The insurance industry till the nineties had only two nationalised players: Life Insurance Corporation (LIC) and General Insurance Corporation (GIC) and its four subsidiaries. These two players had a monopolistic control over the market. These nationalised insurance companies did a commendable job in terms of high growth in volume of business and reach. However, they were not consumer oriented, unwilling to adopt modem practices and technology to upgrade technical skills, and inefficient in operations. The growth in volume was mainly driven by income-tax considerations and hence a major portion of the vast rural area was untapped.
Moreover, with a population of more than one billion and savings rate of around 24 per cent, India has a vast market, which is untapped. The foreign insurance companies’ external influence and pressure to open up the Indian insurance sector was high.
In 1993, the committee under the chairmanship of R N Malhotra, set up to evaluate the Indian Insurance industry and recommend its future direction, submitted its report in 1994 and its major recommendations revolved around the structure and regulation of insurance industry. The main recommendations were:
The government should bring down its stake in the insurance companies to 50 per cent.
Private companies with a minimum paid-up capital of Rs 100 crore should be allowed to enter the industry.
No single company should be allowed to transact business both life and general insurance business. The number of entrants should be controlled.
Foreign companies may be allowed to enter the industry in collaboration with the domestic companies. The committee did not favor foreign companies operating in India through branches.
Postal Life Insurance should be allowed to operate in the rural markets.
The mandatory investments of LIC Life Fund in government securities need to be reduced from 75 per cent to 50 per cent.
The GIC and its subsidiaries should not hold more than 5 per cent in any company.
The promoters’ holding in a private insurance company should not exceed 40 per cent of the total. However, if the promoters wish to start with a higher holding, they should be permitted to do so provided their holding is brought down to 40 per cent within a specified period of time through public offering. No person other than the promoters should be allowed to hold more than one per cent of the equity. Promoters should at no time hold less than 26 per cent of the paid-up capital.
Regulatory and prudential norms as well as conditions for ensuring level-playing field among insurers should be finalised early so that intending entrants into the insurance business would be aware of the stipulations they would have to comply with. These conditions should aim to ensure that life insurers do not neglect the small man or the rural business and that the general insurers have balanced portfolios.
Though nationalised insurance companies are in a position to face competition, it is essential that they quickly upgrade their technology, reorganise themselves on more efficient lines, and are enabled to operate as board-run enterprises.
As an interim measure, the office of Controller of Insurance should berestored its full functions under the Insurance Act and it should be set up as a separate office as a matter of high priority.
Legislation and government notifications through which LIC and GIC were exempted from several provisions of the Insurance Act should be withdrawn.
A strong and effective insurance regulatory authority in the form of a statutory autonomous board on the lines of SEBI should be set up.
The state level cooperatives should be allowed to set up cooperative societies for transacting life insurance business in the state. There will not be more than one society for each state which will be subject to the regulations of Insurance Regulatory Authority.
GIC should cease to be the holding company for its subsidiaries and the exclusive function of GIC should remain that of reinsurer.
When GIC ceases to be holding company of the four subsidiary companies, then the government should acquire GIC’s stake, which is Rs 40 crore in every company. This share, then should be raised to Rs 100