Saturday, November 15, 2008

History of Insurance in India (Colonial Era)

Life insurance in the modem form was first set up in India through a British company called the Oriental Life Insurance Company in 1818, followed by the Bombay Assurance Company in 1823 and the Madras Equitable Life Insurance Society in 1829. All of these companies operated in India but did not insure the lives of Indians. They insured the lives of Europeans living in India.

Some of the companies that started later did provide insurance for Indians, but they were treated as "substandard." Substandard in insurance parlance refers to life insurance for people with physical disability. In this case, the common adjustment made was a "rating-up" of five to seven years to the normal life expectancy of a British person in India. This meant, treating q(x), the (conditional) probability of dying between x and x + 1, for an x-year-old Indian male as if it was q(x + 5) or q(x + 7) of a British male. Therefore, Indians had to pay an ad hoc extra premium of 20 percent or more. This was a common practice of European companies that were
operating in Asia or Latin America.

The first company to sell policies to Indians with "fair value" was the Bombay Mutual Life Assurance Society starting in 1871. The first general insurance company, Triton Insurance Company Ltd., was established in 1850. It was owned and operated by the British. The first indigenous general insurance company was the Indian Mercantile Insurance Company Limited, established in Bombay in 1907. At the time, insurance business was conducted in India without any specific regulation. Insurers were subject to the Indian Companies Act of 1866, but the insurance industry was otherwise unregulated.

After the start of the "Be Indian Buy Indian" movement (called the Swadeshi movement) in 1905, indigenous enterprises sprang up in many industries. Not surprisingly, the movement also touched the insurance industry, leading to the formation of dozens of life insurers along with provident ftind companies (pension ftinds).

In 1912, two sets of legislation were passed: the Indian Life Assurance Companies Act and the Provident Insurance Societies Act. There are several striking features of these legislations. First, they were the first legislations in India that particularly targeted the insurance sector. Second, they did not apply to general insurance, because the government did not feel the necessity to regulate general insurance. Third, they restricted activities of Indian insurers but not foreign insurers, even though the legislation was modeled after the British Act of 1909.

Comprehensive insurance legislation covering both life and non-life business did not materialize for the next 26 years. During the first phase of these years, Great Britain entered World War I—an event that disrupted all legislative initiatives. Later, Indians demanded freedom from the British. As a concession, India was granted "home rule" through the Government of India Act of 1935, which provided for legislative assemblies for provincial governments as well as for the central government. But supreme authority of promulgated laws remained with the British

The only significant legislative change before the Insurance Act of 1938 was Act XX of 1928. It enabled the government of India to collect information about (1) Indian insurers operating in India, (2) foreign insurers operating in India, and (3) Indian insurers operating in foreign countries. The last two elements were missing from the 1912 Insurance Act. Information thus collected allows us to compare the average face value of Indian insurers to their foreign counterparts. In 1928, the average policy value of an Indian company was U.S. $619 compared to $1,150 for foreign companies (Indian Insurance Commissioner's Report, 1929, p. 23).

Foreign insurers were doing well during that period. In 1938, the average size of the policy sold by Indian companies had fallen to U.S. $532 (compared to $619 in 1928), and that of foreign companies had risen somewhat to $1,188 (in 1928, the average size was $1,150).

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