BRIEF HISTORY OF INSURANCESECTOR IN INDIA The insurance sector in India has come a full circle from b e i n g a n o p e n competitive market

to nationalization and back to a liberalized market again.Tracing the developments in the Indian insurance sector reveals the 360degreeturn witnessed over a period of almost 190 years.The business of life insurance in India in its existing form started in India in the ye ar 1818 wi t h t he est abl i shm ent of t he Ori ent al Li f e Insu ranc e C om pan y i n Calcutta.Some of the important milestones in the life insurance business in India are:1912 - The Indian Life Assurance Companies Act enacted as the first statute toregulate the life insurance business.1928 The Indian Insurance Companies Act enacted to enable the government tocollect statistical information about both life and non-life insurance businesses.1938 - Earlier legislation consolidated and amended to by the Insurance Act withthe objective of protecting the interests of the insuring public.1956 - 245 Indian and foreign insurers and provident societies taken over by thecentral government and nationalized. LIC formed by an Act of Parliament, viz.

LIC Act, 1956, with a capital contribution of Rs. 5 crore from the Government of India.The General insurance business in India, on the other hand, can trace its roots tot h e Triton Insurance Company Ltd., the first general insurance c o m p a n y established in the year 1850 in Calcutta by the British.Some of the important milestones in the general insurance business in India are:1907 - The Indian Mercantile Insurance Ltd. set up, the first company to transactall classes of general insurance business.1957 - General Insurance Council, a wing of the Insurance Association of India,frames a code of conduct for ensuring fair conduct and sound business practices.1968 - The Ins ur ance Act am ended t o re gul at e i nvest m ent s and set m i ni m um solvency margins and the Tariff Advisory Committee set up.1972 - The General Insurance Business (Nationalization) Act, 1972 nationalizedthe general insurance business in India with effect from 1st January 1973.107 i nsu rers am al gam at ed an d group ed i nt o four com pani es vi z . t he Nat i onal Insurance Company Ltd., the New India Assurance Company Ltd., the OrientalInsur a nce C om pan y Lt d. a nd t he Uni t ed Indi a Ins uran ce C o m pan y L t d. G IC incorporated as a company.

INSURANCE MARKET IN INDIA NON-LIFE INSURANCE MARKET In December 2000, the GIC subsidiaries were restructured as i n d e p e n d e n t insurance companies. At the same time, GIC was converted into a national re-insurer. In July 2002, Parliamant passed a bill, delinking the four subsidiaries fromGIC.Presently there are 12 general insurance companies with 4 public sector companiesand 8 private insurers. Although the public sector companies still dominate thegeneral insurance business, the private players are slowly gaining a

foothold.According to estimates, private insurance companies have a 10 percent share of t h e m arket , up from 4 per cent i n 2001. In t h e fi rst h al f of 2002, t he pri vat e companies booked premiums worth Rs 6.34 billion. Most of the new entrantsreported losses in the first year of their operation in 2001.With a large capital outlay and long gestation periods, infrastructure projects arefraught with a multitude of risks throughout the development, construction andop erat i on st a ges. These i ncl ude ri s ks as s oci at ed wi t h proj ect i m pl em ent ai on, including geological risks, maintenance, commercial and political risks. Withoutcovering these risks the financial institutions are not willing to commit funds tothe sector, especially because the financing of most private projects is on a limitedor non- recourse basis.Insurance companies not only provide risk cover to infrastructure projects, they also contribute long-term funds. In fact, insurance companies are an ideal sourceof long term debt and equity for infrastructure projects. With long term liability,they get a good asset- liability match by investing their funds in such projects.

IRDA regulations require insurance companies to invest not less than 15 percent of their funds in infrastructure and social sectors. International Insurance companiesalso invest their funds in such projects.Insurance costs constitute roughly around 1.2- 2 percent of the total project costs.Under the existing norms, insurance premium payments are treated as part of thef i x e d c o s t s . C o n s e q u e n t l y t h e y a r e t r e a t e d a s p a s s - t h r o u g h c o s t s f o r t a r i f f calculations.Premium rates of most general insurance policies come under the purview of thegovernment appointed Tariff Advisory Commitee. For Projects costing up to Rs 1Bi l l i on, t he Tari ff Advi sor y C om m i t t ee set s t he prem i u m rat es, for P roj ect s bet ween R s 1 bi l l i on and R s 15 bi l l i on, t he rat es are set i n keepi n g wi t h t heco m m i t t ee's gui del i nes ; and proj ect s abov e R s 15 bi l l i on are s ubj e ct ed t o re -insurance pricing. It is the last segment that has a number of additional productsand competitive pricing.Insurance, like project finance, is extended by a consortium. Normally one insurer t ak es t he l ea d, shoul deri ng about 40 -50 per cent of t he ri sk and recei vi n g a p r o p o r t i o n a t e p e r c e n t a g e o f t h e p r e m i u m . T h e o t h e r c o m p a n i e s s h a r e t h e remaining risk and premium. The policies are renewed usually on an annual basisthrough the invitation of bids.Of late, with IPP projects fizzling out, the insurance companies are turning onceagain to old hands such as NTPC, NHPC and BSES for business.

RE-INSURANCE BUSINESS Insurance companies retain only a part of the risk (less than 10 per cent) assumed by them, which can be safely borne from their own funds. The balance risk is re-insured with other insurers. In effect, therefore, re-insurance is insurer's insurance.It forms the backbone of the insurance business. It helps to provide a better spreadof risk in the international market, allows primary insurers to accept risks beyondtheir capacity, settle accumulated losses arising from catastrophic events and stillmaintain their financial stability.While GIC's subsidiaries look after general insurance, GIC itself has been themajor reinsurer. Currently, all insurance companies have to give 20 per cent of t hei r rei nsur ance busi ness t o G IC . Th e ai m i s t o e nsure t hat G IC 's rol e as t he national reinsurer remains unhindered. However, GIC reinsures the amount further with international companies such as

Swissre (Switzerland), Munichre (Germany),and R o yal e (UK). R ei ns urance prem i um s have seen an ex orbi t ant i ncre ase i n recent years, following the rise in threat perceptions globally. LIFE INSURANCE MARKET The Life Insurance market in India is an underdeveloped market that was onlytapped by the state owned LIC till the entry of private insurers. The penetration of life insurance products was 19 percent of the total 400 million of the insurable popul at i on. The st at e owned LI C sol d i nsurance as a t ax i ns t rum ent , not as a product giving protection. Most customers were under- insured with no flexibilityor transparency in the products. With the entry of the private insurers the rules of the game have changed.The 12 private insurers in the life insurance market have already grabbed nearly 9 percent of the market in terms of premium income. The new business premiums of