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Indian Insurance Industry History

The insurance industry has existed for thousands of years, originating from ancient practices like burial clubs in Rome and risk-sharing guilds in Babylonia and medieval Europe. Modern insurance began taking shape in 17th century England with the establishment of Lloyd's Coffee House. The first life insurance policies and mortality tables were developed in the late 17th/early 18th centuries. Major milestones in India included the nationalization of the life insurance industry in 1956 and general insurance industry in 1972, with the formation of LIC and four public insurance companies. Reforms since 1999 have opened the industry to private companies and competition under IRDA regulation. Today LIC remains the dominant player but is losing market share to growing private insurers.

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Rahul Jain
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Topics covered

  • mortality tables,
  • foreign investment,
  • insurance agents,
  • insurance services,
  • industrialization impact,
  • insurance training,
  • insurance sector analysis,
  • insurance premiums,
  • private insurers,
  • public liability insurance
128 views7 pages

Indian Insurance Industry History

The insurance industry has existed for thousands of years, originating from ancient practices like burial clubs in Rome and risk-sharing guilds in Babylonia and medieval Europe. Modern insurance began taking shape in 17th century England with the establishment of Lloyd's Coffee House. The first life insurance policies and mortality tables were developed in the late 17th/early 18th centuries. Major milestones in India included the nationalization of the life insurance industry in 1956 and general insurance industry in 1972, with the formation of LIC and four public insurance companies. Reforms since 1999 have opened the industry to private companies and competition under IRDA regulation. Today LIC remains the dominant player but is losing market share to growing private insurers.

Uploaded by

Rahul Jain
Copyright
© Attribution Non-Commercial (BY-NC)
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOCX, PDF, TXT or read online on Scribd

Topics covered

  • mortality tables,
  • foreign investment,
  • insurance agents,
  • insurance services,
  • industrialization impact,
  • insurance training,
  • insurance sector analysis,
  • insurance premiums,
  • private insurers,
  • public liability insurance

Introduction to the Industry

THE HISTORY OF INDIAN INSURANCE INDUSTRY

-: ORIGIN OF LIFE INSURANCE :Almost 4,500 years ago, in the ancient land of Babylonia, traders used to bear risk of the caravan trade by giving loans that had to be later repaid with interest when the goods arrived safely. In 2100 BC, the Code of Hammurabi granted legal status to the practice. That, perhaps, was how insurance made its beginning. Life insurance had its origins in ancient Rome, where citizens formed burial clubs that would meet the funeral expenses of its members as well as help survivors by making some payments. As European civilization progressed, its social institutions and welfare practices also got more and more refined. With the discovery of new lands, sea routes and the consequent growth in trade, medieval guilds took it upon themselves to protect their member traders from loss on account of fire, shipwrecks and the like. Since most of the trade took place by sea, there was also the fear of pirates. So these guilds even offered ransom for members held captive by pirates. Burial expenses and support in times of sickness and poverty were other services offered. Essentially, all these revolved around the concept of insurance or risk coverage. That's how old these concepts are, really. In 1347, in Genoa, European maritime nations entered into the earliest known insurance contract and decided to accept marine insurance as a practice.

The First Step


Insurance as we know it today owes its existence to 17th century England. In fact, it began taking shape in 1688 at a rather interesting place called Lloyd's Coffee House in London, where merchants, ship-owners and underwriters met to discuss and transact business. By the end of the 18th century, Lloyd's had brewed enough business to become one of the first modern insurance companies.

Insurance and Myth...


Back to the 17th century. In 1693, astronomer Edmond Halley constructed the first mortality table to provide a link between the life insurance premium and the average life spans based on statistical laws of mortality and compound interest. In 1756, Joseph Dodson reworked the table, linking premium rate to age.

Enter companies...
The first stock companies to get into the business of insurance were chartered in England in 1720. The year 1735 saw the birth of the first insurance company in the American colonies in Charleston, SC. In 1759, the Presbyterian Synod of Philadelphia sponsored the first life insurance corporation in America for the benefit of ministers and their dependents. However, it was after 1840 that life insurance really took off in a big way. The trigger: reducing opposition from religious groups.

The growing years...


The 19th century saw huge developments in the field of insurance, with newer products being devised to meet the growing needs of urbanization and industrialization. In 1835, the infamous New York fire drew people's attention to

the need to provide for sudden and large losses. Two years later, Massachusetts became the first state to require companies by law to maintain such reserves. The great Chicago fire of 1871 further emphasized how fires can cause huge losses in densely populated modern cities. The practice of reinsurance, wherein the risks are spread among several companies, was devised specifically for such situations. There were more offshoots of the process of industrialization. In 1897, the British government passed the Workmen's Compensation Act, which made it mandatory for a company to insure its employees against industrial accidents. With the advent of the automobile, public liability insurance, which first made its appearance in the 1880s, gained importance and acceptance? In the 19th century, many societies were founded to insure the life and health of their members, while fraternal orders provided low-cost, members-only insurance. Even today, such fraternal orders continue to provide insurance coverage to members as do most labor organizations. Many employers sponsor group insurance policies for their employees, providing not just life insurance, but sickness and accident benefits and old-age pensions. Employees contribute a certain percentage of the premium for these policies.

THE INSURANCE INDUSTRY IN INDIAAN OVERVIEW


With the largest number of life insurance policies in force in the world, Insurance happens to be a mega opportunity in India. Its a business growing at the rate of 15-20 per cent annually and presently is of the order of Rs 1560.41 billion (for the financial year 2006 2007). Together with banking services, it adds about 7% to the countrys Gross Domestic Product (GDP). The gross premium collection is nearly 2% of GDP and funds available with LIC for investments are 8% of the GDP. Even so nearly 65% of the Indian population is without life insurance cover while health insurance and non-life insurance continues to be below international standards. A large part of our population is also subject to weak social security and pension systems with hardly any old age income security A well-developed and evolved insurance sector is needed for economic development as it provides long term funds for infrastructure development and strengthens the risk taking ability of individuals. It is estimated that over the next ten years India would require investments of the order of one trillion US dollars.

HISTORICAL PERSPECTIVE
The history of life insurance in India dates back to 1818 when it was conceived as a means to provide for English Widows. Interestingly in those days a higher premium was charged for Indian lives than the non - Indian lives, as Indian lives were considered more risky to cover. The Bombay Mutual Life Insurance Society started its business in 1870. It was the first company to charge the same premium for both Indian and non-Indian lives. The Oriental Assurance Company was established in 1880. The General insurance business in India, on the other hand,

can trace its roots to Triton Insurance Company Limited, the first general insurance company established in the year 1850 in Calcutta by the British. Till the end of the nineteenth century insurance business was almost entirely in the hands of overseas companies. Insurance regulation formally began in India with the passing of the Life Insurance Companies Act of 1912 and the Provident Fund Act of 1912. Several frauds during the 1920's and 1930's sullied insurance business in India. By 1938 there were 176 insurance companies. The first comprehensive legislation was introduced with the Insurance Act of 1938 that provided strict State Control over the insurance business. The insurance business grew at a faster pace after independence. Indian companies strengthened their hold on this business but despite the growth that was witnessed, insurance remained an urban phenomenon. The Government of India in 1956, brought together over 240 private life insurers and provident societies under one nationalized monopoly corporation and Life Insurance Corporation (LIC) was born. Nationalization was justified on the grounds that it would create the much needed funds for rapid industrialization. This was in conformity with the Government's chosen path of State led planning and development. 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).

KEY MILESTONES
1912: The Indian Life Assurance 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 along with provident societies were taken over by the central government and nationalized. LIC was formed by an Act of Parliament- LIC Act 1956- with a capital contribution of Rs. 5 crore from the Government of India.

INDUSTRY REFORMS
Reforms in the Insurance sector were initiated with the passage of the IRDA Bill in Parliament in December 1999. The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck to its schedule of framing regulations and registering the private sector insurance companies. Since being set up as an independent statutory body the IRDA has put in a framework of globally compatible regulations. The other decision taken simultaneously to provide the supporting systems to the insurance sector and in particular the life insurance companies was the launch of the IRDA online service for issue and renewal of licenses to agents. The approval of institutions for imparting training to agents has also ensured that the insurance companies would have a trained workforce of insurance agents in place to sell their products.

PRESENT SCENARIO - LIFE INSURANCE INDUSTRY IN INDIA

The life insurance industry in India grew by an impressive 47.38%, with premium income at Rs. 1560.41 billion during the fiscal year 2006-2007. Though the total volume of LIC's business increased in the last fiscal year (2006-2007) compared to the previous one, its market share came down from 85.75% to 81.91%. The 17 private insurers increased their market share from about 15% to about 19% in a year's time. The figures for the first two months of the fiscal year 2007-08 also speak of the growing share of the private insurers. The share of LIC for this period has further come down to 75 percent, while the private players have grabbed over 24 percent. With the opening up of the insurance industry in India many foreign players have entered the market. The restriction on these companies is that they are not allowed to have more than a 26% stake in a companys ownership. Since the opening up of the insurance sector in 1999, foreign investments of Rs. 8.7 billion have poured into the Indian market and 19 private life insurance companies have been granted licenses. Innovative products, smart marketing, and aggressive distribution have enabled fledgling private insurance companies to sign up Indian customers faster than anyone expected. Indians, who had always seen life insurance as a tax saving device, are now suddenly turning to the private sector and snapping up the new innovative products on offer. Some of these products include investment plans with insurance and good returns (unit linked plans), multi purpose insurance plans, pension plans, child plans and money back plans. (www.wikipedia.com)

Common questions

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Significant milestones in Indian insurance include the 1818 introduction of life insurance for English widows, the first equality in premiums by Bombay Mutual Life Assurance Society in 1870, and the formal regulation through the Life Insurance Companies and Provident Fund Acts of 1912 . The consolidation under the government via nationalization in 1956 and reforms initiated by the IRDA in 1999 drastically altered its trajectory . Each stage—from colonial inequality to nationalization and eventual liberalization—has shaped the current structure of increased regulation, competitive markets, and a mixed public-private model, contributing to a diversified and robust insurance sector catering to the vast Indian populace .

The differential premium rates for Indian versus non-Indian lives in early Indian insurance reflected a perception of higher risk associated with Indian policyholders, likely due to colonial views on local mortality and life expectancy . This practice was eventually addressed by the Bombay Mutual Life Assurance Society in 1870, which began treating Indian and non-Indian lives equally in terms of premiums . This change marked a significant shift towards reducing racial disparities in insurance practices, aligning with broader movements toward equality and modernizing the perception of risk management in colonial markets .

The modern insurance industry traces its origins to ancient practices of risk management, such as the Babylonians' use of loans to cover caravan trade risks, and burial clubs in Rome that provided funeral expenses . The formalization of insurance began with marine insurance contracts in Genoa in 1347 and expanded in 17th century England with Lloyd's Coffee House becoming a hub for marine insurance . The first insurance company in the American colonies appeared in 1735, and life insurance gained traction post-1840 due to reduced resistance from religious groups . In India, the insurance industry began with the establishment of the Bombay Mutual Life Assurance Society in 1870, which treated Indian and non-Indian lives equally regarding premiums. Insurance regulation started with the Life Insurance Companies Act of 1912 and the Provident Fund Act of 1912, leading to further consolidation and state control through the 1938 Insurance Act . Nationalization efforts in 1956 and the creation of LIC marked a significant state intervention modeled on industrialization needs, solidifying the foundation for India's insurance industry .

The introduction of fraternal insurance societies in the 19th century significantly expanded access to insurance by providing affordable coverage to their members, often on a mutual basis without the need for profit . These societies and fraternal organizations catered to specific communities, offering life and health insurance coupled with additional benefits like sickness and accident coverage . This model democratized insurance access, particularly among working-class individuals who might not have otherwise been able to afford traditional insurance policies, thereby promoting broader financial security and social welfare .

The 1999 insurance sector reforms transformed India's industry by establishing the Insurance Regulatory and Development Authority (IRDA), which implemented globally compatible regulations and opened the market to private and foreign players. As a statutory body, IRDA promoted competition by licensing private insurers, leading to significant growth in market share for private firms—from 15% to about 24% within a few years . These reforms introduced innovation in products and aggressive marketing, shifting consumer perception from using insurance as mere tax saving to exploring multifaceted financial tools such as unit linked plans and pension plans .

Industrialization in the 19th century introduced complexities such as urban overcrowding and industrial accidents, prompting innovations in insurance to mitigate these risks. The introduction of public liability insurance in the 1880s responded to increasing liabilities from new industry, while the British Workmen's Compensation Act of 1897 mandated employee insurance against industrial accidents . Additionally, the need to cover massive fire losses, highlighted by events like the Great Chicago Fire of 1871, led to the practice of reinsurance to distribute risk across multiple firms . These developments reflect a shift towards addressing the hazards of industrial life and securing workers' rights, setting precedents for modern insurance solutions .

Reinsurance practices emerged as a crucial strategy to mitigate the financial impact of large-scale urban fires, such as the Great Chicago Fire of 1871, by distributing the risk of enormous losses across multiple insurance companies . This approach prevented any single entity from bearing unsustainable claims, ensuring greater stability and resilience in the insurance market. By involving multiple insurers, reinsurance reduced the burden on primary insurers, thus maintaining their solvency and capacity to underwrite new policies, effectively supporting urban resilience against catastrophic fire hazards .

Key legislative changes in the early 20th century, such as the Life Insurance Companies Act of 1912 and the Insurance Act of 1938, were pivotal in regulating the Indian insurance market . These laws established standards for operations, severity in combating fraud, and ensured greater state oversight, significantly enhancing public trust and market integrity . The 1938 legislation particularly laid down comprehensive guidelines securing consumer interests, consolidating earlier fragmented practices, and providing a framework for structured growth, which was crucial for addressing earlier abuses and ensuring sustainable market development .

Nationalization in 1956 substantially shaped the Indian insurance industry by consolidating over 240 private insurers into the state-controlled Life Insurance Corporation (LIC). This move aimed to channel insurance funds toward national development projects, aligning with the government's state-led economic policies. Nationalization provided LIC with near-monopoly power, facilitating the pooling of capital for infrastructure investments and driving urban-centric growth . While creating a robust public sector entity, the reform limited competition until sector liberalization began in 1999, setting the stage for the later introduction of private players and resulting in a diversified and more competitive market .

The post-2000 growth of private insurance companies in India dramatically reshaped market dynamics by introducing competition, diversity, and innovation in products . The entry of foreign-backed private insurers brought technical expertise, competitive pricing, and diverse offerings like unit linked insurance plans which appealed to consumers seeking investment benefits alongside coverage . This intensified competition reduced LIC's market share from 85.75% to 75% over a few years, compelling it to innovate and improve service quality . As a result, consumers benefited from a wider range of tailored products, improved customer service, and more competitive premium rates .

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