Sunday, November 16, 2008

History of Insurance in India (The Insurance Act of 1938)

In 1937, the government of India set up a consultative committee. Sushil C. Sen, a well-known solicitor in Calcutta, was appointed the chair of the committee. He consulted a wide range of interested parties, including leaders within the insurance industry. It was debated in the legislative assembly, and, finally, in 1938, the Insurance Act was passed. This was the first comprehensive piece of legislation in India, covering both life and general insurers.

It covered deposits, supervision of insurers, investments, commissions of agents, and directors appointed by the policyholders, among other topics. This piece of legislation lost significance after life insurance was nationalized in 1956, and general insurance was nationalized in 1972. With the privatization in the late twentieth century, the Insurance Act of 1938 returned as the backbone of current legislation of insurers.

To implement the 1938 Act, an insurance department was established in the Ministry of Commerce by the government of India; later it was transferred to the Ministry of Finance. One curious element of the Act's classification of lines of insurance business was its inclusion of automobile insurance in the "miscellaneous" category. Later in the century, automobiles became the largest single item of general insurance. However, it continued to be included in the miscellaneous category, making it difficult to delineate the effects of losses due to pricing that drove this sector. For example, the Tariff Advisory Committee effectively fixed prices for a number of general insurance lines of business. Most premiums were below what would have been actuarially fair (especially for auto), but reporting auto insurance under the miscellaneous category masked this underpricing.

When the market was opened again to private participation in 1999, the earUer Insurance Act of 1938 was reinstated as the backbone of the current legislation of insurers, as the Insurance Regulatory and Development Authority Act of 1999 was superimposed on the 1938 Insurance Act. This revival of the earlier legislation has created a messy problem in that the Insurance Act of 1938 explicitly forbade insurers to participate in other financial services activities such as banking.

By 1956, there were 154 Indian life insurers. There were 16 non-Indian insurers, and 75 provident societies were issuing life insurance policies. Most of these policies were centered in the big cities of Bombay, Calcutta, Delhi, and Madras.

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