Page 105 - DMGT512_FINANCIAL_INSTITUTIONS_AND_SERVICES

Financial Institutions and Services

Notes Introduction

Insurance may be described as a social device to reduce or eliminate risk of life and property.
Under the plan of insurance, a large number of people associate themselves by sharing risk,
attached to individual.
The risk, which can be insured against include fire, the peril of sea, death, incident, & burglary.
Any risk contingent upon these may be insured against at a premium commensurate with the
risk involved.

Insurance is actually a contract between 2 parties whereby one party called insurer undertakes
in exchange for a fixed sum called premium to pay the other party happening of a certain event.
Insurance is a contract whereby, in return for the payment of premium by the insured, the
insurers pay the financial losses suffered by the insured as a result of the occurrence of unforeseen
events.
With the help of insurance, large number of people exposed to a similar risk make 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.

8.1 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 20 th 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

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