Nationalisation of Insurance in India
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Introduction
The insurance sector in India has experienced a 360-degree journey over a period of more than a
hundred years. Its transition from an open competitive sector to nationalisation and then back to a
liberalised market characterises this phenomenon. The insurance sector was brought under the
government wrap within ten years of independence. Since then, till the re-opening of the sector in the
1990s, the state-owned companies functioned under the deluge of bureaucracy and inefficiency but
still had millions of policyholders, as there were no alternatives. During this period, any suggestion
regarding the opening up of the sector was met with harsh criticism and agitation from insurance
employees unions. The Congress government (1991-1996), that introduced reforms in various sectors
of the economy could not bring about a change in the insurance sector and it was left to the BJP-led
coalition to instate the present liberal structure, despite criticism from some of its left support groups.
The argument behind opening up of the sector was consumer-centric, which claimed that opening up
insurance would give better products and service to consumers; the opponents of privatisation
argued that in a poor country like India insurance needs to have social objectives and newcomers will
not have that commitment. Although the insurance sector was opened to competition again in 1999-
2000, it still has some way to go before we can gauge its true performance.
Overview
Insurance business is divided into four classes:
a) Life Insurance
b) Fire
c) Marine
d) Miscellaneous Insurance.
Life insurers undertake the Life Insurance business; general insurers handle the rest. The
business of insurance essentially means defraying risks attached to an activity (including life) and
sharing the risks between various entities, both persons and organisations. Insurance companies are
important players in financial markets as they collect and invest large amounts of premium in various
investment instruments. Insurance offers the following benefits:
a) Protection to investors
b) Accumulation of savings
c) Channelling these savings into sectors needing huge long-term investments.
Insurance companies receive a steady cash stream of premium or contributions to pension
plans. Their cash flows are determined on the basis of various actuary studies and models. Since
their liabilities are long-term or contingent in nature, their investments are also long-term and they
are able to maintain a healthy liquidity position. Since they offer more than the return on savings in
the shape of life cover to the investors, the rate of return guaranteed on their insurance policies is
relatively low. Consequently, the need to seek high rates of return on their investments is also low.
Since the risk factor in the insurance business is quite high, insurance companies usually invest in
relatively safer bets such as bonds of GOI, PSUs, state governments, local bodies, corporate houses
and mortgages of long-term nature. Lately, insurance companies have also ventured into pension
schemes and mutual funds.
Life insurance constitutes the major share of insurance business. Life insurance depends
upon the laws of mortality. Life has to end sooner or later and the claim in respect of life is certain.
On the other hand, in case of general insurance, there may never be any claim and the amount
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