History of Insurance Sector In India

Insurance in India has evolved over several centuries, reflecting changes in economic structures, governance, and social needs. From informal risk-sharing arrangements in ancient times to a highly regulated and diversified modern industry, the insurance sector has played important role in India’s financial system. The development of life insurance provides a clear lens through which the broader history of insurance in India can be understood.

Historical Background and Early Concepts

The idea of insurance in India can be traced to ancient times, when communities practised informal methods of risk pooling. References to collective risk-sharing arrangements are found in classical Indian texts such as the Arthashastra, which discussed statecraft, trade, and economic administration. These early practices were not insurance in the modern contractual sense, but they laid the philosophical foundation for sharing losses arising from uncertain events.

Modern insurance, based on formal contracts and actuarial principles, emerged in India during the colonial period under British influence. The initial development of insurance was closely linked to trade, shipping, and the needs of colonial administrators and European merchants.

Early Developments in Life Insurance (Pre-Nationalisation)

The first modern life insurance company in India was established in 1818 with the formation of the Oriental Life Insurance Company in Calcutta. This company primarily served the European population and eventually failed in 1834. In 1829, the Madras Equitable Life Insurance Society began operations in the Madras Presidency, marking another early milestone in the growth of life insurance.

During the nineteenth century, several other insurance companies were established. Notable among them were the Bombay Mutual Life Assurance Society in 1871, Oriental Insurance in 1874, and the Empire of India Life Assurance Company in 1897. Bombay Mutual was particularly significant because it was the first company to offer life insurance to Indians at standard premium rates, without discrimination based on race.

Earlier insurers often charged Indians 15–20 per cent higher premiums, because of colonial prejudices regarding life expectancy.

By the late nineteenth and early twentieth centuries, the insurance market in India consisted of both Indian and foreign companies. While this led to growth in the sector, it also resulted in unhealthy competition, mismanagement, and unfair trade practices, highlighting the need for regulatory oversight.

Evolution of Insurance Regulation

The first major legislative step towards regulating life insurance in India was the Indian Life Assurance Companies Act of 1912. This Act represented the earliest statutory attempt to regulate the life insurance business and applied primarily to Indian insurers. However, it did not cover foreign companies comprehensively.

In 1928, the Indian Insurance Companies Act was enacted, empowering the government to collect statistical information on both life and non-life insurance business conducted by Indian and foreign insurers, including provident insurance societies. This marked an important step towards systematic supervision of the industry.

The regulatory framework was significantly strengthened with the enactment of the Insurance Act of 1938. This comprehensive legislation consolidated earlier laws and introduced detailed provisions relating to registration, investments, solvency margins, and policyholder protection. The Act applied uniformly to life and general insurance companies and became the cornerstone of insurance regulation in India. Amendments in subsequent years, including in 1950, sought to address emerging issues and improve oversight.

Nationalisation of Life Insurance

By the mid-twentieth century, the insurance industry in India was characterised by intense competition, financial instability, and allegations of mismanagement. To protect policyholder interests and ensure orderly growth, the Government of India decided to nationalise the life insurance business.

• On 19 January 1956, the Central Government took over the management of life insurance companies operating in the country.
• Later that year, on 1 September 1956, the life insurance business was formally nationalised. As a result, 245 entities, comprising 154 Indian insurers, 16 foreign insurers, and 75 provident societies, were merged into a single public sector institution.
• This led to the establishment of the Life Insurance Corporation of India under an Act of Parliament, with an initial capital contribution of ₹5 crore from the Government of India.
• Following nationalisation, the Life Insurance Corporation became the sole provider of life insurance in India and enjoyed a statutory monopoly for several decades.

Nationalisation brought stability, uniformity of policies, and a strong focus on expanding insurance coverage, particularly in rural and socially disadvantaged areas. However, it also resulted in a state-controlled market with limited competition and innovation.

Nationalisation of General Insurance

The general insurance sector, which includes non-life insurance such as fire, marine, motor, and health insurance, followed a similar path. In 1972, the General Insurance Business (Nationalisation) Act was enacted. With effect from 1 January 1973, 107 private general insurance companies were amalgamated and reorganised into four government-owned insurers: National Insurance Company, New India Assurance Company, Oriental Insurance Company, and United India Insurance Company.

These companies were placed under a central holding entity, the General Insurance Corporation of India, which was also designated as the national reinsurer. This structure dominated the general insurance market for several decades and aimed to ensure financial stability and uniform service delivery.

Economic Reforms and Liberalisation

The 1990s marked a turning point in India’s economic policy, with a shift towards liberalisation, privatisation, and global integration. As part of these broader reforms, the structure of the insurance sector was re-examined.

In 1993, the Government of India constituted a committee under the chairmanship of R. N. Malhotra, the then Governor of the Reserve Bank of India, to study reforms in the insurance sector.

The Malhotra Committee submitted its report in January 1994, recommending the opening up of the insurance industry to private players and foreign participation. The committee emphasised the need for competition to improve efficiency, customer service, and insurance penetration, while also recommending the establishment of an independent regulatory authority.

Although the committee suggested increasing the capital base of the Life Insurance Corporation significantly, the government adopted a cautious approach. Insurance reforms were implemented gradually, keeping in mind the sensitivity of the sector.

Establishment of a Regulatory Framework

The recommendations of the Malhotra Committee eventually led to the enactment of the Insurance Regulatory and Development Authority Act in 1999. This legislation provided for the establishment of an autonomous statutory regulator to oversee the insurance industry.

In April 2000, the Insurance Regulatory and Development Authority of India was set up with the objectives of protecting policyholder interests, regulating insurance business, and promoting the orderly growth of the sector. With this development, the insurance market was deregulated, and the monopoly of the Life Insurance Corporation came to an end.

Entry of Private and Foreign Insurers

From 2000 onwards, private insurance companies were allowed to operate in both life and general insurance segments, subject to regulatory requirements. Foreign companies were permitted to participate through joint ventures with Indian partners. Initially, foreign equity participation was capped at 26 per cent. This limit was increased to 49 per cent in 2015 and further raised to 74 per cent from 2021, reflecting the government’s intention to attract greater foreign investment, technology, and managerial expertise.

In 2002, the four public sector general insurers were de-linked from the General Insurance Corporation, which was converted into a pure national reinsurer in line with regulatory requirements.

Contemporary Structure of the Insurance Sector

In the present era, India’s insurance sector is characterised by a mixed structure comprising public and private players. The life insurance segment consists of one public sector insurer and several private insurers. The general insurance segment includes public sector companies, private insurers, and specialised entities such as those providing export credit and agricultural insurance.

In addition, standalone health insurance companies, introduced in the 2000s, focus exclusively on health coverage and have contributed to the expansion of health insurance penetration.

The sector is organised into three main categories of insurers: life insurers, general insurers, and standalone health insurers. These entities operate under the regulatory supervision of the Insurance Regulatory and Development Authority of India. Alongside domestic insurers, the market also includes a national reinsurer and branches of foreign reinsurance companies.