliberation, that opening the market to both Indian and foreign private companies could help the economy meet its growing insurance needs, spark insurance growth in rural areas, and promote India as a regional reinsurance hub. The specific provisions of the IRDA Act were to repeal the GIC monopoly and:
- Establish the Insurance Regulatory and Development Authority (the IRDA) to oversee and regulate industry operations
- Re-designate the GIC as a national reinsurer to which all of the country’s direct insurers must continue to yield 20% of their business
- Lift the ban on domestic private companies
- Open the market to foreign participants – albeit with certain restrictions.
Thus in Nov 00, the Government of India restructured the General insurance industry by making GIC the ‘Indian Reinsurer’.
Restructuring of the General Insurance Segment: A notification, at the request of the Insurance Regulatory and Development Authority (IRDA) was issued, which called for the splitting up of the reinsurance business from the general insurance business within the GIC. The General Insurance Business (Nationalisation) Amendment Act, 2002 was passed by both Houses of Parliament and consented by the President of India on August 7, 2002. The GIC was de-linked from its four subsidiaries. Each subsidiary, with their headquarters based in the four largest metropolitan areas, became independent. Consequently, GIC now undertakes only reinsurance business, while the four public sector undertakings (PSUs) – National Insurance Company Limited (NIC), New India Assurance Company Limited (NIACL), Oriental Insurance Company Limited (OIC) and United Indian Insurance Company Limited (UIIC) continued to handle the General insurance business. However, the government still remains the sole owner of the four former GIC subsidiaries. Further, GIC has now ceased to do any direct business in India, except for crop insurance. As the sole reinsurer in the domestic reinsurance market, GIC provides reinsurance to the direct general insurance companies in the Indian market.
Innovation and Expansion: After the opening of the sector to private players, several new products were introduced. They included products liability, corporate cover, professional indemnity policies, burglary cover, individual and group health policies, weather insurance, credit insurance, travel insurance and so on. Some of these products were completely new (eg weather insurance) while others were already available through the public insurance companies. Areas in the country which were previously uninsured were slowly and gradually starting to go in for insurance cover. As a result, the general insurance market in India expanded.
Free Price Regime: Another major factor that provided an impetus to the non-life sector is the gradual introduction of a free-pricing regime. A Tariff Advisory Committee (TAC) was set up to specify tariffs for products offered by various companies. The IRDA set in motion the first phase of de-tariffing by withdrawing the administered pricing mechanism (effectively de-tariffing the regime) in respect of fire, engineering and motor insurance in 01-Jan-07. The free-price regime has led to a reduction in cross-subsidisation between tariff and profitable portfolios like fire insurance and nontariff lines like health insurance. The new regime is also partly responsible for inducing general insurers to design new, innovative and suitable products for different sets of customers.
De-Tariffication: The removal of tariffs effective from Jan 01, 2007 was one of the most important steps taken in the general insurance segment since opening up of the insurance sector. Before de-tariffication about 70% of the General Insurance business was driven by various tariffs being prescribed by Tariff Advisory Committee (TAC), which was established under the Insurance Act of 1938, to control and regulate the rates, terms, advantages and conditions in the general insurance business. The major classes of general insurance business under tariff regime were fire, petrochemicals, engineering and motor insurance. The Regulator’s purpose was to ensure that the rates were fixed appropriately and equitably keeping the interests of both the insurer and policy holder in mind through a scientific method of rating. However, a major hurdle came up in the form of lack of updated data and the absence of a system to disseminate the data to the public. Even the PSU insurers were not able to publish consolidated data on each class of insurance. As a result pricing of different classification of risks was done in an ad-hoc manner which resulted in cross subsidisation among different class of risks and also within a class. Apart from this, the insurer in a regulated market did not have flexibility in pricing or innovation of products as they had to adhere to the terms and conditions of the tariff. Added to that, as the PSU insurers were enjoying monopoly status and profitability was not given a priority. Lack of flexibility and increase in level of complacency resulted in erosion of underwriting skills of the insurers and of their income. It was these above reasons that prompted the IRDA to de-tariff the general insurance industry. In order to facilitate filing of products to be used in de-tariffed market, the Authority came up with draft guidelines on File & Use requirements for general insurance products. It stipulated the requirement for obtaining board approval for underwriting policy, the responsibilities of the Compliance Officer, Classification of Products for filing, Data support and Role of Appointed Actuary etc.
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