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Indian Financial System

Notes contributions to a common fund out of which the losses suffered by the unfortunate few, due to
accidental events, are made good.

Indian insurance companies play a key role in India's financial sector. With India's population
becoming more affluent and globalized, insurance is growing rapidly. This increasing market is
creating considerable competition among Indian insurance companies in an industry that 20
years ago was relatively small.

13.6 Public and Private Sector Insurance

The concept of insurance is intimately related to security. Insurance acts as a protective shield
against risk and future uncertainties. Traditionally, a risk-averse behavior has been a
characteristic feature of Indians who preferred a "low & certain" disposable income to a "high &
uncertain" one.

Hence insurance has become a close associate of Indians since 1818, when Oriental Life Insurance
Company was started by Europeans in Kolkata to cater to the needs of their own community.
The age was characterized by intense racial discrimination as Indian insurance policy holders
were charged higher premiums than their foreign counterparts. The first Indian Insurance
Company to cover Indian lives at normal rates was Bombay Mutual Life Assurance Society
which was established in the year 1870.

By the dawn of the 20th century, new insurance companies started mushrooming up. In order to
regulate the insurance business in India and to certify the premium rate tables and periodic
valuations of the insurance companies, the Life Insurance Companies Act and the Provident
Fund Act were passed to regulate the Insurance Business in India in 1912. Such statistical estimates
made by actuaries revealed the disparity that existed between Indian and foreign companies.
The Indian Insurance Sector went through a full circle of phases from being unregulated to
completely regulated and then being partly deregulated which is the present situation. A brief
on how the events folded up is discussed as follows:
The Insurance Act of 1938 was the first legislation governing all forms of insurance to provide
strict state controls over insurance business.
In 19th January, 1956, the life insurance in India was completely nationalized through the Life
Insurance Corporation Act of 1956. At that time, there were 245 insurance companies of both
Indian and foreign origin. Government accomplished its policy of nationalization by acquiring
the management of the companies. Bearing this objective in mind, the Life Insurance Corporation
(LIC) of India was created on 1st September, 1956 which has grown in leaps and bounds henceforth,
to become the largest insurance company in India.
The General Insurance Business (Nationalization) Act of 1972 was formulated with the objective
of nationalizing nearly 100 general insurance companies and subsequently amalgamating them
into four basic companies namely National Insurance, New India Assurance, Oriental Insurance
and United India Insurance which have their headquarters in four metropolitan cities.
The Insurance Regulatory and Development Authority (IRDA) Act of 1999 deregulated the
insurance sector in India and allowed the entry of private companies into the insurance sector.
Moreover, the flow of Foreign Direct Investment (FDI) was also restricted to 26 % of the total
capital held by the Indian Insurance Companies.
While LIC is the sole operator in the public sector, the following are a few examples of private
companies in India are as under:

272 LOVELY PROFESSIONAL UNIVERSITY