malhotra committee
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INTRODUCTION
The Committee on Reforms: In The Insurance Sector, popularly known as Malhotra
Committee had recommended in 1994 that brokers, representing the customer, be brought
in as another marketing and distribution channel, as prevalent in most of the developed
and developing markets to protect the consumer interests, to raise the level of
professional standards in risk management and underwriting and to speed up claims
settlement.
The Insurance sector in India governed by Insurance Act, 1938, the Life Insurance
Corporation Act, 1956 and General Insurance Business (Nationalisation) Act, 1972,
Insurance Regulatory and Development Authority (IRDA) Act, 1999 and other related
Acts. With such a large population and the untapped market area of this population
Insurance happens to be a very big opportunity in India. Today it stands as a business
growing at the rate of 15-20 per cent annually. Together with banking services, it adds
about 7 per cent to the country’s GDP .In spite of all this growth the statistics of the
penetration of the insurance in the country is very poor. Nearly 80% of Indian
populations are without Life insurance cover and the Health insurance. This is an
indicator that growth potential for the insurance sector is immense in India. It was due to
this immense growth that the regulations were introduced in the insurance sector and in
continuation “Malhotra Committee” was constituted by the government in 1993 to
examine the various aspects of the industry. The key element of the reform process was
Participation of overseas insurance companies with 26% capital. Creating a more
efficient and competitive financial system suitable for the requirements of the economy
was the main idea behind this reform. Since then the insurance industry has gone through
many sea changes .The competition LIC started facing from these companies were
threatening to the existence of LIC .since the liberalization of the industry the insurance
industry has never looked back and today stand as the one of the most competitive and
exploring industry in India. The entry of the private players and the increased use of the
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new distribution are in the limelight today. The use of new distribution techniques and
the IT tools has increased the scope of the industry in the longer run.
Insurance sector in India is one of the booming sectors of the economy and is growing at
the rate of 15-20 per cent annum. Together with banking services, it contributes to about
7 per cent to the country's GDP. Insurance is a federal subject in India and Insurance
industry in India is governed by Insurance Act, 1938, the Life Insurance Corporation Act,
1956 and General Insurance Business (Nationalisation) Act, 1972, Insurance Regulatory
and Development Authority (IRDA) Act, 1999 and other related Acts.
The origin of life insurance in India can be traced back to 1818 with the establishment of
the Oriental Life Insurance Company in Calcutta. It was conceived as a means to provide
for English Widows. In those days a higher premium was charged for Indian lives than
the non-Indian lives as Indian lives were considered riskier for coverage. The Bombay
Mutual Life Insurance Society that started its business in 1870 was the first company to
charge same premium for both Indian and non-Indian lives. In 1912, insurance regulation
formally began with the passing of Life Insurance Companies Act and the Provident
Fund Act.
By 1938, there were 176 insurance companies in India. But a number of frauds during
1920s and 1930s tainted the image of insurance industry in India. In 1938, the first
comprehensive legislation regarding insurance was introduced with the passing of
Insurance Act of 1938 that provided strict State Control over insurance business.
Insurance sector in India grew at a faster pace after independence. In 1956, Government
of India brought together 245 Indian and foreign insurers and provident societies under
one nationalised monopoly corporation and formed Life Insurance Corporation (LIC) by
an Act of Parliament, viz. LIC Act, 1956, with a capital contribution of Rs.5 crore.
The (non-life) insurance business/general insurance remained with the private sector till
1972. There were 107 private companies involved in the business of general operations
and their operations were restricted to organised trade and industry in large cities. The
General Insurance Business (Nationalisation) Act, 1972 nationalised the general
insurance business in India with effect from January 1, 1973. The 107 private insurance
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companies were amalgamated and grouped into four companies: National Insurance
Company, New India Assurance Company, Oriental Insurance Company and United
India Insurance Company. These were subsidiaries of the General Insurance Company
(GIC).
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REFORMS IN INSURANCE
The insurance sector in India have come a full circle from being an open competitive
market to nationalization and back to a liberalized market again. Tracing the
developments in the Indian insurance sector reveals the 360- degree turn witnessed over a
period of almost two centuries. The business of life insurance in India in its existing form
started in India in the year 1818 with the establishment of the Oriental Life Insurance
Company in Calcutta.
The General insurance business in India, on the other hand, can trace its roots to the
Triton Insurance Company Ltd., the first general insurance company established in the
year 1850 in Calcutta by the British.
The main objective of this section is to review the insurance sector at broader aspects and
to outline the main findings of important studies relating to insurance sector to use the
analysis as a background, for delineating the area of the present work.
In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor
R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its
future direction. The Malhotra committee was set up with the objective of
complementing the reforms initiated in the financial sector. The reforms were aimed at
creating a more efficient and competitive financial system suitable for the requirements
of the economy keeping in mind the structural changes then underway and recognizing
that insurance was an important part of the overall financial system where it was
necessary to address the need for similar reforms. In 1994, the committee submitted the
report and recommendations.
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The committee emphasized that in order to improve the customer services and increase
the coverage of insurance policies, industry should be opened up to competitions. But at
the same time, the committee felt the need to exercise caution as any failure on the part of
new players could ruin the public confidence in the industry. Hence, it was decided to
allow competition in a limited way by stipulating the minimum capital requirement of
Rs.100 crores.
The committee felt the need to provide greater autonomy to insurance companies in order
to improve their performance and enable them to act as independent companies with
economic motives. For this purpose, it had proposed setting up an independent regulatory
body- The Insurance Regulatory and Development Authority. Reforms in the Insurance
sector were initiated with the passage of the IRDA Bill in Parliament in December 1999.
The IRDA since its incorporation as a statutory body in April 2000 has fastidiously stuck
to its schedule of framing regulations and registering the private sector insurance
companies. Since being set up as an independent statutory body the IRDA has put in a
framework of globally compatible regulations. The other decision taken simultaneously
to provide the supporting systems to the insurance sector and in particular the life
insurance companies was the launch of the IRDA online service for issue and renewal of
licenses to agents. The approval of institutions for imparting training to agents has also
ensured that the insurance companies would have a trained workforce of insurance agents
in place to sell their products.
THE COMMITTEE ON REFORMS IN THE INSURANCE SECTOR
THE GOVERNMENT appointed the committee on reforms in the insurance sector
(1994) in april 1993 headed R.N.MALHOTRA,the former Governor of the Reserve Bank
of India.The terms of reference of the said Committee were:
(1) to examine the structure of the insurance industry as it has evolved within the existing
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framework and to assess its strength and weaknesses in terms of the objective of creative
an efficient and viable insurance industry providing a wide reach of insurance services
and a variety of insurance products wit a high quality of service to the public and serving
as an effective instrument for mobilization of financial resources for development.
(2) to make recommendations for changes in the structure of the insurance industry, as
well as the general framework of policy, as may be appropriate for the pursuit of the
above objectives keeping in mind the structural changes currently underway in other parts
of the financial system and in the economy.
(3) to make specific suggestions regarding the LIC and the GIC, which would help to
improve the functioning of these organizations in the changing economic environment
(4) to review the present structure of regulation and supervision of the insurance sector
and to make recommendations for strengthening and modernizing the regulatory system
in the tune with changing requirements.
(5) to review and make recommendations on the role and functioning of the surveyors,
intermediaries and other ancillaries of the insurance sector.
(6) to make recommendations o such other matters as the Committee considers relevant
for the health and long-term development of the insurance sector.
In under a year. the Committee submitted its Report, which was approved in principle by
the government. The major thrust of the recommendations was towards the opening up of
the insurance sector,for which initiative had to come from the government.
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LIBERALISATION OF THE INSURANCE INDUSTRY
The first sign of government concern about the state of the insurance
industry was revealed in the early nineties, when an expert committee
was set up under the chairmanship of late R.N.Malhotra. The Malhotra
Committee, which submitted its report in January 1994, made some
farreaching recommendations which, if implemented, could change the
structure of the insurance industry. The Committee urged the
insurance companies to abstain from indiscriminate recruitment of
agents, and stressed on the desirability of better training facilities, and
a closer link between the emolument of the agents and the
management and the quantity and quality of business growth. It also
emphasised the need for a more dynamic management of the
portfolios of these companies, and proposed that a greater fraction of
the funds available with the insurance companies be invested in non-
government securities. But, most importantly, the Committee
recommended that the insurance industry be opened up to private
firms, subject to the conditions that a private insurer should have a
minimum paid up capital of Rs. 100 crore, and that the promoter’s
stake in the otherwise widely held company should not be less than 26
per cent and not more than 40 per cent.
Finally, the Committee proposed that the liberalised insurance industry
be regulated by an autonomous and financially independent regulatory
authority like the Securities and Exchange Board of India (SEBI).
Subsequent to the submission of its report by the Malhotra Committee,
there were several abortive attempts to introduce the Insurance
Regulatory Authority (IRA) Bill in the Parliament. While several political
parties were against the very idea of allowing private firms to enter the
insurance industry, others were unsure about the extent of the stake
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that foreign investors/firms should be allowed to have in the post-
liberalisation insurance companies. However, it was evident that there
was broad support in favour of liberalisation of the industry, and that
the bone of contention was essentially the stake that foreign entities
was to be allowed in the Indian insurance companies. In November
1998, the central Cabinet approved the Bill which envisaged a ceiling
of 40 per cent for non-Indian stakeholders: 26 per cent for foreign
collaborators of Indian promoters, and 14 per cent for nonresident
Indians (NRIs), overseas corporate bodies (OCBs) and foreign
institutional investors (FIIs). However, in view of the widespread
resentment about the 40 per cent ceiling among political parties, the
Bill was referred to the standing committee on finance. The committee
has since recommended that each private company be allowed to
enter only one of the three areas of business—life insurance, general
or non-life insurance, and reinsurance— and that the overall ceiling for
foreign stakeholders in these companies be lowered to 26 per cent
from the proposed 40 per cent. The committee has also recommended
that the minimum paid up share capital of the new insurance
companies be raised to Rs. 200 crore, double the amount proposed by
the Malhotra Committee. The redrafted Bill, which was scheduled to be
introduced in the Parliament during the budget session of 1999, is yet
to see the light of the day.
The liberalisation of the insurance industry in India has thus emerged
as the litmus test for the ability and the willingness of a central
government to push through market friendly economic reforms. At the
same time, the government’s action in this sphere of economic activity
is being viewed by some others as the indicator of the extent to which
the government is willing to accommodate the dictates of the
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International Monetary Fund and the United States. The consequence
has been politicisation of the reform of the insurance sector, and
analyses of possible post-liberalisation scenarios have given way to
jingoism and doublespeak.
The insurance industry is a key component of the financial
infrastructure of an economy, and its viability and strengths have far
reaching consequences for not only its money and capital markets,1
but also for its real sector. For example, if households are unable to
hedge their potential losses of wealth, assets and labour and non-
labour endowments with
insurance contracts, many or all of them will have to save much more
to provide for events that might occur in the future, events that would
be inimical to their interests. If a significant proportion of the
households behave in such a fashion, the growth of demand for
industrial products would be adversely affected, thereby reining in
industrial and GDP growth. Similarly, if firms are unable to hedge
against “bad” events like fire and onthe-
job injury of a large number of labourers, the expected payoffs from a
number of their projects, after factoring in the expected losses on
account of such “bad” events, might be negative. In such an event, the
private investment would be adversely affected, and certain potentially
hazardous activities like mining and freight transfers might not attract
any private investment. It is not surprising, therefore, that economists
have long argued
that insurance facility is necessary to ensure the completeness of a
market.
However, while insurance companies provide hedging opportunities to
households and the corporate sector by selling them de facto
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American“put” options that can be exercised in the event of a
calamity, they themselves remain vulnerable to risks that are
associated with risk management. Further, owing to changes in the
nature of their products, they are increasingly becoming vulnerable to
the risk that is usually associated with banks and non-bank financial
intermediaries, namely, mismatch of assets and liabilities. While not a
significant amount has been written about the experiences of the
emerging markets, the US experience suggests that even in a
developed financial markets with provisions for supervision, insurance
companies can become insolvent and/or face runs. Since the viability
of insurance companies is a necessary condition for the emergence of
a robust insurance industry, it would be imprudent to ignore the impact
that market forces might have on the aforesaid viability.
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MALHOTRA COMMITTEE
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 sector be permitted to enter the insurance industry. They stated that
foreign companies be allowed to enter by floating Indian companies, preferably a joint
venture with Indian partners.
Following the recommendations of the Malhotra Committee report, in 1999, the
Insurance Regulatory and Development Authority (IRDA) was constituted as an
autonomous body to regulate and develop the insurance industry. The IRDA was
incorporated as a statutory body in April, 2000. The key objectives of the IRDA include
promotion of competition so as to enhance customer satisfaction through increased
consumer choice and lower premiums, while ensuring the financial security of the
insurance market.
With the Insurance Regulatory and Development Authority Act, 1999 coming into force,
the insurance industry has been opened up for the private sector. The Act provides for the
establishment of a statutory IRDA to protect the interests of insurance policy holders and
to regulate, promote and ensure orderly growth of the insurance industry. The IRDA was
formed by an Act of Parliament on April 19, 2000.
Under the IRDA Act, an ‘Indian insurance company’ will be allowed to conduct
insurance
business provided it satisfies the following conditions:
• It must be formed and registered under the Companies Act, 1956;
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• The aggregate holdings of equity shares by a foreign company, either by itself or
through its subsidiary companies or its nominees, should not exceed 26% paid up equity
capital of the Indian insurance company;
• Its sole purpose must be to carry on the life insurance business or general insurance
business or reinsurance business.
2 To operate the insurance business in India, the Indian insurance company has to obtain
a certificate of registration from IRDA.
It has also been provided in the IRDA Act that on or after the commencement of the
IRDA Act, no insurer will be allowed to carry on the life and general insurance business
in India, unless it has a paid up equity capital of Rs. 1 billion. For carrying on the
reinsurance business, the minimum paid up equity capital has been prescribed as Rs. 2
billion. The Reserve Bank of India (RBI) has also issued guidelines for banks’ entry into
the insurance business. For banks, prior approval of the RBI is required to enter into the
insurance business. The RBI would give permission to banks on a case-by-case basis,
keeping in view all relevant factors. Banks having a minimum net worth of Rs. 5 billion
and satisfying other criteria in respect of capital adequacy, profitability, non-performing
asset (NPA) level and track record of existing subsidiaries can undertake insurance
business through joint ventures, subject to certain safeguards. However, banks need not
obtain prior approval of the RBI for engaging in insurance agency business or referral
arrangement without any risk participation, subject to certain conditions.
In December, 2000, the subsidiaries of the General Insurance Corporation of India
were restructured as independent companies and at the same time GIC was converted into
a national re-insurer.
Today there are 24 general insurance companies including the ECGC and Agriculture
Insurance Corporation of India and 23 life insurance companies operating in the country.
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The insurance sector is a colossal one and is growing at a speedy rate of 15-20%.
Together with banking services, insurance services add about 7% to the country’s GDP.
A well-developed and evolved insurance sector is a boon for economic development as it
provides long- term funds for infrastructure development at the same time strengthening
the risk taking ability of the country.
1994, the committee submitted the report and some of the key recommendations
included:
i) Structure
Government stake in the insurance Companies to be brought down to 50%. Government
should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act
as
independent corporations. All the insurance companies should be given greater freedom
to
operate.
ii) Competition
Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter
the
sector. No Company should deal in both Life and General Insurance through a single
entity.
Foreign companies may be allowed to enter the industry in collaboration with the
domestic
companies.
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Postal Life Insurance should be allowed to operate in the rural market. Only one State
Level Life
Insurance Company should be allowed to operate in each state.
iii) Regulatory Body
The Insurance Act should be changed. An Insurance Regulatory body should be set up.
Controller of Insurance- a part of the Finance Ministry- should be made independent
iv) Investments
Mandatory Investments of LIC Life Fund in government securities to be reduced from
75% to
50%. GIC and its subsidiaries are not to hold more than 5% in any company (there
current
holdings to be brought down to this level over a period of time)
v) Customer Service
LIC should pay interest on delays in payments beyond 30 days. Insurance companies
must be
encouraged to set up unit linked pension plans. Computerisation of operations and
updating of
technology to be carried out in the insurance industry
The committee emphasized that in order to improve the customer services and increase
the
coverage of insurance policies, industry should be opened up to competition. But at the
same
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time, the committee felt the need to exercise caution as any failure on the part of new
players
could ruin the public confidence in the industry. Hence, it was decided to allow
competition in
a limited way by stipulating the minimum capital requirement of Rs.100 crores.
How big is the insurance market ?
Insurance is a Rs.400 billion business in India, and together with banking services adds
about 7% to India’s GDP. Gross premium collection is about 2% of GDP and has been
growing by 15-20% per annum. India also has the highest number of life insurance
policies in force in the world, and total investible funds with the LIC are almost8% of
GDP.
WHY OPEN UP THE INSURANCE INDUSTRY ?
An insurance policy protects the buyer at some cost against the financial loss
arising from a specified risk. Different situations and different people require a different
mix of risk-cost combinations. Insurance companies provide these by offering schemes of
different kinds.
Insurance 20-20:
One of the main differences between the developed economies and the emerging
economies is that insurance products are bought in the former while these are sold in
latter. Focus of insurance industry is changing towards providing a mix of both protection
/ risk over and long-term investment opportunities. Some of the major international
players in the insurance business, which might try to enter the Indian market, are – Sun
Life of Canada, Prudential of the United Kingdom, Standard Life, and Allianz etc.
Although the insurance sector is officially open to private players, they still need a
license from the IRDA, Following might be the future strategies of insurance companies.
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(1)The new entrants cannot compete with the state owned LIC on price alone. Due to its
size, LIC operates at very low costs and their premier on policies that offer pure
protection are on a
par with comparable schemes across the globe. What the new insurance companies will
probably offer is higher returns than the annualized 9-10% one can hope to earn from
LIC’s policies. This will put pressure on LIC to offer more attractive returns.
(2)Consumers can also expect product innovations. For instance, at present, LIC provides
cover for permanent disability and what the new companies could offer is temporary
disability insurance as well.
(3)Apart from the basic term insurance, most insurance products worldwide are sold as long-
term investment opportunities with the protection component being clearly spelt out in
the scheme.
(6) Foreign companies would also use superior software (like APEX) that will give them an
edge over the in-house LICsoftware. This technology will help private insurers in product
development and customizing products to suit individual needs.
(8)Access to insurance too will probably become more widespread. Role of intermediaries
would decrease and sale of insurance through direct channels and banks would increase.
Simple products like term insurance might be sold through the telephone or direct mail to
high net worth clients.
Why allow entry to private players?
• The choice between public and private might amount to choosing between the
lesser of two evils. An insurance contract is a "promise to pay" contingent on a
specified event. In the case of insurance and banking, smooth functioning of
business depends heavily on the continuation of the trust and confidence that
people place on the solvency of these financial institutions. Insurance products
are of little value to consumers if they cannot trust the company to keep its
promise. Furthermore, banking and insurance sectors are vulnerable to the "bank
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run" syndrome, wherein even one insolvency can trigger panic among consumers
leading to a widespread and complete breakdown. This implies the need for a
public regulator, and notpublic provision of insurance. Indeed in India, insurance
was in the private sector for a long time prior to independence
India is poised to experience major changes in its insurance markets as insurers operate
in an increasingly deregulated and liberalized environment. However, despite the
liberalization in the insurance sector, public sector insurance companies are expected to
maintain their dominant positions, at least in the foreseeable future. Nevertheless, given
the enormous potential of the Indian market, it is expected that there will be enough
business for new entrants. For consumers, opening up of the insurance sector will mean
new products, better packaging, and improved customer service. Product innovation and
channel diversification would gain momentum, in line with the global trend of financial
services convergence. For government, insurance, especially life insurance, can
substitute for State security programmes. It can thus relieve pressure on social welfare
systems and allow individuals to tailor their security programmes to their own
preferences. This substitution role is especially valuable, given the growing demand for
social security and the increased financial challenges faced by the Indian social
insurance system.
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RECOMMENDATIONS
The Committee has made its recommendations on the Terms of Reference as under.
A. Detariffing:
1. To take immediate and urgent steps to move towards detariffing the entire general
insurance market that includes the profitable segments like the fire and engineering and
the unprofitable business segments like motor. It is strongly recommended that this issue
should be addressed on a priority basis and a free market without tariffs and price
controls should be organized. IRDA, TAC and the General Insurance Council of the
Insurance Association of India should collaborate with each other to ensure a smooth
changeover to the non tariff system not later than 1st April 2006.
2. A road map should be drawn up for this purpose. IRDA, TAC and the General
Insurance Council should encourage, assist and guide individual insurers to build up
statistical bases for their own risk acceptances on all businesses currently under tariffs,
category-wise, as is now prevalent in the respective tariffs. This will enable them to be
ready for a Pure Risk rate regime (wherein the rates will not include any administration
and /or procurement costs or profit margins) proposed by the Committee to operate at
least with effect from 1st April 2006. This will thus prepare the insurers for a completely
detariffed market two years later. Involvement of consulting actuaries of insurers in this
exercise should be considered.
Insurers should gross up the designated Pure Risk rates to cover for their administration
and procurement expenses and profit margins according to their best underwriting
judgment. To this extent the market should have floating rates in which the underwriting
skills and cost and profit considerations will have a primacy from 1st April 2006.
3. The effect and fall out of the introduction of Pure Risk rate regime in the interim may
have an adverse impact on the rates in the short run on profitable segments whereas the
rates may go up in the hitherto unprofitable segments. To avoid or mitigate unhealthy
competition in pricing, until the market stabilizes, the Pure Risk rates (which will not
include any administration and / or procurement costs or profit margins) should be
regarded as the minimum benchmark subject to strict discipline and inspection as an
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intermediate step. Insurers should be alerted on the need to control expenses to achieve
appropriate balances in their results.
During such regime of Pure Risk rates, the standard terms and conditions of the tariff
wordings should be preserved. The roadmap envisaged must thoroughly dwell on this
aspect.
The TAC should be entrusted with the responsibility to prepare Pure Risk rates to be
regarded as the minimum for two years commencing from 1st April 2006 or even earlier if
possible and such rates should have the status of tariff rates. The TAC should monitor the
breaches of Pure Risk rates.
Punishment for breaches should be hefty enough to discourage deliberate breaches.
4. Since there is an industry tariff structure currently in force on most portfolios, the
Committee is of the view, that there has been very little incentive for individual insurers
to build up their individual risk category acceptances and experiences to be able to price
risks on claims cost plus basis.
Absence of statistical data would compel an insurer to price risks on assumptions either
with a conservative element built into it or force it to follow the rates of any of its
aggressive competitor. In a strongly developed broker market, the pressure on
underwriters will be intense; and the current competition is still young, just three years
old. The Indian insurance market is yet to mature in terms of underwriting skills to be
able to face tougher competitive conditions likely to emerge in future.
Underwriting and pricing of risks should, therefore, be based on statistical data to back up
the intended pricing structure both at the level of the individual insurer and of the market
as a whole. It is time for individual insurers to start building up their statistical data on
sound lines to avoid a chaotic situation and price wars later.
The IRDA, TAC and the General Insurance Council should guide and assist individual
insurers to adjust to the transformation that a free market situation will impose on their
business practices, mindset and procedures.
The changeover has to be as smooth as possible and with full awareness of its
consequences.
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5. Customers do need price competition to experience the full benefits of liberalization.
Insurers need to practice underwriting skills and risk management techniques to evaluate
risks and price products to fit in with global trends and practices. They should be enabled
to learn from international trends and developments. Brokers and agents need to display
their professional wares and expertise.
B. Special discount, Intermediary Remuneration, Special dispensation to PSUs and
Paid-up Capital norms.
1. To continue with the 5% Special discount (that has been in usage for over 25 years) in
the interim for certain Corporate bodies – both in the private and public sector on fire and
engineering insurances only- till detariffing of rates by 1st April 2006 or earlier as the
case may be. There is no justifiable reason demonstrated to the Committee for its sudden
withdrawal.
2. Since the Rs 10 lakh paid-up capital norm for corporate bodies, as defined below, fixed
earlier for qualifying for special discount of 5% is very low under the present economic
trends, the Committee recommends that the eligibility limit for the special discount of 5%
should now be raised to a minimum paid-up capital of Rs 1 crore and above for corporate
bodies. The special discount of 5% should be further restricted to such corporate bodies
for only fire and engineering insurances.
This will widen the access of corporate client base, below paid-up capital of Rs 1 crore,
both to the agents and brokers to display their professional expertise.
There should be no special discount of 5% allowed on any tariff cover either to
individuals or corporate bodies whose paid-up capital is below Rs 1 crore.
IRDA/TAC may issue suitable instructions in this regard.
Where special discount 5% is not applicable, the agency commission for insurances of
individuals and corporate bodies with a paid –up capital below Rs 1 crore should be
restricted to a maximum of 10% for agents. The
brokerage should be a maximum of 12.5% on tariff covers.
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Although not related to the paid-up capital issue, it is recommended that for statutory
covers both the agents and brokers should be eligible to a maximum of 10%
remuneration, as no special expertise is required to sell and service these covers and
further there shall be no special discount payable on this.
For non-tariff covers the brokers should be eligible to a maximum remuneration of 17.5%
and the agents to a maximum of 15% as currently specified.
3. The Corporate bodies, whether private limited companies or public limited companies
or public sector undertakings or statutory bodies having a paidup capital of Rs 1 crore
and above and up to Rs 25 crores should be allowed to have a choice of availing either a
5% special discount and place fire and engineering businesses directly with an insurer or
seek the services of a broker/agent when they will become ineligible for the 5% special
discount. The remuneration to brokers in such an event should be limited to a maximum
of 7.5%. The agency commission should be restricted to a maximum 6.25 %.
4. The Corporate bodies, whether private limited companies or public limited companies
or public sector undertakings or statutory bodies having a paid –up capital of above Rs 25
crores should be allowed to have a choice of availing either a 5% special discount and
place the fire and engineering business directly with an insurer or seek the services of a
broker/ agent, when they will become ineligible for the 5% special discount. The
remuneration to brokers in such an event should be limited to a maximum of 6.25%. The
agency commission should be restricted to a maximum of 5%.
In suggesting the above norms and remuneration, the Committee would like to record that
these remuneration packages should be regarded only as interim measures pending the
detariffing of the market with the introduction of Pure Risk rate regime not later than 1st
April 2006. The brokers/agents should be enabled in the interim to get integrated into the
system for their future potential gains and the more important professional roles they will
be expected to play.
5. The present brokerage/commission structure as it exists in the present regulations on
tariff covers, does in the view of the Committee, encourage rebating and malpractices to
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flourish. It has happened in the past, despite numerous measures discouraging their
proliferation by way of social control of insurance and nationalization.
The Regulator at this initial stage of liberalization of markets should be wary of such
substantial remuneration to be paid on tariff covers, wherein the professional input is
limited, whether it is the broker or the agent. Inducing competition in the market, while
controlling prices and product features for most covers will inevitably encourage
unhealthy practices to flourish.
Hence the Committee has suggested detariffing the market by the introduction of Pure
Risk rate regime not later than by 1st April 2006 as the logical step to create an
environment where competition is fair and there is a level playing field.
6. As regards the impact of brokerage and commission on procurement costs of insurers
on tariff covers, it is observed that the cost of transacting insurance business in India has
remained high at over 30% of the earned premiums generated for both the public and the
private players. Additional costs if imposed suddenly would further burden them.
Insurers have neither actively adopted nor taken any serious measures to reduce costs nor
have they any strategies in place to do so that will result in lower premiums to consumers
at least in future. Insurers have combined ratios (claims cost plus expenses) in excess of
114% on earned premiums for the year 2002/3 resulting in huge underwriting losses. The
Boards of Directors of these insurers should actively encourage drawing up of plans to
reduce management costs in order to lower their combined ratios that will ultimately
benefit consumers.
The Committee is also of the view that in a tariff market the brokerage and commission
structure as recommended above is in keeping with the services that can be rendered by
them.
Detariffing should, however, be completed not later than 1st April 2006 in order to allow
the Pure Risk rate regime and market forces to decide on prices and intermediation
expenses and allow consumers to experience the benefits of liberalization.
21
C. Remuneration of agents and brokers:
1. There should be a differential maintained between the Agents and Brokers in their
remuneration packages. The latter has more onerous responsibilities and functions to
discharge. As such the maximum brokerage payable should be a little higher than the
agency commission.
2. Agency commission for tariff covers should be revised to a maximum of 10% to
maintain a differential of 2.5% in the remuneration structure between brokers and agents /
corporate agents.
3. For statutory covers, however, 10% remuneration should be maintained for both of
them, as no special expert advice is required in providing or servicing such covers.
4. On non-tariff covers, the maximum remuneration for brokers should remain at 17.5%
and that of agents at 15%.
D. Government/Public Sector Undertakings:
1. The Committee recommends that all corporate bodies be treated alike and for
intermediation purposes treated under the Special Discount recommendation as
mentioned in B - 2 to 4 above. This is irrespective of whether they are in the private
sector or public sector. As such, public sector undertakings should be permitted to
exercise their choice for intermediary access with stipulations on paid-up capital norms,
remuneration and discounts as mentioned under in B - 2 to 4 above.
2. Fairness and equity requires that IRDA should not take a selective view in organizing
the market or in limiting the freedom of choice to any sector on its own.
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CONCLUSION
A committee was set up in 1993 under the chairmanship of R.N. Malhotra, former
Governor of the Reserve Bank of India, to make recommendations for reforms in the
insurance sector. The Malhotra Committee recommended introduction of a concept of
“professionalisation” in the insurance sector to make out a strong case for paving the way
for foreign capital.
In its report submitted in 1994, the committee recommended, among other things, that:
Private players be included in the insurance sector.
Foreign companies be allowed to enter the insurance sector, preferably through joint
ventures with Indian partners.
The Insurance Regulatory and Development Authority (IRDA) be constituted as an
autonomous body to regulate and develop the insurance sector.
The key objectives of the IRDA would include promotion of competition so as to
enhance customer satisfaction through increased consumer choice and lower premiums
while ensuring the financial security of the insurance market.
Brokers representing the customer be brought in as another marketing and distribution
channel, a practice prevalent in most developed markets
Raise the level of professional standards in risk management and underwriting and speed
up settlement of claims.
Following the recommendations, the IRDA was constituted as an autonomous body in
1999 and incorporated as a statutory body in April 2000. With the coming into force of
the IRDA Act, 1999, the insurance industry was opened up to the private sector.
23
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