INTRODUCTION

Insurance has been used in India from ancient times. Overseas traders used a maritime insurance
scheme. The joint family system, which was unique to India, was a kind of social insurance for
each member of the family on his or her own life. Insurance law has steadily evolved, passing
through numerous stages ranging from nationalisation of the insurance business to current
changes allowing private companies and international participation in the insurance market. The
Indian Constitution is federal in the sense that powers are divided between the Centre and the
States. Insurance is covered on the Union List, which includes matters that are solely under the
Centre's legislative jurisdiction. Because the Central Legislature has the authority to regulate the
insurance business in India, the legislation in this respect is uniform throughout the country.

NATIONALISATION OF INSURANCE

The Central Government took over the operation of the life insurance business of 245 Indian and
international insurers and provident organisations functioning in India on January 19, 1956. The
Life Insurance Corporation ("LIC") was established in September 1956 as a result of the Life
Insurance Corporation Act, 1956 ("LIC Act"), which allowed LIC the exclusive right to
undertake life insurance business in India. An exception was allowed in the event of any
company, firm, or individual seeking to engage on life insurance business in India in respect of
"persons ordinarily residing outside India," provided the Central Government's permission was
obtained.

The general insurance sector was similarly nationalised on January 1, 1973, with the enactment
of the General Insurance Business (Nationalisation) Act, 1972(hereinafter referred to as “Act”).
The shares of existing Indian general insurance companies and undertakings of other existing
insurers were transferred to the General Insurance Corporation ("GIC") under the provisions of
the GIC Act in order to secure the development of the general insurance business in India as well
as the regulation and control of such business. The GIC was founded by the Central Government
in November 1972 in compliance with the terms of the Companies Act, 1956 ("Companies
Act"), and it began operations on January 1, 1973. Prior to 1973, there were 107 businesses
supplying general insurance in India, including foreign companies. These companies were
merged and renamed the National Insurance Company Ltd. ("National Co."), the New India
Assurance Company Ltd. ("New India Co."), the Oriental Insurance Company Ltd. ("Oriental
Co."), and the United India Assurance Company Ltd. ("United Co."). Apart from aviation
insurance, GIC's primary activity is reinsurance. The four subsidiaries handle the majority of the
general insurance business, including fire, marine, motor, and miscellaneous insurance.

Nationalization was supposed to enable standards of conduct and sound procedures in general
insurance, provide efficient customer service, and stimulate fair and healthy competition among
subsidiaries. Nationalisation of general insurance was beneficial for a variety of reasons,
including:

Distribution Pattern:

Nationalised insurers would have a significant reach and presence, which private insurers would
not have. A widespread dispersion of insurance offices was required to effectively serve the
demands of the economy.

Trust and Faith:

One of the reasons for the nationalisation of life insurance was the prevalence of fraud in the
market. At the time of life insurance nationalisation, 25 insurance firms were already bankrupt,
with another 25 on the verge of going bankrupt. People would have faith and trust in
government-run businesses. As a result, nationalisation of the general insurance sector was also
required at the time.

Promotion of Insurance in Rural Areas:

Private businesses would be uninterested with the country's economic progress. As a result, they
would never encourage insurance in rural regions, which was critical to the country's economic
progress. Private insurance businesses do not have such a broad perspective.

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 PROVISIONS OF THE GENERAL INSURANCE BUSINESS (NATIONALISATION)
ACT, 1972

Chapter I

The first chapter of this statute provides for the title, declaration as to the policy of the State and
definitions of terms that are frequently used in throughout this enactment. Sec. 2 declares that
this law gives effect to state policy of securing principles enumerated in Art. 39(c) of the
Constitution of India. Sec. 2 defines the significant and frequent terms appearing throughout this
Act.

Chapter II

Provisions in this Chapter provide for the transfer of shares of general insurance companies to
the Central Government free of all trusts, liabilities, and encumbrances. This Chapter also
provides that the change of ownership of insurance companies from public to private would not
affect the employment of the existing employees. They would continue to work as per the terms
and conditions of their existing employment.

Chapter III

This Chapter deals with the formation of The General Insurance Corporation of India (GIC). Sec.
9(1) directs the Central Government to form a Government Company under the provisions of
The Companies Act, for the purpose of superintending, controlling, and carrying on the business
of general insurance. It also has provisions for transfer of shares from the Central Government to
the GIC and vice versa.

Chapter IV

This part of the statute rules out the means and method of paying the insurance companies which
will be acquired in furtherance to this Act. Under the provisions of this Chapter the Central
Government is to pay the GIC for the acquisition of the general insurance companies. Further,
the mode of payment is also clarified in Sec. 13 of this Act. It states that if the amount is under

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Rs. 25,000 then it shall be paid in full at once. However, if the amount exceeds Rs. 25,000, then
it shall be cleared in three equal instalments.

Chapter V

Chapter V of this Act rules out the scheme for reorganization of general insurance companies.
Sec. 16 gives power to the Central Government to merge or amalgamate two separate general
insurance companies. It further provides for mechanisms to resolve disputes that may arise from
the employees against the amalgamation of such companies. There are provisions to secure
reasonable compensation to such employees. This chapter was put in place to ensure that weaker
companies do not continue to suffer losses. Therefore, securing the interests of the employees
working in such companies.

Chapter VA

This Chapter was included in the statute in 1984. This chapter only one provision which gives
Central Government the power to regulate the terms and conditions of service of employees and
other officers. It is mainly concerned with the regulation of pay scales of the employees of
general insurance companies.

Chapter VI

The function of the General Insurance Corporation and the acquired companies is given under
this Chapter. The provisions regarding the management of these entities can also be found under
this Chapter. The basic functions include carrying out business relating to general insurance. It
also includes assisting, aiding, and advising the acquired companies in relation to setting up
standards of conduct, sound practices, providing quality services. The GIC can also advise on
controlling expenditure and planning investments for the acquiring companies. Whereas the
acquired companies are expected to conduct general insurance business and develop it to the best
advantage of the community. Sec. 20 of this Act directs the companies to distribute their balance
of profit as dividend to the Corporation. Sec. 22 empowers the Central Government to transfer
any officer or employee of the companies to any other company. Also, Government has the
power to issue directions to these companies by virtue of Sec. 23 of this Act.

Chapter VII

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This Chapter of the Act takes care of the miscellaneous matters relating to the general insurance
business. Sec. 24 states and directs the acquired companies to have exclusive privilege of
carrying out business of general insurance in India. However, this exclusive privilege was
revoked by virtue of amendment brought in by the General Insurance Business (Nationalisation)
Act of 2002. After this amendment, all the companies are to conduct business as per the
provisions of Insurance Act, 1938. Sec. 27 also provides for reduction of liabilities that may have
arisen by entering into contract of insurance before the commencement of this Act. Sec. 28 of
this Act provides right to the acquired companies to apply for relief in certain cases. These cases
include instances where the company may have sold their assets more less consideration or
acquired some property for excessive consideration or any other transaction which may have
resulted in loss for the company. The court would then decide the matter and make an
appropriate order. Further provisions of this Act direct the companies to deliver the possession of
their property and documents to the Corporation. A punishment of imprisonment of one year or a
fine of one thousand rupees is also prescribed for anyone who withholds delivery of property as
per Sec. 30 of this Act. Also, the officers and employees of the companies will get the status of
public servants post commencement of this Act as per Sec. 31. There are certain exemptions
which are given under Sec. 36 of this Act. Firstly, this Act is not applicable to the general
insurance companies wholly owned by any of the State Governments. Also, this Act is not
applicable on companies whose business is being wound up voluntarily or by order of any court.
Finally, Sec. 39 of this Act empowers the Central Government to make rules to carry out the
provisions of this Act. These rules could cover matters such as manner of dealing with profit,
conditions to be imposed on business, calling in reports from the Corporation or any other
company or any other matter which the government deems fit.

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THE GENERAL INSURANCE BUSINESS (NATIONALISATION) AMENDMENT ACT,
2021

There is bill introduced in the Parliament for the amendment of this Act. The Act was enacted to
nationalise all private companies undertaking general insurance business in India.  The Bill seeks
to provide for a greater private sector participation in the public sector insurance companies
regulated under the Act. This Bill was passed in both the houses of the Parliament and received
the assent of the President on 18 th August 2021. The Act was subsequently amended in 2002 to
transfer the control of these four subsidiary companies from GIC to the central government,
thereby making them independent companies.  Since 2000, GIC exclusively undertakes
reinsurance business.

The amendment removes the proviso of Sec. 10B which required the Central Government to
maintain fifty one percent shares of all the acquired companies. The Bill removes this provision
which enables the entry of private players in this market by investing in the companies
establishes via this Act such United Co, New India Co. and so on.

The Act defines general insurance business as fire, marine or miscellaneous insurance business. 
It excludes capital redemption and annuity certain business from the definition.  Capital
redemption insurance involves payment of a sum of money on a specific date by the insurer after
the beneficiary pays premiums periodically.  Under annuity certain insurance, the insurer pays
the beneficiary over a period of time.  The Bill removes this definition and instead, refers to the
definition provided by the Insurance Act, 1938.  Under the Insurance Act capital redemption and
annuity certain are included within general insurance business.

The Bill provides by adding Sec. 24B that the Act will not apply to the specified insurers from
the date on which the central government relinquishes control of the insurer. Control means: (i)
the power to appoint most directors of a specified insurer, or (ii) to have power over its
management or policy decisions. The Act empowers the central government to notify the terms
and conditions of service of employees of the specified insurers. The Bill provides that schemes
formulated by the central government in this regard will be deemed to have been adopted by the

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insurer. The board of directors of the insurer may change these schemes or frame new
policies. Further, powers of the central government under such schemes (framed under the Act)
will be transferred to the board of directors of the insurer.

The Bill specifies that a director of a specified insurer, who is not a whole-time director, will be
held liable only for certain acts by addition of Sec. 31A.  These include acts which have been
committed: (i) with his knowledge, attributable through board processes, and (ii) with his
consent or connivance or where he had not acted diligently.

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 CONCLUSION

This Act basically aimed in giving control of the insurance sector in the hands of the
government. The rationale behind this was to secure the interests of the general public. To ensure
that the majority of the population was insured. Therefore, the insurance business was taken
away from the private players and handed over to the safe hands of the government. However,
the recent amendment has moved away from this rationale. This move can be attributed to the
change in government ideology. The precious UPA government was a bit aggressive on
government control over key economic sectors. However, the present NDA government is seen
to implement policy to hand over the acquired business sectors back to the private sector. This is
done to ensure rapid economic growth as put forward by the recent policy changes of this
government.

This amendment will bring in more private capital in the general insurance business and improve
its reach to make more products available to customers. Also, the move is part of
the government’s strategy to open up more sectors to private participation and improve
efficiency. Further, it will enhance insurance penetration and social protection to better secure
the interests of policyholders and contribute to faster growth of the economy.

However, there are a few concerns with respect to this amendment. There is a possibility that this
move will affect the insurance sector in the country and the workers engaged with the General
Insurance Corporation. Moreover, it may lead to total privatisation of general insurance
companies. Privatising would lead to opening a Pandora’s Box, throwing into insecurity 30 crore
policyholders. Another major concern is that the government will also lose money by way of
dividend in the proportion of shares being offered.

The effect of the recent amendment will start showing in some time. Therefore, it is too early to
comment on the effects brought in by the amendment, more data will be required to analyse if
the privatisation is indeed beneficial for the economy and the general population.