NEW GOVERNMENT
COMMENTARY
INTERVIEWS
SPECIALS
CHAT
ARCHIVES
SEARCH REDIFF

Why the insurance bill is controversial

The so-called insurance bill is actually termed the Insurance Regulatory and Development Authority Bill or IRDA 1999.

The IRDA seeks to allow 26 per cent foreign equity in life, general and reinsurance businesses. Foreign insurance companies will be allowed to hold up to 26 per cent in joint ventures with Indian firms.

The bill stipulates the minimum capital requirement for life and general insurance at Rs 1 billion and for reinsurance firms at Rs 2 billion, but proposes touch solvency margins for private insurers.

The bill incorporates the provisions of the earlier Insurance Regulatory Authority bill 1998. The IRA bill was introduced in Parliament by the previous government but could not be passed because the Lok Sabha was dissolved even as the bill was scheduled for a debate.

The parliamentary standing committe on finance, then headed by Murli Deora of the Congress, recommeded certain amendments to the IRA bill.

The bill seeks to grant statutory status to the interim Insurance Regulatory Authority and amend the Insurance Act 1938, the Life Insurance Corporation Act 1956 and the General Insurance Business (Nationalisation) Act 1972 to end the monopoly of the LIC and GIC over the insurance business.

The bill lays down that the Indian promoter to dilute the stake in the private insurance firms from 74 per cent to 26 per cent in ten years.

The bill stipulates tough solvency margins -- Rs 500 million for life insurance firms, Rs 500 million or a sum equivalent to 20 per cent of net premium income for general insurance and Rs 1 billion for reinsurance business.

The insurer has to maintain separate acounts relating to fund of shareholders and policy-holders. The funds of policy-holders should be retained within the country but does not cover repatriation of profits and dividends.

Insurance companies under the new regime will have to have exposure to rural and social sectors. Foreign investment in insurance, the bill states, is crucial to financing infrastructure and better insurance cover.

The interim IRA, as it stands today, is a multi-member board constituted in 1995 following the recommendations of the Malhotra Committee on insurance reforms.

Passage of the bill will give the IRDA powers to regulate the insurance industry on the lines of the Securities and Exchange Board of India for the capital markets and to a certain extent the Reserve Bank of India for the banking sector.

The IRA has already been vested with the powers of the Controller of Insurance -- the erstwhile regulatory authority for the insurance sector.

However, the interim IRA enjoys very limited powers. For the Controller of Insurance had been rendered largely redundant following nationalisation of the insurance industry in 1956 (LIC) and 1973 (GIC). Most of the powers of the regulators were transferred to the government.

Once the legislation is passed, the IRDA can prescribe prudential norms such as solvency margins (minimum net worth requirements for issuing insurance cover) and investment guidelines for insurance companies.

It will also clear appointments to top posts and issue guidelines for insurance intermediaries such as surveyors (those who assess loss) and insurance agents.

Most important, the IRDA will also have the power to grant licences to new companies to operate in the insurance sector.

Along with the IRA Bill, the government proposes to amend the LIC and GIC Nationalisation Acts, a move that will permit private companies to apply for a licence to do business in India.

So what the bill and its accompaniments seek to do is reverse, at least partly, the government's takeover of the life insurance business in 1956 (the LIC Nationalisation Act) and the non-life business in 1973 (GIC Nationalisation).

The opposition to the opening up of the insurance sector is varied.

One group says it was mismanagement and corruption that forced the government to nationalise the insurance business in the first place, and going back to the old days will mean a return to those evil ways.

There is an apprehension that new private players will ignore the social sector, which will place them at an unfair advantage over the LIC and GIC.

Another group is part of the swadeshi brigade (who believe in nationalistic self-reliance), which fears the return of the East India Company in an insuring avatar.

Proponents of the IRDA Bill say it will improve service standards by opening the industry to competition. It is also expected to expand the market. They cite instances of other countries where the insurance sector has bloomed after it was opening up to foreign investment.

They say the bill will pave the way for generation of funds for long-term investments. This will go a long way in financing the infrastructure sector.

The Indian foray of foreign companies is expected to boost debt markets in India.

The bill, if passed, will bring an end to the monopoly of LIC and GIC. The new entrants will be private corporates or banks/financial institutions with a foreign partner. Nearly all the parties that have announced plans for entry into the insurance sector have tied up with a foreign insurance player.

Once the draft guidelines are notified and in-principal approvals granted, it will take at least one year for a company to commence operations. This means the private companies will be in a position to start doing business only in the year 2000/2001 or thereafter, if the bill gets cleared during the Budget session of 2000, as Power Minister P R Kumaramangalam has been saying.

Monoliths that they are, the GIC and LIC are, however, expected to withstand the private sector onslaught.

The total premium collections in the country are not likely to see an immediate jump. Experts say if insurance companies are given flexibility in pricing policies, insurance premia might actually go down from the present Rs 250 billion in the initial period.

ALSO SEE

Interview: SJM convenor S Gurumurthy on the IRDA bill
Columnist Jay Dubashi on insurance reforms
Columnist Dilip Thakore on the insurance imbroglio
Columnist Dilip Thakore on moves for insurance deregulation
December 1998: Opposition to insurance reform mounts
BJP ideologue sees foreign pressure on govt in insurance issue
The Great Insurance Debate
December 1998: Protests break out across India against insurance bill
Interview with insurance workers' representative N M Sundaram
Parties in power run for 'cover'
Insurance employees to protest
Business