1.

1 Introduction

Insurance industry is an important and integral component of the macro economy.

It has emerged as a dominant institutional player in the financial market impacting the
health of economy. It has multi-dimensional role in savings and capital market, while the
primary role of an insurance company is to provide insurance coverage for managing
financial risks, it plays a very crucial role in promoting savings by selling a wide range of
products and also actively contributes in promoting and sustaining the capital market of a
country. Insurance sector has micro and macro effects on the economy. The micro effects
are on individual safety, investments, savings perspective, and contribution to growth of
economy. The macro effects are financing infrastructure, promoting investments,
contribution to capital formation, financial leveraging and accessing resources.
In the emerging economy, characterized by the reduced role of state and declining
state supported social security, the importance and the role of the insurance industry has
increased significantly not only as a risk manager but also as retirement security and
annuity provider. Moreover, growing institutionalization of the financial market has also
provided a momentum to boost the insurance companies. There is phenomenal growth
resulting from both micro and macro effects of insurance. If the insurance sector is not
regulated, then it will go to affect adversely the insurance growth, like in the micro sense
people will lose their savings and in the macro sense the financial market will destabilize
and collapses. Therefore, there is a need to regulate insurance in the context of the
changing market and economic environment is required for managing insurance
companies effectively.
This study is an attempt to work in this direction. Most of the research available
on insurance in India is basically a kind of historical account which focus on life
insurance as an insurance entity rather than an important component of financial services
industry. Therefore, a need was felt to study insurance industry as well as the regulation
of insurance in India in the context of changing dynamics of macro economy and
financial markets in the backdrop of ongoing globalization and economic reforms.
Moreover, several emerging and crucial issues which are critical to growth such as risk

management, regulation, business ethics, corporate governance, etc., have not been given
the required attention by industry managers. These are not merely the required conditions
to enhance customer value but are necessary for strategic market expansion.
The insurance business has become highly important to society's prosperity, for
people and for economic development. Its solidity, as a financial market, is vital for the
economy. Some say that the macro-economic effect of Insurance Business/Firms collapse
would be tremendous and that insurers are just "too big" to be allowed to fail. However,
due to certain characteristics, insurance markets' soundness is fragile, especially when
judged by the general concept of assuring competition in the market. The importance of
the insurers' solvency to the economy and the un-balanced relationship between the
insurers and the insured population, led legislators to heavily regulate this sector. This
regulation includes licensing rules, ongoing supervision and intervention in the
insurersinsured
relations. Among other measures, the regulatory efforts rely upon the restriction
of intra-industry competition. Regulating the industry with prudential principles will help
the growth of the industry.
Any sector, which touches the life of the common man needs regulation,
particularly so when inequalities and disparities of different types obtain or are likely to
occur on account of the action or inaction on the part of the economic agents involved.
For example, there can arise inequalities of opportunity; inequalities of income; wealth;
regional imbalances; inter-sectoral imbalances; inequalities in social infrastructure, etc.
This becomes particularly relevant in developing countries when they launch on a
liberalization programme. As the markets in such countries are not well- developed, they
cannot be relied upon for ensuring that in the process of deregulation, public monopolies
are not replaced by private monopolies.
Economists in the developed world would like the correction of imbalances to be
left to the market forces and would not like the government to intervene. The assumption
of the trickledown effect implicit in this arrangement may have been viable in those
countries at a point of time in history. Later, the experience in developing countries was

different in that the vested interests blocked any efforts at distribution of social benefits.
For preventing such a phenomenon from occurring, and for ensuring social justice, an
element of compulsion and regulation becomes necessary.
Regulation is the result of pressures from business, consumers, and environmental
groups and results in regulation, which supports business and protects consumers, works,
and the environment. Regulation is undertaken to ensure that the economic system
operates in a manner consistent with the public interest and to overcome market failures.
Regulation is an activity carried out on regular basis by the government by which
it tries to direct, control and modify the behavior of its citizens, organization and business
entities operating within its boundaries in a desired way so as to achieve an equalitarian
growth and development of the country. It is a process enacted by the law that supervises
or controls some specific activities made by the affected firms and it is planned in such a
way that it protects the public from exploitation by industries with monopoly power. So
government agencies will regulate the specified task of administering and enforcing the law.
While enforcing the regulatory law, these agencies are actively supported by the courts.
Regulation: Definitions
According to Philip Selznick (1985), Regulation is sustained and focused control
exercised by a public agency over activities which are valued by a community. This
definition very much states centered view of regulation with total emphasis being given
to intervention of public agencies. In the view of Posner (1971) Regulation is supplied
in response to the demand of public for the Correction of inefficient or inequitable market
practices. Stigler (1971) states that Regulation instituted primarily for the protection
and benefit of the Public at large or some large subclass of the public.
Robert Baldwin (1999) has defined regulation in three different senses,
As a specific set of commands
As a deliberate state influence
As all forms of social control or influence

Julia Black (2002) states that (i) Regulation is the promulgation of rules by
government accompanied by the mechanisms for monitoring and enforcement, usually
assumed to be performed through a specialist public agency. (ii) It is any form of direct
state intervention in the economy, whatever form that intervention might take. (iii)
Regulation is all mechanisms of social control or influence affecting all aspects of
behavior from whatever source, whether they are international or not.
Regulation is the sustained and focused attempt to alter the behavior of others
according to defined standards or purposes with the intention of producing a broadly
identified outcome or outcomes, which may involve mechanisms of standard-setting,
information-gathering and behavior-modification.
However, as the definition suggests, regulation is also often used to achieve wider
social goals like equity, diversity, or social solidarity and to hold powerful corporate,
professional, or social interests to account.
1.2 Evolution of Regulation
The evolution and rationale behind regulation can be traced back to 1676 in the
works of Lord Matthew Hale. He has justified the governmental intervention in specific
areas of public interest. Hale considered the law of business to be affected with a public
interest in cases where facilities and business derive some common public interest and
thus cannot be treated as private. The court of Illinois gave a verdict based on Hales
work to justify governments regulatory intervention in the case of Munn v/s. Illinois.
This principle later known as Public Utility Principle is applicable greatly in the areas
of finance, education, telecommunication, insurance etc., which serves larger public
interest.

Baldwin and Cave (1999) has compounded many reasons:

Checking abuse of market power by monopolies and natural monopolies
eg. utilities
Distribution of benefits arising from windfall profits.
To protect consumers from information asymmetry/inadequacies and promote
healthy competitive market
Continuity and availability of services in public interest, where the supplier may
find continuance of services uneconomical. Regulation can ensure continuity of
services in social interest; by finding alternative means say cross subsidization.
eg. Telephone in rural areas.
Check anti-competitive behavior and predatory pricing by market participants.
To protect interest of weaker groups in case of unequal bargaining powers.
Regulation may be needed to co-ordinate altruistic intension for benefit of future
generations or society at large.

1.2.1 Rationale for Regulation

(i) Economies of scale
In some industries and activities due to technical and natural advantages, one firm
may find it cheaper to expand production and the relatively large firm will take advantage
and may gain market power. One cause is economies of large scale production.
In insurance, as in banking, there are significant economies of scale. The financial
economies of scale in property liability insurance and reinsurance derive mainly form
the pooling of risks the larger and the better diversified a pool, the better it works. In
terms of diversification, the more extensive the markets from which risks are drawn the
better, since property risks are often correlated geographically.
For life insurance, the financial economies come on the asset side rather than on
the liability side as in property liability. The larger the portfolio of assets, the better
diversified a life can be and the larger the individual investments.
6

Because of these financial economies of scale, a large insurance company doing

business over a wide geographic area will be inherently safer than a small, local
company. That means that the larger firm will require a lower equity ratio and therefore,
that its return on equity will be higher.
In insurance, as in banking, many of the fixed costs are indivisible. This is true
both of the specialized personal, such as actuaries, underwriters and investment managers
and information technology. A large insurance company will need to spend
proportionally less on these budget items than a small company, giving the larger
company a competitive advantage.
Reputational economies of the scale are particularly important in insurance. An
insurance policy represents a promise. The value of the policy to the insured, therefore
depends on his or her confidence that the promise will be kept. A large, long-established,
and well known insurer is more likely to inspire such confidence than a new, small
company that no one has ever heard of.
(ii) Economies of Scope
A single, large firm may also have a cost advantage over a group of small firms
when it is cheaper to produce a number of different commodities together rather than
making each separately in a different firm. Savings made possible by simultaneous
production of many different products by one firm are called economies of scope.
Economies of scope draw insurance companies into related activities and draw
other financial institutions into insurance.
Life insurance and property liability: one obvious advantage of scope is
between the two types of insurance life and property liability. Although the
two businesses are different in important respects, there are similarities.

Insurance and other financial services as we have seen, life insurance

companies are already deeply involved in financial intermediation and in the
financial markets.

Insurance and banking the economies of scope between banking and insurance
seem to lie principally in marketing. As we have seen, marketing costs are a

significant part of the cost of insurance.

7

(iii) Theory of Limit Pricing

Even if society reconciles itself to monopoly in such cases, it generally does not
want to let the monopoly firm wield its market power without limits. Therefore it will
consider regulating the companys decisions on matters such as pricing. The first and
most universal problem facing the regulator is how to prevent and regulate the firm
from
pricing and taking other actions that exploit the public and undermine the efficiency of
the market, but to do so in ways that do not destroy the regulated firm or prevent it from
serving the public effectively.
(iv) Barriers to Entry
Lack of Information is one the barriers for a new company entering into the
market of insurance. As we have seen the key to making a profit is pricing premiums
correctly. The lack of actuarial information and also setting up of marketing network to
sell the insurance products easily will act as a barrier to entry for a new firm.

1.2.2 Aims of Regulations

Generally regulations has the following goals
To enforce applicable laws
To prosecute cases of market misconduct, such as insider trading.
To license the providers of financial services.
To protect clients and investigate complaints.
To maintain confidence in the financial system.
To face the challenges of market imperfections such as
(i) Information asymmetry
(ii) Market power
(iii) Negative externalities.

1.2.3 Objectives of Regulation:

To enhance the confidence of economic agents in the financial system.
To foster the development of competitive and efficient financial markets.
To promote public understanding of the financial system.
To improve the framework for regulatory performance and accountability.
To contribute to enhancement of financial stability.
To strengthen the protection of financial service consumers.
To promote financial inclusion and universal access to financial services
1.2.4 Methods of Regulation:
Maintains of Capital Adequacy
Maintains of Liquidity
Exposure to Risk
Maintains of Solvency Ratio
1.2.5 Classification of Regulation:
Regulation can be broadly classified in to three categories (Skipper, D. Harold
and Know, J. 2007).
Economic regulations- the analysis of government intervention relating to risk
management by emphasizing the financing and legal dimension of societal risk
management, by intervention directly in market decisions such as pricing and
competition.
Social regulation-protect public interest, for example, the environment, health and
safety.
Administrative regulations-red tape or administrative mechanisms through
which government collect information and monitor industries.

1.3 Financial Regulation

Financial regulations are a form regulation or supervision which subjects financial

institution to certain requirements, restrictions and guidelines aiming to maintain the
integrity of the financial system. This may be handled by either a government or NGO.
Since the three powerful forces viz globalization, information technology and
convergence will pose significant challenges to financial stability, the market requires
regulation in order to protect the investors all stack holders and to protect financial
stability in the economy.

1.3.1 Financial Regulations versus Liberalization

Substantial empirical evidence on the working of financial regulation vs.
liberalization for more than 30 years in a large number of countries across five continents
is now available to enable us to form a more informed and balanced judgment regarding
the choice of regulated vs. liberalized financial system. Much of this evidence suggests
that over-enthusiasm and over-optimism need to be avoided in respect of both regulation
and deregulation. The IMF-WB guided/imposed liberalization, deregulation policies have
significantly increased volatility, instability, contagion and vulnerability in the financial
system. They have in many cases been accompanied by the collapse of banks, other
financial institutions, national currencies, etc. As a result, the approach of economists,
financial experts, authorities, IMF, WB has now become far more cautious. It is now
widely admitted that while private ownership results into financial crises, and public
ownership and policy often helps to rescue the financial markets out of crises. and
collapses. The massive misallocation of capital by the Savings and Loan Associations,
and by banks in the aftermath of partial deregulation of the early 1980s in USA suggest
that free or competitive markets do not necessarily allocate resources more
efficiently.
The lessons from the liberalization in Eastern Europe, Central Asia, Soviet Union,
and South East Asia have not been encouraging. As per one assessment, the liberalization

10

experiment has not proceeded the way many economists had predicted. The post
liberalization period has been a difficult period for most of the countries. There have been
many bitter and disappointing deregulation failures.
It has been observed that the liberalization globalization process has exposed
nations to enormous shocks. Growth requires financial institutions that lend to domestic
firms. The policy of selling banks to foreign owners has impeded growth and stability.
The contractionary policies under liberalization have forced man countries into deep
recession. Faced with substantial adverse evidence, the partisans of financial
liberalization have argued that it has failed because of
(a) The existence of implicit or explicit deposit insurance.
(b) Inadequate banking supervision.
(c) Macroeconomic instability.
(d) Excessive risk-taking by banks.
They have suggested the following prerequisites or preconditions for the success
of liberalization:
(i) Adequate banking supervision and prudential regulation should be introduced so that
banks have a well-diversified loan portfolio, and which provide at least minimum
accounting and legal infrastructure.
(ii) Macro-economic and price stability should be achieved.
(iii) Fiscal discipline and restraint should become a reality.
(iv) The government should not impose discriminatory taxes on financial intermediation.
(v) The banks should pursue competitive and profit-maximizing policy. The newly
emerging cautious approach to liberalization is well-reflected in the following
viewpoint of the World Bank.
Good regulation of financial firms is essential. The policy makers should align
private incentives with public interest in such a way that the scrutiny of financial
institutions by official supervisors is buttressed by supervision b market participants.
Although there is much for the government to do, there are other areas where the public
sector has little comparative advantage.

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The shift towards accepting the mix of regulation-deregulation is reflected in the

newly coined and used concepts such as market-aware regulation, prudential
regulation, enabling regulation, incentive-compatible regulation, and right-type
regulation.
While Stiglitz (1999) has suggested decentralization as the alternative to
regulation or liberalization, the World Bank has suggested the following policy as the
appropriate policy for the future.
We need to have a right type of regulation which has the following features:
(a) It is incentive compatible, i.e. it is designed in such a way that it ensures the
creation of incentives for market participants which help it to achieve its goals.
(b) It works with the market but does not leave things to the market, it is a marketaware
regulation.
(c) It keeps authorities at arms length from transactions, lessening the opportunities for
conflicts of interests and corruption.
(d) It removes distortions that lead to too little direct investment, too little long-term
finance, too little equity finance, and too little lending to small firms and the poor

12

Table. 1.1 Types of Financial Regulations

Type of Financial Regulation Measures taken by the Regulator
Competitive Regulation (Prevention of
anticompetitive behavior)
Rules designed to deal with the
structure of industries
Rules designed to prevent
anticompetitive behavior
Rules designed to ensure that
markets remain contestable
Price Regulation

Administering interest rates, fees

and commissions
Permitting price cartels
Direct lending controls and
compulsory investment schemes
Restrictions on cross border capital
flows
Market Integrity (Prevention of Market
Misconduct)
Disclosure of Information
Conduct of business rules
Entry restrictions through licensing
Governance and fiduciary
responsibilities
Conditions of minimal financial
strength
Prudential Regulation (Prevention of
Asymmetric Information)
Entry and Capital requirements
Balance Sheet restrictions
Liquidity and Accountability
requirements
Customer support schemes
Restrictions on associations among
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financial Institutions
Government Policy (Prevention of
Systemic Instability)
Maintenance of sustainable
macroeconomic environment
Monetary, Fiscal and Credit Policy
Insurance regulation Rules designed to deal with the
structure of insurance industries
Rules designed to prevent
anticompetitive behavior in
insurance market
Rules designed to ensure that
markets remain contestable
Source: Carmichael et al. (2002)

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1.4

Insurance Regulation

Regulation acquires significance in sensitive areas like financial transactions,

where chances of mismanagement, deception, fraud etc., are more possible. If such
malpractices do occur, the loser is the common man, who does not understand the intricacies
of the transactions and can be misled. Hence, social supervision, that is, government
supervision, becomes essential. This is true for all the sectors in the financial services viz.
banking, stock markets and insurance (Palande, et al. 2003).
In common with other financial services, insurers are repositories of public trust,
and accept money from the insured in return for a promise of payment at some future date
or on the occurrence of some particular event. An insurance company can fulfill this
commitment only if it has adequate professional capability, is financially soundly managed,
holds adequate reserves to meet the requirement of funds with reference to the
nature of term of liabilities, and invests its huge funds carefully, so this needs to explain
the paradox that even while on the one hand, countries with a very stiff restrictive regime
are trying to dismantle some of the redundant controls, and on the other hand, countries
with a less interventionist policy are attempting an increased level of regulation.
Regulations in insurance are a general set of principles covering minimal
requirements for best practices in the areas of licensing, prudential regulations and
requirements; supervisory powers, managing asset quality and loss provisioning and most
importantly, enhancing corporate governance in insurance organizations all unexceptionable
in principle. However, there is no universally accepted model of regulation and different
countries have different arrangements. There can be shades of control by the regulator,
can be strict or it may be liberal; supervision can be reactive or proactive; intervention
may be more intrusive or less; a large area of activities may be brought under the purview of
the regulatory authority or it would be limited. The exact set-up will depend on the economic
and political philosophy of the country concerned. The countries with open economy will
encourage the domestic firms to collaborate with foreign companies, which are having
global experience in capital and asset management, and are large in size in terms business
volume and with using high technology. But there is no guarantee that all such companies
will behave well. Reckless rate wars, undercutting, unhealthy links with industrial houses
and a disregard for prudential norms are not totally unknown in other markets. Hence, the
15

need to regulate them strictly and accordingly, they are subjected to close regulation by the
state in all countries, with the objective of ensuring that their business is run fairly, is
conducted by competent persons, and protects the legitimate interests of the insuring
public
1.4.1

Purpose of Insurance Regulation

The ultimate purpose of insurance regulation is to protect the policy holder or

consumer by ensuring that the insurance firm will be able to pay in the event that the
policy holder files a claim. In other words it is about the slovenly that is maintaining
sufficient capital to meet the obligations. This is particularly important for life insurance
or liability policies where there is typically a long time span between the purchase of the
protection policy and the payment of the claim. The need for regulatory control arises
because, insurance services or only produced and delivered after they are purchased and
paid for by policy holders. Since policy holders, typically lack the skills and information
to monitor the financial soundness of their insurers, government laws are needed.
The purpose of insurance regulation is not to prevent insurance in solvencies all
together as this would be highly distortive and inefficient, i.e the cost of achieving such a
result would outweigh regulation benefits. One of the goal of insurance regulation should
be to reduce insolvencies to en acceptable minimum to minimize their negative impact.
The secondary of insurance regulation is to treat insurance customers fairly and
promote efficiency and competition in the industry. Insurance regulation is microprudential
focusing on the solvency of the individual insurance companies.
1.4.2 Reasons for Insurance Regulation
Insurers are regulated by the states for several reasons including the following
1. Maintain insurer solvency
2. Compensate for inadequate consumer knowledge
3. Ensure reasonable rates
4. Make insurance available
Maintain Insurer Solvency: Insurance regulation is necessary to maintain the solvency
of the insurers. Solvency is important for several reasons. First reason, premiums are paid
16

in advance, but the period of protection extends in to the future. If an insurer goes
bankrupt and a future claim is not paid, the insurance protection paid for in advance is
workless. Therefore, to ensure that claims will be paid, the financial strength of insurers
must be carefully monitored. Second reason for stressing solvency is that individuals can
be exposed to great financial insecurity if insurers fail and claims are not paid. e.g. If the
insureds home is totally destroyed by a cyclone or an earthquake and the loss is not paid,
he or she may be financially ruined. Thus because of possible financial hardship to
insureds, beneficiaries, and third party claimants, regulation must stress insurer solvency
finally, when insurers insolvent, certain social and economic costs are incurred. Examples
include the loss of jobs by insurance company employees, a reduction in premium taxes
paid to be states and a freeze on the withdrawals of cash values by life insurance policy
owners. These costs can be minimized if insolvencies are prevented
Compensate for Inadequate Consumer Knowledge: Regulation is also necessary
because of inadequate consumer knowledge. Insurance contracts are technical, legal
documents that contain complex clauses and provisions without regulation, an
unscrupulous insurer could draft a contract so restrictive and legalistic that it would be
worthless.
Majority consumers do not have sufficient information for comparing and
determining the monetary value of different insurance contracts. It is difficult to compare
dissimilar policies with different premiums because the necessary price and policy
information is not readily available. For example, individual health insurance policies
vary widely by cost converges and benefits. The average consumer would find it difficult
to evaluate a particular policy based on the premium alone.
Without good information, consumers cannot select the best insurance product.
This failure can reduce the impact that consumers have on insurance markets as well as
the competitive incentive of insurers to improve product quality and lower price. Thus,
regulation is needed to produce the same market effect that results from knowledge
consumers who are purchasing products in highly competitive markets.
Finally, some agents are unethical and state licensing requirements are minimal.
Thus, regulation is needed to protect consumers against unscrupulous agents.
Ensure Reasonable Rates: Regulation is also necessary to ensure reasonable rates. Rates
17

should not be so high that consumers are being charged excessive prices. Nor should they
be so low that the solvency of insurers is threatened. In most insurance markets,
competition among insurers results in rates that are not excessive. Unfortunately, this
result is not always the case. In some insurance markets with relatively few insurers, such
as credit and title insurance, rate regulation is needed to protect consumers against
excessive rates. Regulation also protects consumers against some insurers who may
attempt to increase rates to exorbitant levels after a natural disaster occurs so as to recoup
their underwriting losses.
Make Insurance Available: Another regulatory goal is to make insurance available to all
persons who need it. Insurers are often unwilling to insure all applicants for a given type
of insurance because of underwriting losses. Inadequate rates, adverse selection, and a
host of additional factors. However, the public interest may require regulators to take
actions that expand private insurance markets so as to make insurance more readily
available. If private insurers are unable or unwilling to supply the needed converges, then
government insurance programmers may be necessary.
It is not as if regulation becomes necessary only when there are private players in
the field. There are operations which require professional regulation even in the nationalized
sector, particularly in areas relating to expenses, customer service, claim settlements,
resolution of disputes, reasonableness of tariffs, and prevention of restrictive trade practices.
The Malhotra Committee also felt that the insurance regulatory apparatus should be activated
even in the present set-up of the insurance sector and recommended the establishment of a
strong and effective Insurance Regulatory Authority in the form of a statutory autonomous
Board on the lines of the SEBI.
The experience of the banking sector and the capital markets, where regulatory mechanisms
have been set up and regulation has been enforced with some firmness, has been good. Thus,
the banking sector has a Board for Financial Supervision since November 1994, and the stock
markets are overseen by the SEBI. Insurance has seen the emergence of the IRDA, which has
become functional since the beginning of the year2000

18

With the private sector's entry into the insurance business, a regulatory system became even
more necessary in the insurance industry where large monetary stakes are in volved and for
which there are parallels in other parts of the world. The Malhotra Committee also observed
that while regulation over the other financial sectors has been strengthened, the regulation of
the insurance industry was organized in a peculiar manner under which the industry itself was
also its regulator. This rendered the concept of regulation itself ineffective. It, therefore, felt
that the re- establishment of effective regulation over the insurance business would become
all the more urgent if the sector were to be liberalized.

To put this in place, special dispensations given to the LIC and the GIC and its subsidiary
companies by government notifications had to be withdrawn so that they do not enjoy a
favored treatment vis--vis other insurers. In the light of this, the government set up a
regulatory mechanism in the form of the IRDA to ensure that the same regulation is
applicable equally and seriously to all the players, public and private. In this sense,
The IRDA is not an active player, but really a referee. This will ensure equity and social
justice and at the same time prevent a recurrence of the old malaise and emergence of
new monopolies. The IRDA has taken active steps towards closely monitoring the
industry and bringing in some discipline therein.
In some countries, there are attempts at creating some self-regulatory
organizations (SROs). There are others where responsibilities are sought to be put on
professionals such as auditors, and actuaries. It is not known whether and how far such
arrangements have been effective. However, it is difficult to visualize that in a country
like India, long used to regulations and controls of various types, self-regulation in
sensitive sectors like financial services can prove effective in the short run. It is naive to
believe that enlightened self- interest will force the companies to be more transparent.
Regulation is often opposed on the ground that regulations render the market less
competitive, less efficient and inhibit entrepreneurship. Regulations are also perceived to
be inflexible, expensive and administered as in a 'command and control' fashion. However,
these anxieties are misplaced, because in essence, regulation is to be used as an efficient
mechanism for permitting the financial market place to work. Although in certain quarters
there are misunderstandings and reservations about regulation in general, and a regulatory
authority in particular, it is really in the general interest of the economy as well as the
insurers themselves to have a sound regulatory mechanism. That is the only way to ensure
19

that all the players in the market are brought under the same discipline and the interests of
the insured are adequately protected.
It is argued that the resolution of these issues by an open market will obviate the
need for any legislation. On the other side, there is a forceful school that insists that such
regulations are needed because the private sector incentives will never be adequate. It is
too costly and virtually impossible for individuals to monitor large institutions, and the
government can do so more efficiently with various instruments at its command. Without
regulation, the individual would be unable to differentiate between honest, unscrupulous
or shaky insurers.
There are alternatives, but the most effective is the rule of law. The government
has the authority to impose penalties for breach of contract and mechanisms for determining
when that has occurred. Regulation is a preventive approach that attempts to set
boundaries for behavior beyond which there would be an implicit or explicit breach of
contract. Such a breach would have to be handled by the courts or by arbitration, or by a
similar law-dispensing agency.
1.4.3 Insurance Regulation in India:
Regulation of insurance in India was introduced with the promulgation of the
Indian Life Assurance Companies Act, in 1912. The Insurance Act, 1938 sought to create
a strong and powerful supervisory and regulatory authority in the Controller of Insurance,
who was a statutory functionary. It set out his role and responsibilities more clearly and
emphatically and empowered him to direct, advice, caution, prohibit, investigate, inspect,
prosecute, search, seize, fine, amalgamate, authorize, register, and liquidate insurance
companies. In fact, the government perhaps exercised more control on insurance than on
any other economic activity.
Prior to nationalization, the insurance industry in India had suffered from certain
weaknesses such as malpractice in claims settlement, unhealthy rate cutting and misuse
of insurance funds for speculative and other purposes. Several financial scandals that
arose even during a control regime did, in fact, further underline the need for strict and
prudent regulation.
In 1999, the IRDA Bill was introduced which became Act and brought into effect
20

from April 2000. The main objectives of the Act where to protect the interest of the
holders of insurance policies, and to regulate, promote and ensure orderly growth of the
insurance industry.
Regulatory Measures
A sound regulatory mechanism is an essential prerequisite for the success of any
market related reforms, particularly when the sector under consideration is the financial
sector by C.S. Rao, Chairman, IRDA (2002).
Development of stable & strong insurance system is essential for economic
development of the country. Regulatory measures are required for instilling public
confidence in insurance companies, deliver reliable and quality services. It has to secure
the long-term stability of financial services through monitoring their financial soundness
and fair treatment of their customer. With the experience of failure of non-banking.
Financial institutes and loss of depositors money, regulatory measures have a very
effective, role to control with facilitating investment and trade. Insurance Act 1938 is
being modified as per the suggestions of IRDA. Globalization of financial activity,
innovations in financial instruments and practices have to be strictly controlled.
There is often a conflict between strict regulation and development. Regulation is
based on past experience where as development is future oriented. Developing new
products, processing and servicing is not an easy matter. It is expected that regulations
will work as driver for change and force the players to do things in a better way.
Regulations by IRDA in India are praiseworthy as they are pro-development. It has
emerged as prudential supervisor and developer of capacity in terms of risk pooling,
reinsurance and skills. It has to guide towards insurance penetration and insurance
density. It makes insurance available to poor in rural areas. Insurance companies have to
provide risk cover as well as contribute to long-term investment.
Regulation consists of rule making and enforcement: Economic theory offers
complimentary rationale for regulating financial institutions. In financial services markets
for regulatory service create outside discipline that controls and co-ordinates industry
behavior. Institutions benefit from regulation that enhances customer confidence,
increases the convenience of customer transactions, or creates cartel profits.

21

1.4.4 Justification for Regulation

The standard explanation or justification for governmental regulation of a market
is that the market, left to itself, will not produce the goods or services in an efficient
manner and at the lowest possible cost. Of course, efficiency and low-cost production are
hallmarks of a perfectly competitive market. Thus, a market unable to produce efficiently
must be one that is not competitive at the time, and that will not gain that status by itself
in the foreseeable future. Of course, it is also possible that governments may regulate
markets that are viewed as competitive currently but unable to sustain competition, and
thus low-cost production, over the long run. A version of this justification for regulation
is that the government controls a feature of the economy that the market mechanisms of
competition and pricing could not manage without help. A shorthand expression
economists use to describe the reasons for regulation is market failure. A market is said to
fail if it cannot, by itself, maintain all the requirements for a competitive situation.
The economist explanations for the need of regulation is limited to check market
failure but the requirement cannot be negated in the areas where there exist no markets
especially in the case of monopolies and natural monopolies to check the abuse of market
powers. So, economists see regulation largely as a remedy for market failure.
Governments in most developed economies have created elaborate systems of
regulation for financial markets, in part because the markets themselves are complex and
in part because financial markets are so important to the general economies in which they
operate. The numerous rules and regulations are designed to serve several purposes,
They fall into the following categories:
1. To prevent issuers of securities from defrauding investors by concealing relevant
information.
2. To promote competition and fairness in the trading of financial securities.
3. To promote the stability of financial institutions.
4. To restrict the activities of foreign concerns in domestic markets and institutions.
5. To control the level of economic activity.
In the present climate of deregulation, suggesting any regulatory mechanism may
sound odd. Regulation and attendant laws are sometimes seen as anomalies in a democracy
22

or as antithetical to liberalization. It may be pointed out that any regulation or

discipline is not incongruent with the concept of democracy. Rather, liberalization and
regulation go hand in hand, because after the deregulation of the public sector, the
market-driven economy can produce certain distortions which need to be avoided. Liberal
policies do not demand total withdrawal of the government from economic activity.
However, it is expected to disengage itself from areas where it does not have strength and
concentrate on improving its performance in respect of activities which are its direct
responsibility.
Even in societies where most decisions are left to the market place, the
government still has a role in shaping and monitoring the market. In fact, without
supportive regulatory measures, mere enthusiasm for a market economy and a belief in its
inherent efficiency will not be enough and may actually create some problems in the
short run. In these matters, we should be guided not by ideology, but by experience,
which suggests that the introduction of appropriate intervention in important sectors is
absolutely necessary.
Under liberalization, the role of the government is expected to shift from that of a
producer and provider to that of a protector. The model of the state as the owner of the
means of production, the producer and provider of the goods and services as well as the
regulator, has turned out, in most parts the world, to be too inefficient to meet the rising
expectations of the consumers. The government can fulfill its varied responsibilities
effectively and efficiently only if there is well-equipped machinery in place. They cannot
be handled through a department of the government, but are best left to a body of experts
which takes collective decisions and not at the discretion of a government official who
reports directly to the government and can, therefore, be influenced in his decisions. The
Asian financial crisis has demonstrated the dangers of weak regulatory and supervisory
systems, unable to match the added risks taken on by market participants in a more
competitive environment.
The transition from a command economy dominated by the public sector to a
market economy where the private sector is more active needs to be organized carefully.
This has been corroborated by the experience even in developed countries which are
proponents of the free-market economies, but which, after the deregulation process was
carried out, had to set up regulatory authorities for different sectors. For instance, after
23

privatization, the UK had to adopt a system of 'supervisory authorities', especially in

respect of utilities like telephones, which earlier were in the domain of the public sector.
The Japanese statutes provide for the industry's supervision, and set out policies for a
company's license, the capital or foundation fund, restriction on dividends, dissolution or
liquidation, and day-to-day supervision. Singapore, South Korea and Taiwan also have
fairly elaborate systems for regulation.
This need explains the paradox that even while on the one hand, countries with a
very stiff restrictive regime are trying to dismantle some of the redundant controls, and
on the other hand, countries with a less interventionist policy are attempting an increased
level of regulation.
Collaborations with foreign companies which are globally experienced and are
large in size are no guarantee that all such companies will behave well. Reckless rate wars,
undercutting, unhealthy links with industrial houses and a disregard for prudential norms
are not totally unknown in other markets. Hence, the need to regulate them strictly needed.
Accordingly, they are subjected to close regulation by the state in all countries, with the
objective of ensuring that their business is run fairly, is conducted by competent persons,
and protects the legitimate interests of the insuring public.
1.4.5 Forms of Regulation
Disclosure regulation is the form of regulation that requires issuers of securities to
make public a large amount of financial information to actual and potential investors. The
standard justification for disclosure rules is that the managers of the issuing firm have
more information about the financial health and future of the firm than investors who
own or are considering the purchase of the firms securities. The cause of market failure
here, if indeed it occurs, is commonly described as asymmetric information, which means
investors and managers have uneven access to or uneven possession of information. This
is referred to as the agency problem, in the sense that the firms managers, who act as
agents for investors, may act in their own interests to the disadvantage of the investors.
The advocates of disclosure rules say that, in the absence of the rules, the investors
comparatively limited knowledge about the firm would allow the agents to engage in
such practices.

24

It is interesting to note that several prominent economists deny the need and justification
for disclosure rules. Led by George Benston, they argue that the securities market would,
without governmental assistance, get all the information necessary for a fair pricing of
new as well as existing securities. In this view, the rules supposedly extracting
key data from agent-managers are redundant. One way to look at this argument is to
ask what investors would do if a firm trying to sell new shares did not provide all the
data investors would want. In that case, investors either would refuse to buy that firms
securities, giving them a zero value, or would discount or under price the securities. Thus,
a firm concealing important information would pay a penalty in the form of reduced
proceeds from sale of the new securities. The prospect of this penalty is potentially as
much incentive to disclose as the rules of a governmental agency.
Financial activity regulation consists of rules about traders of securities and
trading on financial markets. A prime example of this form of regulation is the set of
rules against trading by insiders who are corporate officers and others in positions to
know more about a firms prospects than the general investing public.
Regulation of financial institutions is that form of governmental monitoring that
restricts these institutions activities in the vital areas of lending, borrowing, and funding.
The justification for this form of government regulation is that these financial firms have
a special role to ply in a modern economy. Financial institutions help households and
firms to save; they also facilitate the complex payments among many elements of the
economy; and in the case of commercial banks they serve as conduits for the
governments monetary policy. Thus, it is often argued that the failure of these financial
institutions would disturb the economy in a severe way.
Regulation of foreign participants is that form of governmental activity that limits
the roles foreign firms can have in domestic markets and their ownership or control of
Financial institutions. Authorities use banking and monetary regulation to try to control
changes in a countrys money supply, which is thought to control the level of economic
activity. We mention it here briefly in order to provide a comprehensive picture
of the governments role in modern financial systems.

25

1.4.6 Regulatory Reform

Regulatory reform is the result of several forces and developments. First, as we
noted earlier, financial crisis often prompts significant shifts in the focus and extent of
regulation. Several recent examples from the United States illustrate the point.
At one time, the maximum interest rate that depository institutions were permitted
to pay on certain deposit accounts was set by government regulation. When interest rates
in the open market rose above the ceiling imposed by the government, funds inevitably
flowed out of depository institutions and were used to purchase securities, that is, to make
direct investments. When this process of disintermediation threatened the economic
well-being of many U.S. banks, the Federal Reserve and other regulatory bodies were
forced to remove the interest rate ceilings. The U.S. savings and loan crisis is another
example where federal legislation was passed in 1989 which changed the regulatory
structure of deposit-accepting institutions. Finally, the stock market crash of October
1987 produced some shifts in the rules governing the U.S. markets for stock and
derivative stock market instruments such as stock index futures and stock index options.
A second motivation for regulatory reform in the recent past has been financial
innovation, or the development of new financial products. A wide array of new classes of
financial assets appeared in the last two decades and forced the introduction of new
regulations on trading these products. Specific products that spurred new regulation in the
1980s include the derivative instruments (options and futures) based on stock market
indexes. The German government extensively revised its laws on futures and options and
even authorized the establishment of a German exchange for them. The U.S. government
has also found it necessary to devise new rules for the use of these innovative products by
regulated financial institutions.

Globalization of the worlds financial markets is the third reason for recent, notable
reforms in the regulatory structure of many counties. Naturally, any
governments regulations are enforceable only within its borders. If a regulation is too
costly, has little economic merit, or simply impedes an otherwise worthwhile financial
transaction, market participants can evade it by transacting outside the country. As
financial activities move to other nations, many interested parties lose money, and see
26

reason to call for reexamination and reform of the questionable regulation. The German
response to the widespread use of futures and options is an example of this phenomenon.
Another example is Britains deregulation of its stock market (or the Big Bang), which
was, in part, a response to competition from foreign exchanges and trading opportunities
(Schwartz, Robert. A.1991).
Another impact of globalization is that it reveals the costs of unwise regulations
that prevent financial institutions from competing effectively for business in the world
marketplace. Here a good example is regulation of the Japanese financial market. While
at one time Japanese banks had sufficient funds to provide funding for non-Japanese
multinational companies domiciled in Japan, regulations kept the banks from lending to
foreign firms and from capitalizing on clear financial opportunities. The banks protested
to the government, which eventually lifted the regulations and permitted them to compete
with non-Japanese banks.
An important result of reform has been structural change in the financial
institutions being regulated. As noted above, the U.S. regulatory system has separated the
activities performed by different financial institutions. (Similar separation was
characteristic of the United Kingdom and Japan.) Today, however, in a change that has a
global sweep regulatory reform gradually has permitted financial institutions to offer
a wider range of financial services and to become financial supermarkets. A major focus
of current and prospective regulatory reform, in several major industrial countries, is the
outdated and regulation needs to be re-oriented according to the changed structure of
global financial architecture

27

1.5

Statement of the Research Problem

Insurance of life and properties have gained more importance in all the civilized
societies in the world. Insurance in India was a protected area till 2000 has market was
control by public sector insurance companies. After 2000, the new reforms brought in
Indian insurance sector to fasten the growth of insurance market, to increase insurance
penetration and insurance density in the country.
Consequently much reform measure brought in, which resulted into inflow of
several players into the insurance sector. The reforms/regulatory measures brought in the
name of IRDA with a intention to regulate and develop the insurance sector which
influenced positive investment behavior on insurance among insurance investors.
Hence in this context a study is designed to examine what is the impact of
insurance regulation on the growth of insurance sector in India and also to examine the
impact of regulation on insurance density, insurance penetration and concentration of
insurance industry before and after the setting up of IRDA. The study considers the
following variables for analysis and interpretation of the objectives.
Researchable Issues:
a) What is the impact of regulation on insurance sector? Macro level analysis
b) What is the impact of regulation on insurance market? Meso level analysis
c) What is the impact of regulation on insurance market? Micro level analysis

1.6 Objectives:
1. To examine the nature and direction of regulation of insurance sector in India.
2. To examine the impact of regulation on insurance market penetration and
insurance market density in post reform period.
3. To examine the impact of regulation on insurance market concentration in India.
4. To examine the impact of regulation on the confidence of investors in the
insurance sector.

28

1.7 Hypotheses:
1. Growth of insurance sector in India is positively correlated with Insurance
regulation.
2. Insurance regulation has positive impact on market penetration and market
density of insurance sector in India.
3. Post regulatory period has shown a positive change in the market structure of
insurance sector.
4. There is a positive change in the confidence of insurance investors after insurance
regulation.

1.8 Scope of the Study

This study focuses on the impact of insurance regulation on insurance sector in
the post liberalization period from 2000-01 to 2012-13. The study attempts to analyze the
impact of regulation on nature and direction of insurance sector, insurance penetration,
insurance density and insurance market concentration. The study also attempts to unravel
the dynamics involved in the confidence of insurance investors in the post regulation
period. The study is also importance the fact that it has attempted to understand the
psyche of Indian insurance investor towards public and private sector insurance
companies after opening up of the insurance business in India. Variable such as age,
gender, occupation, qualification, geographic location etc., have been analyzed
thoroughly in this study. Since insurance subject falls in the centers list, this study is a
national study, where all India values aggregated. The present study compares Indias
position with world averages in terms of insurance density and penetration and national
values are computed for analyzing insurance market concentration. The primary data
collected to analyze the impact of insurance regulation on insurance investors
confidence covers the four major areas in Karnataka viz., Bangaluru, Mysore, Mangalore
and Dharwad with adjoining rural areas.

29

1.9 Methodology:
This study has used different methods for conducting research. In order to
analyze the macro level variables like insurance density, insurance penetration and
comparing India with world averages, the study has used the descriptive methods. To
evaluate market structure the study used analytical methods in the meso level. At micro
level for analyzing the confidence of insurance investors after insurance regulation the
study has used a participatory method and Focused Group Discussion (FGD) approach. It
includes both primary and secondary data. Primary data on confidence of the insurance
investors was collected through a structured questionnaire. The secondary data used in
the research are extracted from different published sources such as IRDA Annual
Reports, RBI reports, Swiss-Re Sigma reports World Bank-reports
The composition of the respondents include insurance investors from both public
and private insurance companies drawn from four major areas in Karnataka viz.,
Bangaluru, Mysore, Mangalore and Dharwad with adjoining rural areas.

30

-----------------------------------------------------CHAPTER II
LITERATURE REVIEW AND
METHODOLOGY
------------------------------------------------------

31

2.1 Introduction:
The previous chapter with the brief introduction of the present study, in addition
the first chapter dealt with various concepts likes evolution of regulation, financial
regulation, Insurance regulation, and about insurance market. The present chapter deals
with theoretical background of regulation, the review of literature and methodology
adopted for the study to understand the work done on the study area. An attempt has been
made to review some important works related to the present study. The study is a well
conversant with relevant theories, raises a few researchable issues and finds some
research gaps with the concepts from the relevant literature.

2.2 Theorization of Regulation:

Various theories have been put forward to explain regulations. The most important
ones are public interest theory and private interest theory (Skipper, D. Harold and Know,
J. 2007).
2.2.1 Economic Regulation Theories
Public Interest Theory: explains that regulations exist to serve the public interest
by protecting consumer from abuse. This regulatory theory flows directly from
the goal of government seeking to rectify market imperfections. The theory rests
on the idea that regulations are made for ensuring public interest and regulators
are experts in the field with no self-interest to pursue.

Private Interest Theory: Believes that regulations exist to promote the interests
of private parties. Thus, Peltzman (1976) suggests that self interested regulators
engage in regulatory activities consistent with maximizing their political support.

32

2.2.2 Financial Regulation Theory (Modigliani, et al. 2002)

Stiglitz (1999) have been in the forefront to present a case for financial regulation,
and to question the unlimited financial liberalization. It has been argued by them that
financial markets are prone to market failures, and there are certain forms of government
intervention that will make them function better. In the economies where the markets are
underdeveloped and imperfect, unfettered competition does not ensure Pareto-Optimum
or Pareto-Efficient resources allocation. The payments system and public confidence in
the integrity of financial system are public goods and the government intervention
provides that public good. The unfettered competition among the financial intermediaries
cannot achieve and protect the social benefits of people.
It has been further argued that the long-term relationship between the borrowers
and lenders is of great value, importance, and use, but it does not develop in a
competitive environment because of time inconsistency problem which means that ex
ante a long-term relationship is desirable, but, ex post, the borrowers or lenders have the
incentive to change their mind.
2.2.3 Financial Liberalization Theory
Let us now turn to the discussion of important arguments and views of the
proponents of financial liberalization for promoting financial and economic development/
McKinnon and Shaw have argued that the developing countries are characterized by the
government intervention and interference in the financial system. These countries suffer
from poor performance in respect of saving, investment, and growth due to financial
control, regulation, repression authorities. The indicators of financial repression are :
(a) The existence of indiscriminate distortions in financial prices such as interest rates
and exchange rates.
(b) Imposition of interest rates ceiling or fixing nominal interest rates administratively
resulting in low or negative real interest rates.
(c) Prescribing high reserve ratios.
(d) Instituting directed credit programmers.
(e) Inefficient quantitative (non-price) credit (loan able funds) rationing.
Financial repression results not only in the lower volume of investment, but also
33

in lower quality of investment because banks and financial institutions ration available
funds or allocate credit not in the light of expected marginal productivity of investment
but by using their discretion or in the light of transactions costs, perceived default risk,
quality of collateral, political pressures, loan size and covert benefits of loan officers.
Directed credit programmes force financial institutions to increase their risk exposure
with no compensating increase in returns which raise delinquency and default rates, and
which contributes to increasing the fragility of the financial system.
Interest rates ceilings and low/negative real interest rates distort the economy in a
large number of ways:
(1) They produce bias towards current consumption or indulgence reducing savings
below socially optimum level.
(2) They induce saver to hold their savings in non-productive real assets.
(3) They make potential lenders to prefer relatively low-yield direct investment.
(4) They induce borrowers to choose relatively more capital intensive projects,
resulting in capital-intensive industrial structure inconsistent with the factor
endowment of countries.
(5) They result in financing projects which are low-yielding and inefficient.
(6) They deter banks and Financial Institutions from incurring necessary expenses
for loan assessment, which results in the selection and financing of low-quality,
high-risk projects. In other words, they misallocate resources and give rise to
inefficient investment profile.
(7) They make people rent-seekers.
It has been argued that the elimination of financial repression through financial
liberalization, deregulation, and privatization is essential to eliminate all these ill-effects
and distortions, and to put developing economies on high saving, high investment, and
high growth path. Financial liberalization would result in
(a) Increase in interest rates on a variety of financial assets as they would adjust to
their competitive free-market equilibrium level.
(b) Increase in saving, reduction in the holding of real assets, and increase in financial
deepening.
(c) Expansion in the supply of real credit.
(d) Increase in investment.
34

(e) Increase in average productivity of investment.

(f) Increase in allocative efficiency of investment.
The real rate of interest as the return to savers is the key to higher level of
investment, and it, as a rationing device, is a key to greater efficiency of investment. The
developing countries have investment opportunities but they do not have adequate
savings, and, therefore, they need to raise interest rates in their economies.
In short, the financial repression reduces the real size of the financial system, it
inhibits financial deepening and financial development, and economic development,
while financial liberalization accelerates financial and economic development.

2.3 Thematic Review of Literature:

A number of major studies relating to border theoretical, empirical and insurance
regulatory related studies were presented below
Indian economy is moving from controlled economy to regulated economy. The
line between control and regulation has to be distinct and, therefore, the basis, extent and
mode of regulation has to be made clear. Regulation essentially seeks to control price,
sale and production decisions of firms such that private interests align with the larger
public interest.
The public interest approach to regulation can be dated back to Prof. Arthur
Pigou, who dealt with externalities as a source of market failure. Markets prove
inefficient and hence regulatory control is justified. The purpose of regulation is to
improve public welfare/ public interest by correcting market failures and government
intervention in the market will improve the welfare of the citizens.
Literature review are broadly presented under the below section
Studies relating to Market Regulation
Studies relating to Financial Regulation
Studies relating to Insurance Regulation
2.3.1 Studies relating to Market Regulation
Posner, Richard (1969) discusses about the costs of regulation in general and
35

studied regulating monopolies, which dealing with the issue of regulating natural
monopolies or more specifically utilities reforms that question the traditional basis of
regulating monopolies. The traditional dead weight loss of monopoly profit maximizing
price is questioned. He maintains that price need not be to maximize short term profits.
He points out other managerial objectives which may lead to lower the price. Preventing
potential entrants from entering and developing good reputation are two such reasons.
Besides he questions the rationale for comparing monopoly pricing with competitive
price when the general industrial tendency is oligopolistic whose prices themselves are
uncertain. He points out that supra competitive profits are themselves a incentive for the
monopolist to contain costs and innovate. Taxing monopoly profits is a far better
alternative to direct regulatory controls according to Posner. He dismisses other effects of
monopoly such unresponsive behavior and inferior quality as likely to cause loss of profit
and lower costs which attracts entry. He emphasis on the distortionary effects of rate of
return regulation which lead to inferior services besides the problems of regulatory lags.
He calls for a regulatory system based on a cost benefit analysis that includes both direct
and indirect costs of regulation.
Akerlof (1970) pioneered the study on information asymmetry and showed how
imperfect information would lead to adverse selection and the ultimate collapse of the
market through low quality sellers crowding out good quality sellers. The other important
reason for market failure and ground for regulation is that of information asymmetry and
bounded rationality.

36

37

38

-----------------------------------------------------CHAPTER III:
INSURANCE REGULATION IN
INDIA AN OVERVIEW
------------------------------------------------------

39

3.1 Introduction
Regulation is a process established by law that restricts or controls some specific
decisions made by the affected firms. It is designed to protect the public from
exploitation by the firms with monopoly power. Regulation is usually carried out by
government agency assigned the task of administering and interpreting the law. That
agency also accesses a court in enforcing the regulatory law. It is clear from the
definition of regulation, that it is a way to modify or control human behavior and it is
done so to influence people to act together in the interest of society at large. Human
behavior can be controlled in many ways using different regulatory levers that could be
fiscal, financial, insurance, social, legal etc., on a whole, regulations call for a multi
disciplinary approach involving law, economics, political science, sociology, history,
psychology, geography, management and social administration.
Regulation of insurance in India was introduced with the promulgation of the
Indian Life Assurance Companies Act, in 1912. The Insurance Act, 1938 sought to create
a strong and powerful supervisory and regulatory authority in the Controller of Insurance,
who was a statutory functionary. It set out its role and responsibilities more clearly and
emphatically and empowered to direct, advice, caution, prohibit, investigate, inspect,
prosecute, search, seize, fine, amalgamate, authorize, register, and liquidate insurance
companies. In fact, the government perhaps exercised more control on insurance than on
any other economic activity.
Prior to nationalization, the insurance industry in India had suffered from certain
weaknesses such as malpractice in claims settlement, unhealthy rate cutting and misuse
of insurance funds for speculative and other purposes. Several financial scandals that
arose even during a control regime did, in fact, further underline the need for strict and
prudent regulation.
The experience of the banking sector and the capital markets, where regulatory
mechanisms have been set up and regulation has been enforced with some firmness, has
been good. Thus, the banking sector has a Board for Financial Supervision since 86
November 1994, and the stock markets are overseen by the SEBI. Insurance has seen the
40

emergence of the IRDA, which was constituted on 19th April, 2000 vide Government of
India's notification no. 277. The key objective of the Authority is to promote market
efficiency and ensure consumer protection. The Authority has been required by law,
under Section 20 of the IRDA Act, to furnish an Annual Report on its performance and
other related issues to the Central Government.
3.1.1 Objective of the Chapter:
The objective of this chapter is to examine the nature and direction of regulation
of insurance sector in India. Here we will trace the origin of insurance in India as well as
regulations framed by the IRDA and their effect on various aspects of insurance sector in
India like regulation effect on the insurance firms, insurance agents and policy holders.
3.1.2 Methodology:
In this chapter the study has used descriptive methods to examine the impact of
insurance regulation on the nature and direction of insurance sector in India.
3.1.3 Data Source
In this chapter the study has used the secondary data which are extracted from
different published sources such as IRDA Annual Reports, IRDA Journals, and RBI
Statistics-data base on Indian economy.
3.2 Evolution of Insurance Regulation in India:
In India, insurance has a deep-rooted history. It finds mention in the writings of
Manu ( Manusmrithi ), Yagnavalkya ( Dharmasastra ) and Kautilya ( Arthasastra ). The
writings talk in terms of pooling of resources that could be re-distributed in times of
calamities such as fire, floods, epidemics and famine. This was probably a pre-cursor to
modern day insurance. Ancient Indian history has preserved the earliest traces of
insurance in the form of marine trade loans and carriers contracts. Insurance in India has
evolved over time heavily drawing from other countries, England in particular.
1818 saw the advent of life insurance business in India with the establishment of
the Oriental Life Insurance Company in Calcutta. This Company however failed in 1834.
In 1829, the Madras Equitable had begun transacting life insurance business in the
Madras Presidency. 1870 saw the enactment of the British Insurance Act and in the last
three decades of the nineteenth century, the Bombay Mutual (1871), Oriental (1874) and
41

Empire of India (1897) were started in the Bombay Residency. This era, however, was
dominated by foreign insurance offices which did good business in India, namely Albert
Life Assurance, Royal Insurance, Liverpool and London Globe Insurance and the Indian
offices were up for hard competition from the foreign companies.
In 1914, the Government of India started publishing returns of Insurance
Companies in India. The Indian Life Assurance Companies Act, 1912 was the first
statutory measure to regulate life business. In 1928, the Indian Insurance Companies Act
was enacted to enable the Government to collect statistical information about both life
and non-life business transacted in India by Indian and foreign insurers including
provident insurance societies. In 1938, with a view to protecting the interest of the
Insurance public, the earlier legislation was consolidated and amended by the Insurance
Act, 1938 with comprehensive provisions for effective control over the activities of
insurers.
The Insurance Amendment Act of 1950 abolished Principal Agencies. However,
there were a large number of insurance companies and the level of competition was high.
There were also allegations of unfair trade practices. The Government of India, therefore,
decided to nationalize insurance business.
An Ordinance was issued on 19th January, 1956 nationalizing the Life Insurance
sector and Life Insurance Corporation came into existence in the same year. The LIC
absorbed 154 Indian, 16 non-Indian insurers as also 75 provident societies245 Indian
88 and foreign insurers in all. The LIC had monopoly till the late 90s when the Insurance
sector was reopened to the private sector.
The history of general insurance dates back to the Industrial Revolution in the
west and the consequent growth of sea-faring trade and commerce in the 17th century. It
came to India as a legacy of British occupation. General Insurance in India has its roots in
the establishment of Triton Insurance Company Ltd., in the year 1850 in Calcutta by the
British. In 1907, the Indian Mercantile Insurance Ltd was set up. This was the first
company to transact all classes of general insurance business.
1957 saw the formation of the General Insurance Council, a wing of the Insurance
Association of India. The General Insurance Council framed a code of conduct for
ensuring fair conduct and sound business practices.
42

In 1968, the Insurance Act was amended to regulate investments and set
minimum solvency margins. The Tariff Advisory Committee was also set up then.
In 1972 with the passing of the General Insurance Business (Nationalization) Act,
general insurance business was nationalized with effect from 1st January, 1973. 107
insurers were amalgamated and grouped into four companies, namely National Insurance
Company Ltd., the New India Assurance Company Ltd., the Oriental Insurance Company
Ltd and the United India Insurance Company Ltd. The General Insurance Corporation of
India was incorporated as a company in 1971 and it commence business on January 1sst
1973.
This millennium has seen insurance come a full circle in a journey extending to
nearly 200 years. The process of re-opening of the sector had begun in the early 1990s
and the last decade and more has seen it been opened up substantially. In 1993, the
Government set up a committee under the chairmanship of RN Malhotra, former
Governor of RBI, to propose recommendations for reforms in the insurance sector. The
objective was to complement the reforms initiated in the financial sector. The committee
submitted its report in 1994 wherein, among other things, it recommended that the private
89 sector be permitted to enter the insurance industry. They stated that foreign companies
are allowed to enter by floating Indian companies, preferably a joint venture with Indian
partners.

3.3 Categorization of IRDA Regulations:

IRDA regulations are broadly grouped under three categories
Regulations relating to insurance firms
Regulation relating to insurance corporate/insurance agents
Regulations relating to consumer/policy holders

43

3.3.1 Regulations relating to Insurance Firms.

(i) Registration of Indian Insurance Companies
An applicant desirous of carrying on insurance business in India should make a
requisition for registration application. He should apply for grant of certificate of
registration after the acceptance of his requisition by IRDA. The requisition should be
made separately for each class of business of insurance, namely, (i) life insurance
consisting of linked/non-linked or both (ii) general insurance including health incurrence/
cover. Linked business means life/health insurance contracts under which benefits or
wholly /partly to be determined by reference to the value of the underlying assets or any
approved index.
In India only Indian insurance companies, which are registered under the
Company Act are eligible to apply for registration. Any company which applies for the
registration has to show evidence of having 100 corers and 200 corers are more as paid
up equity share capital. The holding of the equity by a foreign company is maximum up
to 26 per cent with Indian partnership.

YEAR

NO.OF.COMPANIES

CUMULATIVE NO OF

2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
2013-2014
2014-2015

01
04
07
02
02
01
01

COMPANIES
01
05
12
14
16
17
18

Table 3.1 Registration of Indian Life insurance companies from 2008 to 2015

44

YEAR
2008-2009
2009-2010
2010-2011
2011-2012
2012-2013
2013-2014
2014-2015

NO.OF.COMPANIES

CUMULATIVE NO OF

04
06
03
03
02
02
00

COMPANIES
04
10
13
16
18
20
20

Table 3.2 Registration of Indian Non-Life insurance companies from 2008 to 2015

45

-----------------------------------------------------Chapter IV:
IMPACT OF REGULATION ON
THE INDIAN INSURANCE SECTOR.
------------------------------------------------------

46

4.1 Introduction
Insurance sector is an important and integral component of macro economy and
has emerged as a dominant institutional player in the financial market. It influences the
health of economy through its multi-dimensional role in savings and capital market.
While the primary role of an insurance company is to provide insurance coverage for
managing personal financial risks, it plays a very crucial role in promoting savings by
selling a wide range of products and also actively contributing to the promotional
substance in promotion and sustenance of the capital market of a country. In the
emerging economy, characterized by the reduced role of state and declining state
supported social security, the importance and the role of the insurance industry has
increased significantly as a risk manager. Moreover, growing institutionalization of the
financial market has also provided a momentum to boost the insurance companies.
Therefore, a reassessment of the role of insurance in the context of the changing market
and economic environment is required.
The worlds one of the largest investments happens in insurance sector and it
involves peoples long term savings. At the same time their may be any mismanagement
of funds with far reaching implications. So regulating the insurance sector is very
essential. For this purpose Government of India enacted IRDA Act 1999, which opened
up the insurance sector for the private participation and which impacted on the market
structure parameters such as insurance penetration, insurance density and insurance
market concentration.

47

4.1.1 Objective of the Chapter

The objective of this study is to analyse the impact of insurance regulation on
insurance penetration and insurance density in India in post liberalization period. This
broad objective can be further sub-divided into two smaller objectives as fallows.

(a) To analyze the impact of insurance regulation on insurance penetration and

insurance density in India in post liberalization period. For this, the study has attempted to
compare the penetration and density of life insurance and non-life insurance segments in
India with that of the world. For this analysis the reference period is year 2001

(b). To analyze the impact of insurance regulation on the dynamics of insurance

market structure in post liberalization period. For this, the study has used the market
share analysis and market concentration approach. Using this, Concentration Ratio (CRk)
and Herfindahl-Hirschman (HH) Index have been calculated.

4.1.2 Methodology
In this chapter descriptive methods is used to analyze the impact of regulations on
macro level variables like insurance density, insurance penetration. The variables like
insurance density and penetration of India are compared with world averages. In the meso
level, analytical method is used to examine the impact of regulation on market structure
with the help of Concentration Ratio (CRk) and Herfindahl-Hirschman (HH) Index.
4.1.3 Data Source
In this chapter the study has utilized secondary data from different published
sources such as IRDA Annual Reports, IRDA Journals, RBI Statistics-Data Base on
Indian Economy, Swiss-Re Sigma World Insurance Data Base, World Bank-World
Development Indictors, research articles, textbooks and selected websites like Ebsco, Jstor,
N-list.

48

4.2 Impact of Insurance Regulation on Insurance Density & Insurance

Penetration:
The measure of macro variables like insurance penetration and density will reflect
level of development of insurance sector in any country. Since insurance sector alongwith the
banking and finance will constitute a majority of financial market, which
influences overall growth and development of economy. In the insurance sector, the
common people have deposited their saved money with trust. To protect the interest of
the policy holders, government enacted regulations. So in this chapter we are analyzing
the impact the regulation of insurance density and penetration.
4.2.1 World Insurance Scenario:
We are living in the era of globalization, where the national economies are
integrated with the world economy. All countries are interdependent on one another in
the trade of goods and services in general and in the transaction of financial services in
particular. Since insurance is a major part of financial services, which influences the
saving pattern of the economy as whole. So to analyze the growth and development of
insurance sector in any country, we have to study the insurance scenario of the world.
As per World Insurance Report 2012 published by reinsurance major Swiss Re,
the economic environment and financial markets in 2012 were challenging for insurers.
Growth of global real gross domestic product (GDP) slowed to 2.5 per cent in 2012 from
3 per cent in 2011, below the average over the previous 10 years. Economic growth in
advanced economies slowed to 1.2 per cent from 1.5 per cent in 2011, largely due to the
onset of recession in Western Europe. Emerging markets held up better, but their growth
slowed down due to their dependence on exports to advanced markets.
Expansionary monetary policies continued in all advanced markets, supporting
equity markets and pushing long-term bond yields to record lows. With this, most stock
markets posted a solid gain in 2012, rising 16 per cent on average. The low interest rate
environment continued to put downward pressure on insurers profitability, particularly
on the life side. The global life insurance premium increased by 2.3 per cent after
contracting by 3.3 per cent I the previous year. While the growth is encouraging, it is still
lagging behind the average pre-crisis growth rate. The growth in advanced markets was
49

1.8 per cent (-3 per cent in 2011), largely supported by the robust performance in
advanced Asia and the US, while Western Europe continued to shirk. Growth wasreported in
all key emerging markets (except India) and premiums expanded by 4.9 per
cent. In non-life insurance market, growth in premium continued to accelerate modernly,
growing by 2.6 per cent in 2012 (1.9 per cent in 2011). In emerging markets, the non-life
premium registered solid, broad-based growth of 8.6 per cent in 2012 (8.1 per cent in
2011). Advanced markets growth picked up slightly to 1.5 per cent (0.9 per cent in 2011),
expanding for the fourth consecutive year since declining in 2008
The prospect for growth in life insurance business will remain sluggish in 2013 in
the advanced markets. While in emerging Asia, growth is expected to resume in China
and India. The prospect for nonlife market is more positive. A gradual rate hardening
which begun in 2011 is expected to continue and broaden in scope. Interest rates are not
expected to raise much in 2013 impacting life insurers. The major central banks in the
US, Japan and Europe will continue their expansive monitory policies as long as the
weak growth environment and high unemployment persists.

4.2.2 Indian Insurance in a Global Scenario

Globally the share of life insurance business in total premium was 56.8 per cent.
However, the share of life insurance business in Asian region was only 28.9 per cent,
which is in contradiction with the global trend. For the share of life insurance business in
total insurance business was very high at 80.2 per cent while the share of non-life
business was small at 19.8 per cent.
In life insurance business, India is ranked 10th among the 88 countries, for which
data are published by Swiss Re during 2012. The life insurance premium in India
declined by 6.9 per cent (inflation adjusted). During the same period, the global life
insurance premium increased by 2.3 per cent. Indias share in global life insurance
market was 2.03 per cent during 2012, as against 2.30 per cent 2011.
The non-life insurance sector witnessed a significant growth of 10.25 per cent
(inflation adjusted) during 2012. Its performance is far better when compared to global
non-life premium, which expanded by meager 2.6 per cent during the same period.
50

However, the share of Indian non-life insurance premium in global non-life insurance
premium was small at 0.66 per cent and India ranks 19th in global non life insurance
market.

4.2.3 Insurance Penetration in India

The measure of Insurance penetration reflects the level of development of the
insurance sector in a country. Insurance penetration is measured as a percentage of
insurance premium to GDP of a country.

YEARS
2009
2010
2011
2012
2013
2014
2015

Penetration
1.90
1.93
2.32
3.26
2.88
4.80
4.70

Table. 4.1 Insurance Penetration in India (in percentage)

51

4.2.4 Insurance Density in India

The measure of Insurance density reflects the level of development of the
insurance sector in a country. The Insurance density is calculated as the ratio of insurance
premium to population of a country (per capita premium).
YEARS
2009
2010
2011
2012
2013
2014
2015

Density
7.0
8.5
9.9
47.3
54.8
59
53.2

IRDA Annual Reports for the years 2009 to 2015

52

4.3 Impact of Insurance Regulation on Insurance Market Structure

Market structure means the number firms in a market, and the distribution of
market shares between them. It refers to the nature and the degree of competition in the
market for goods and services. The structure of the market is determined by the nature of
competition prevailing in that market. The popular basis of clarifying the market structure
rests on three crucial elements, (i) the number of firms producing a product, (ii) the
nature of product produced by the firms, i.e. whether it is homogeneous or differentiated,
and (iii) the ease with which new firms can enter the industry. The price elasticity of
demand for a firms product depends upon the number of competitive firms producing
the same or similar product as well as on the degree of substitution which is possible
between the product of a firm and other products produced by rival firms. Therefore, a
distinguishing feature of different market categories is the degree of price elasticity of
demand faced by an individual firm.
On the basis of competition, market structure takes two different forms/stages.
1. Perfect competition, where large number of firms operating, producing a
homogeneous product with uniform price.
2. Imperfect competition, wherein individual firms exercise control over the price
to a smaller or larger degree depending upon the degree of imperfection present in
a market. It has several sub categories.
Monopolistic competition large number of firms produces some what
different products which are close substitutes of each other and pricing
differently.
Oligopoly few firms producing homogeneous or differentiated products
which are close substitutes of each other. Here the price will become
rigid/sticky.
Monopoly the existence of a single producer or seller which is producing or
selling a product which has no close substitutes. Since a monopoly firm has a
sole control over the supply of a product, so it has a very large control over
the price of its products.

53

Form the point of consumers benefit, the society prefers perfect competition (an
extreme scenario) over the other stages like monopolistic competition, Oligopoly and
Monopoly (the other extreme scenario)
The common measures used in describing market structure are the Concentration
Ratio and Herfindahl-Hirschman Index. The four-firm concentration ratio, for ex. shows
the total market shares of the largest four-firms as a proportion of the whole market. The
Herfindahl-Hirschman Index works by adding the squares of the proportional shares of
all firms.
In order to provide better insurance cover/service to citizens and also to augment
the flow of long term sources for financing infrastructure, the insurance sector/industry in
the country was opened for private firms participation on the recommendation of the
Malhotra committee. The government opened up the insurance sector and also set up
statutory IRDA. The IRDA act was enacted in 1999 to provide for the establishment of
the IRDA to protect the interest of policy holders, to regulate, promote and ensure orderly
growth of the industry and for matters connected therewith, the insurance.
Since 1999, Indian insurance sector has undergone a sea change in the wave of
liberalization. There is a substantial restructuring of domestic insurance sector including
financial sector. The process of liberalization has brought structural changes in the
financial market in general and insurance market in particular. These measures intended
to improve macro economic efficiency of the sector.
Until 1999, the insurance organization in India was comprised of two state
owned monolithic institutions, namely the Life Insurance Corporation of India (LIC) in
life insurance business and the General Insurance Corporation of India (GIC) and its four
subsidiaries in general insurance business. The setting up of the IRDA was a clear signal
of the end of monopoly in the insurance sector and paved way for different structure of
insurance market in India. More private Institutions entered into the market giving more
competition to public sector companies. Since the opening up of the insurance market,
the first sets of licenses were granted from October-2000 onwards. With this the new
156 private sector players entered the Indian insurance market in the form of joint ventures
between well-established international insurance players. With the private sector's entry
into the insurance business, a regulatory system became even more necessary in the
54

insurance industry where large monetary stakes are involved and for which there are
parallels in other parts of the world.
In this section an attempt is made to examine the impact of regulation on
dynamics of Indian insurance market structure. There is a focus on the market share of
both life and non-life insurance segments, since the opening up of insurance sector for
private participation. Insurance market concentration is calculated n this basis
Concentration Ratio and Herfindahl-Hirschman (HH) Index.
After liberalization more private players entered into the insurance market giving
more competition to existing public sector companies. Now there are 52 insurance
companies are operating in India of which 24 companies are in life insurance segment
and 27 companies are in non-life insurance segment, which are listed below
LIST OF INSURANCE COMPANIES OPERATING IN INDIA (As on Oct, 2015)
Public Sector Life Insurer
1. Life Insurance Corporation of India (LIC)
Private Sector Life Insurers
1. Aegon Religare Life Insurance Co. Ltd
2. Aviva Life Insurance Co. Ltd.
3. Bajaj Allianz Life Insurance Co. Ltd.
4. Bharti AXA Life Insurance Co. Ltd.
5. Birla Sun Life Insurance Co. Ltd.
6. Canara HSBC OBC Life Insurance Co. Ltd.
7. DLF Pramerica Life Insurance Co. Ltd.
8. Edelweiss Tokio Life Insurance Co. Ltd.
9. Future Generali Life Insurance Co. Ltd.
10. HDFC Standard Life Insurance Co. Ltd.
11. ICICI Prudential Life Insurance Co. Ltd.
12. IDBI Federal Life Insurance Co. Ltd.
13. ING Vysya Life Insurance Co. Ltd.
14. India First Life Insurance Co. Ltd.
55

15. Kotak Mahindra Old Mutual Life Insurance Co. Ltd.

16. Max Life Insurance Co. Ltd.
17. MetLife India Insurance Co. Ltd.
18. Reliance Life Insurance Co. Ltd.
19. Sahara India Life Insurance Co. Ltd.
20. SBI Life Insurance Co. Ltd.
21. Shriram Life Insurance Co. Ltd.
22. Star Union Dai-ichi Life Insurance Co. Ltd.
23. TATA AIA Life Insurance Co. Ltd.
Public Sector Non-Life Insurers
1. National Insurance Co. Ltd.
2. New India Assurance Co. Ltd.
3. Oriental Insurance Co. Ltd
4. United India Insurance Co. Ltd
Specialized Insurers
1. Agriculture Insurance Co. Ltd
2. Export Credit Guarantee Corporation Ltd
Private Sector Non-Life Insurers
1. Bajaj Allianz General Insurance Co. Ltd.
2. Bharti AXA General Insurance Co. Ltd.
3. Cholamandalam MS General Insurance Co. Ltd
4. Future Generali India Insurance Co. Ltd.
5. HDFC ERGO General Insurance Co. Ltd.
6. ICICI Lombard General Insurance Co. Ltd.
7. IFFCO Tokio General Insurance Co. Ltd.
8. Liberty Videocon General Insurance Co. Ltd.
9. L & T General Insurance Co. Ltd.
10. Magma HDI General Insurance Co. Ltd.
11. Raheja QBE General Insurance Co. Ltd.
12. Reliance General Insurance Co. Ltd.
13. Royal Sundaram Alliance Insurance Co. Ltd.
14. SBI General Insurance Co. Ltd.
56

15. Shriram General Insurance Co. Ltd.

16. TATA AIG General Insurance Co. Ltd.
17. Universal Sompo General Insurance Co. Ltd.
Standalone Health Insurers
1. Apollo Munich Health Insurance Co. Ltd.
2. Max Bupa Health Insurance Co. Ltd.
3. Religare Health Insurance Co. Ltd.
4. Star Health and Allied Insurance Co. Ltd

57

58

59

----------------------------------------------------CHAPTER V:
IMPACT OF INSURANCE
REGULATION ON INVESTORS
CONFIDENCE: AN EMPIRICAL
ANALYSIS
-----------------------------------------------------

60

5.1 Introduction
Indian insurance industry which is integral part of financial sector consists of
various stake holders like insurance firms, insurance agents/advisors and policy
holders/insurance investors. Insurance firms underwrite their policies and sale their
policies to policy holders through insurance agents/advisors, who act as a vital link
between firms and investors. The policy holders who purchase insurance policies with
their saved amount with trust and confidence on the insurance firms. But the maturity
time of the policies having a long gestation period, it is very important that insurance
firms have to settle their claims at the end of the maturity time. Insurance firms should
never become insolvent. Because of this all over the world insurance sector is heavily
regulated to avoid any misuse of funds. The insurance sector in India also is regulated
by IRDA regulation. Since insurance investors are the driving force of insurance
sector, to protect the interest of the policy holders, IRDA brought many regulations
relating to the firms, agents/advisors and policy holders.
In this chapter, this study has a broad purpose of understanding investors
confidence after insurance regulation in the post liberalization period of Indian
insurance sector.
5.1.1 Methodology
In this chapter the study has used participatory method i.e. field survey, and
Focused Group Discussion (FGD) approach to analyze the impact of insurance
regulation on the confidence of insurance investors. The data collected from field
survey were subjected to various statistical analyses using descriptive statistical
techniques like mean and standard deviation and advanced statistical techniques like
One Sample T Tests, ANOVA, Levenes Test for Equality of Variances, and Tukey
HSD Multiple Comparison post hoc tests. These techniques have been applied,
hypotheses are framed and tested and on the basis of the results obtained, inferences
are drawn using five point Likerts scale. .

5.1.2 Data Source

The primary data collected through field survey from the respondents across
Karnataka. The respondents are drawn from the insurance investors, managers,
61

executives and advisors of select insurance companies.

5.1.3 Study Region
The primary data was drawn across four major areas in Karnataka viz.,
Bangaluru Mysore, Mangalore and Dharwad with adjoining rural areas. The profiles
of the respondent insurance investors were divided across five demographic
variables. In the demographic variable of age is divided in to five categories from 18
years to 61 yeas above. In case gender, this was categorized in to male and female.
The respondent qualification was categorized into matriculation, graduation, post
graduation and others. In terms of occupation the respondents were grouped into
government service, business, professionals, private service, retired and students.
According to location the respondents were classified in to urban, semi-urban and
rural.
5.1.4 Sampling Design
The population of the study consists of all current insurance investors in
Karnataka. To investigate the confidence of Indian insurance investors, respondents
have been selected on Random sampling basis. Responses from 126 respondents were
collected and analyzed.

62

5.2 Insurance Investors Confidence after Insurance regulation

Formulating prudent insurance regulations for delivering world-class
insurance products to the clientele has been one of the priorities for the regulators at
the time of liberalizing the insurance market in India. The privatization of insurance
sector has brought about a phenomenal change in the Indian insurance sector with 52
private insurance companies are competing in the insurance space in India along with
the 5 State owned public sector insurance companies. Since Indian life insurance
industry is just a decade old as far as privatization is concerned, the future seems to be
exciting and understanding of investors confidence levels would definitely help the
insurers and the regulatory body to take stock of the things and evolve strategies to
address some of the issued raised by the insurance investors.
One of the objectives of this study is to understand the investors confidence
after insurance regulations in post liberalization period. It is interesting to know that
whether the presence of IRDA, the apex insurance regulatory body, has made any
difference to the opinions of Indian insurance investors with respect to the trust and
confidence that they pose with insurance regulations enacted by IRDA. This part of
the study attempts to understand the insurance investors Confidence after insurance
regulation in post liberalization period. For examining this, the study has used
participatory technique

63

64

65

66

----------------------------------------------------CHAPTER VI:
SUMMARY OF FINDINGS,
CONCLUSIONS AND
SUGGESTIONS
-----------------------------------------------------

67

6.1 Introduction
The present study was carried out with a broad objective of understanding the
impact of insurance regulation on the insurance sector in India after liberalization.
The specific objectives are framed to examine
1. The nature and direction of insurance regulation in India
2. The impact of insurance regulation on insurance penetration and insurance
density vis--vis global insurance scenario
3. The impact of insurance regulation on the insurance market structure in
India post liberalization period and
4. The impact of insurance regulation on the confidence levels of the insurance
investors in India.
Since the deregulation of Indian insurance industry from 2000, there have been
fast paced developments in terms of entry of private insurance companies with
collaboration with internationally renowned insurance companies, which increased
influence of the regulatory body IRDA, heightened competition and the business is
getting louder by the day with the prospect of 20-30 players in life insurance market is
well within the sight.
The summaries of findings are presented according to the objectives
set for this study.

6.2 Findings with respect to Nature and Direction of Insurance

Regulation in India
After enactment of IRDA Act 1999, the insurance sector was opened for the
private participation and IRDA since 2000 on wards framing regulations related to
insurance sector till January 2014 it brought out several regulations relating to various
aspects of insurance sector which includes amendments. In this study we have
categorized the regulations in to three groups.
6.2.1 Number of Life insurance and Non-life insurance companies:
The number of life insurance companies have gone up from only one company
i.e., LIC of India in 1999 to drastically go up to five companies soon after setting up
68

of IRDA in 2000-01 and to 12 in 2001-02. From then onwards it stabilized and

moved up to 22 companies in 2008-09 and slowed down to a final tally of 24 till date.
The number of non-life insurance companies has gone up from four public sector
companies in 1999 to drastically go up to ten companies soon after setting up of
IRDA in 2000-01 and to 20 in 2007-08. From then onwards it stabilized and moved
up to 24 companies in 2009-10 and stabilized at to a final tally of 27 till date.
6.2.2 Solvency Ratio
The solvency ratio of all life insurers and non life insurers are more than one
indicating that the available solvency margin in more than the required solvency
margin. It underlines the capability of insurance companies to meet their obligations
with minimum time and effort. It can also be observed that in life insurance segment
the solvency margin of LIC of India is consistent in the range between 1.3 to 1.54
indicating that their business is now six decades of experience in Indian insurance
conditions and therefore, there is consistency in their maintenance of solvency ratio.
Whereas for other private life insurers, they have started their operations with a higher
solvency ratio as they invest into the business and as they started selling more and
more life insurance policies, their obligations increased and the solvency ratios started
declining but as things stand now, all the life as well as non life insurance firms in
India do have a healthy solvency ratios.
6.2.3 Obligations to Social and Rural Sector
This study reveals that the Micro-Insurance portfolio has made steady progress
during the year 2011-12 to 2014-15. More life insurers have rigorously pursued their
Micro-Insurance operations and many new products have been launched during the
year. The distribution infrastructure has also been considerably strengthened and the
new business has shown a decent growth, though the volumes are still small.
A further analysis of the statistics reveals that LIC of India has covered more
than 1.3 crore lives which are more than 15 times the lives covered by all the private
life insurers( 7.5 lakh lives) put together. This is an indication of the fact that LIC of
India has its branches throughout the length and the breadth of the country whereas
private life insurers are operating only in urban and semi urban localities and their
micro insurance business is only a compliance to IRDA regulations than the real urge
69

to serve the rural and urban poor for inclusive growth.

6.2.4 Individual Agents/Advisors and Corporate Agents
This study reveals that the number of agents in LIC of India increased from
8.9 lakh in 2006-07 to 15.93 lakh in 2008-09 and decreased to 10.82 lakh in 2011-12
and thereafter slightly increased to 11.72 lakh in 2012-13. Correspondingly, in
private life insurance segment, the number of agents recruited was phenomenal in
2006-07 at 11.03 lakh and increased year on year to 14.03 lakh in 2009-10 and then
slipped drastically to 9.49 lakh in 2012-13. This is an indication of the fact that there
is no stability of tenure of insurance agents/advisors in private life insurance. This is a
serious issue since insurance agents/advisors form a vital link between the firm and
the policy holders to enhance customer relationship and sustain it till the claim
settlement. LIC of India definitely has an edge in this crucial aspect of life insurance
business.
The study also indicates that LIC of India traditionally relied more on
individual agents since its inception than on corporate agents. Whereas the private life
insurers banked heavily on corporate agents and hence there were 2420 corporate
agents by the year 2009-10. But it can be seen that there is a sort of collapse
thereafter to reach a paltry 532 corporate agents by 2012-13. Private life insurers lost
their way in the midst of global financial crisis and what was their key result area of
sales through corporate agents was dented beyond repair and now it would take
Herculean task to make a turnaround.
6.2.5 Growth in Premium income of Life and Non- life Insurance Segment
It can be seen that the first year premium which is reflection of new business
underwritten each year shows that both LIC of India and private life insurers are
making steady progress though LIC is showing a better performance only to stabilize
during 2009-10 and slight decline thereafter. It shows that the first year premium
which includes single premium and regular premium is a measure of trustworthiness
of life insurers, LIC of India, scores over private life insurers for obvious reason that
it is a public sector major and Indian insurance investors pose more confidence than
on private life insurers.
70

The renewal premium is a measure of consistency with which the policy

holders make payments towards their premium obligations and the persistence efforts
of insurance agents/advisors. In this count also, LIC of India has far better record
than their private counterparts. The total premium underwritten by life insurers has
increased steadily for both LIC of India and private life insurers. But the premium
underwritten by LIC of India shows much higher trajectory than private life insurers.
As for as gross direct premium income for non-life insurance segment is
concerned the performance of both public and private sector companies are more or
less similar in the sense that the premium collected by the public sector has gone up
form 13,500 crore in 2002-03 to 35022 crore in 2014-15, where as the private sector
in the same period has gone up from 1350 crores to 27950 crores. This show that line
between public and private companies is getting thinner by the year and sooner or
later the private sector is poised to match the public sector performance

6.3. Regulations with respect to consistency and transparency in disclosure

And speedy claims management:
As per the findings of the this study, a majority of the respondents are of the
opinion that, IRDA has not done much to ensure consistency and transparency in
disclosure and that it has to ensure all the insurers should make periodic declaration
of investment reports. To convince a large population, which is comparatively not
well informed about the intangible benefits of life insurance is indeed a tough task. In
a business such as life insurance, where the customer entrusts the companies with his /
her financial savings, transparency has a direct relation to sales. Hence, transparency
should start from the point of purchase of insurance policies and integrate itself to all
aspects of the relationship till it boils down to claim settlements in which especially
71

private life insurers have poor rector.

Therefore, the insurance industry needs to engage in serious dialogue on a
regular basis with consumer bodies and other interested parties on issues such as
access for the less affluent and general consumer confidence. There is a need for the
industry, the regulator and consumers to establish a collective, forward-looking joint
agenda. This should particularly focus on how the industry can better serve its
customers. The IRDA may consider establishing a broad ranging forum, including
representatives from all parts of the industry, consumer groups, the IRDA and
Government. This should meet regularly with the aim of agreeing priorities,
monitoring progress, giving early warning of problems that might be arising and
thereby, adding teeth to the regulations to ensure consistency and transparency in
disclosure and speedy claims settlement.

6.4. Regulations to monitor the selling efforts of agents/advisors:

An important finding of this study is that the respondents are univocal in
expressing their disgruntlement about insurance agents/advisors, who though trained
professionally, are not doing proper assessment of investors needs and risk attitude,
not honest enough to sell the right policy for the investors, still resort to mis-selling of
the insurance policies leading to lapsation of the policies. This opinion cuts across all
the respondents irrespective of their age, gender, qualification, occupation and place
of residence.
Customer needs analysis is the crux of the life insurance business. It requires
that an advisor has to understand the financial needs of an individual depending on his
earning capacity, dependents, future productive years etc. and calculate human life
value of the person in question. Accordingly, the advisor has to advise him on the
best insurance policy that suits his requirements. The insurers also pressurize them to
72

reach the targets in terms of commission earned and the number of policies logged in.
In this high pressure race, the customer ends up with a policy which is contrary to
what his needs are.
Therefore, the results of this study show that the investors confidence towards
insurance agents/advisors is precariously less, indicating that it is high time that the
regulatory body has to take up this issue seriously to evolve more stringent
regulations to streamline the selling behaviour of the agents/advisors so that the
confidence levels of the insurance investors will be enhanced.

73