• Preface
  • What is meant by privatization in the insurance sector?
  • Sector/Activities of Insurance Liberalization
  • Steps taken for privatization in the insurance sector of India
  • Advantages and disadvantages of privatization in insurance sector,

Economic liberalization has become the basic mantra of development of modern developing nations. Developing nations have started considering it as the key to economic development and are considering it as a panacea to get rid of many of their socio-economic problems. The process of India’s economic liberalization is not limited to the industrial sector and has entered the service sector as well. Insurance is one such service sector in which the process of liberalization has started. As a result, apart from public companies in the insurance sector, private companies are also engaged in insurance business. Recently, taking this process forward, the Central Government has also allowed foreign companies to participate in the insurance business. As a result, in the coming times, not only competition will be encouraged in the insurance business, but diversity will also be seen in the insurance business.

Privatization in the field of insurance refers to those efforts by which the rules, policies, norms and procedures regulating and controlling the insurance sector can be modified in such a way that private sector entrepreneurs and companies are empowered to use the latest technology and knowledge. It can be encouraged so that the way for rapid development of insurance business and national economy can be paved and it can be made globally competitive by giving it a transnational direction.

Pro. According to Madhu Dandvate ‘Privatization refers to those efforts by which the economic system is freed from its inelasticities and those arbitrary controls and procedures of bureaucracy, which give rise to delay, corruption and inefficiency and reduces production.

In conclusion, privatization refers to those efforts by which a country’s economic policies, norms and rules and administrative controls and procedures are made in line with the needs of the country’s rapid economic development, and the use of latest technology and knowledge is encouraged. It is done so that by giving a transnational direction to the country’s economy, it can be established as a competition on the globe. For this, private and foreign companies should be allowed to enter this business.

Several activities are necessary to be done for the liberalization of the insurance sector. The following measures can be taken in the field of its liberalization:

  1. Improving the regulations related to insurance.
  2. To make effective arrangements for regulation of insurance but to remove obstacles in the way of its development.
  3. Providing exemption to the private sector to enter the insurance business.
  4. Regulation of healthy competition between private and public sector insurance institutions.
  5. Ensuring the cooperation of foreign entrepreneurs / institutions in the insurance sector.
  6. Denationalization or Privatization of Life Insurance Corporation and General Insurance Corporation and its subsidiary companies.
  7. To regulate and control the flow of foreign capital in the insurance sector so that there can be continuous flow of necessary capital in this sector.
  8. Participation of foreign entities / ventures in the insurance business of India.
  9. To expand postal insurance to extend insurance to rural areas of the country.
  10. Establishing Insurance Regulation and Development Authority and providing all powers of Insurance Act.
  11. To make effective arrangements for providing efficient and effective service to the policy holders.
  12. To provide directions for determining insurance premiums on a rational basis.
  13. To encourage the development of new insurance products.

The process of privatization in the insurance sector of India was started in 1993 itself when the then Finance Minister Dr. Manmohan Singh In the budget speech of the year 1994-95, announced the liberalization of the insurance sector. Since this announcement, the following major steps have been taken in the direction of privatization in the insurance sector.

  1. Formation of the Malhotra Committee – In April 1993, the Malhotra Committee was constituted. This committee was formed to suggest reforms and deregulation in the insurance sector. This committee was entrusted with the task of studying the following specific aspects and giving suggestions.
    • To examine the structure of the insurance industry, to know its advantages and disadvantages so as to develop an efficient and economical insurance industry.
    • To make special suggestions to the Life Insurance Corporation and the General Insurance Corporation so that they can improve their functioning in line with the changing economic environment.
    • Advising the government regarding the entry of private and foreign companies in the insurance sector.
    • To advise on such matters as the Committee may consider necessary for the efficient and long-term development of the insurance industry.
  2. Malhotra Committee Report – In January 1994, the Malhotra Committee submitted its report to the government. There were 27 recommendations in this report. Some of the major recommendations are as follows:-
    • The insurance sector should be privatized in a controlled manner.
    • Foreign companies, if allowed in the insurance sector, should be asked to set up companies in India. Indian companies should also participate in such companies.
    • Out of the shares held by the Government in Life Insurance Corporation and General Insurance Corporation, 50 percent of the shares should be disinvested among the public and employees.
    • Contribution to pension schemes run by insurance companies should be exempt from tax.
    • There should be an insurance regulatory body similar to the insurance regulator, which should have complete regulatory powers.

Benefits – There are many benefits of privatization in the insurance sector. Its benefits can be studied by dividing them into the following categories:-
  1. Benefits to the economy – Privatization in the insurance sector can bring the following benefits to the economy: –
    • Development of world-class insurance market – Liberalization will make it possible to develop a world-class insurance market in the Indian economy, due to which there will be free competition in the market and high-level insurance. Services will be available at the lowest cost.
    • More employment and income – By liberalizing the insurance sector, more employment opportunities will also be available in the country. Not only this, the per capita income will also increase gradually.
    • More capital formation – People will also have more savings due to more employment and income. With this more savings, people will be inclined to take more and more insurance. The ultimate result of this will be that capital formation will also increase in the country. According to the estimates of the Confederation of Indian Industry, in the present (1999-2000) where Rs. 20,000 crores. 1,48,000 crores, while by 2009-2010 it will reach 1,48,000 crores. Most of this amount will play an important role in capital formation of the country.
    • Increase in foreign exchange reserves – With the development of world-class market of insurance, the country’s insurance institutions will get insurance business in foreign countries as well. Apart from this, foreign institutions will also invest capital in the country. Therefore, foreign investment and premium received will undoubtedly increase foreign exchange reserves.
    • Maturity in Debt Market – The amount of premium received from the insurance business will bring maturity in the short term and debt market in the country. The era of stability in the loan market will begin and invention of new loan documents will be possible.
    • Development of infrastructure – The capital required from the insurance business will speed up the development of infrastructure in the country. With this, the necessary resources will be easily available for the construction of roads, railways, water, electricity, telecommunications, industrial settlements, dams, canals etc.
    • Rapid growth of industries – As a result of privatization, good affordable and expected insurance services will be available in the country. Along with this, capital formation and availability will also improve. This will provide an opportunity for rapid development of all types of industries in the country. There will be special development of industries necessary for infrastructure like cement, iron and steel industries.
    • Development of knowledge and knowledge-based industries – The process of privatization of insurance industry will lead to rapid development of knowledge and knowledge based industries. As a result, there will be rapid development of insurance education and training institutions, insurance related software and hardware, insurance consultancy institutions, insurance brokers and underwriters organizations etc.
    • Higher government income – Liberalization and entry of private sector in the insurance industry will give the government more income from taxes. The Indian life insurance sector currently attracts relatively low income tax.
    • Heavy investment in social sectors – Liberalization in the insurance sector will also make possible heavy investment in the social sectors of the country. With the availability of more capital and taxes, necessary funds will be available for the development of education, medicine, family welfare etc. in the country.
    • International Cooperation – International cooperation will also increase by privatizing the insurance sector. The cooperation of all foreign insurance companies, foreign institutions etc. will be taken in this work.
    • Increase in international reputation – The country’s international reputation will also increase due to liberalization in the insurance sector. When any sector of the economy develops and prospers, the country’s reputation in the international community automatically increases.
  2. Benefits to the Industry – The following benefits can be obtained from the privatization in the insurance sector to the insurance industry.
    • technology transfer- Privatization in the insurance sector will lead to transfer of new technology of insurance in the country. Latest techniques for assessment of risks, determination of premium, investment of money etc. will come in the country, this will strengthen the insurance industry.
    • New products – With privatization in the insurance sector, new insurance products i.e. insurance letters will be available in the country. With this, the insurance industry will be able to develop and expand its business by providing the latest products.
    • Flexible price policy – In economic liberalization, insurance institutions will be able to adopt flexible price policy and the era of administrative price policy will end. They may determine the competitive price based on the effects of market factors.
    • Availability of services of management and finance experts – In the process of liberalization, the services of the best management and finance experts from all the countries of the world will be available. With their services, the insurance business can be conducted efficiently with economy.
    • Development of professional managers- Privatization in insurance sector will lead to development of knowledge of insurance.Many teaching managers will be developed.
    • Contribution to the development of insurance business – Privatization in the insurance sector will also contribute to the development of insurance business. The field of insurance business will increase. Its area will not be limited to big cities, but will also extend to small villages. Its market will also become international from local. According to the estimates of the Confederation of Indian Industry, the current (1999-2000) amount of premium due to the increase in life insurance business alone is Rs 20,000 crore. 1,48,000 crore by 2009-10 to Rs. Will happen 14,000 crore from pension schemes till 2009-10. amount will be received. The amount of commercial non – life insurance increased to Rs 37,500 crore by 2009-10 . 400 crore and the premium of personal non life insurance will also be Rs. 5,000 crore to Rs. Will happen From these figures, it can be estimated that how much the insurance business will develop due to privatization.
    • Improvement in Productivity and Efficiency – Privatization in the insurance sector will also increase the productivity and efficiency of this industry. International competition itself will contribute more and more to it.
    • Development and expansion of business activities – With the good services of insurance, many high-risk business activities can also be developed in the country.
    • Development of Competitive Capability – The development of professional managers, the availability of latest insurance products at reasonable prices and the development of the market sector will lead to the development of the competitive ability of the insurance industry. As a result, Indian insurance institutions will be able to establish their feet in the international market.
    • Satisfied Human Resource – With privatization in the insurance sector, the human resource (employees) of the insurance industry will be satisfied. With the development in the insurance sector, they will also get good training, they will get to do good business. As a result, productivity and effectiveness will increase. All these will give them more income and satisfaction.
  3. Benefits to the public / consumers – Privatization in the insurance sector can have the following benefits to the public ie consumers,
    • Freedom in selection – Privatization in the insurance sector will give consumers freedom in choosing insurance policies and insurance companies. They can buy any insurance from whichever company they want and whatever they want.
    • Reasonable premium – Due to privatization, there will be many insurers in the market, the insured will be able to get insurance from that insurer whose premium will be minimum.
    • Consumer Protection – In a competitive market, all insurers will take utmost care of the interests of the consumer. Hence consumer interests will be protected.
    • Comprehensive schemes of social security – Many types of social security insurance letters will be available through many insurers. These schemes will include insurance papers of pension, gratuity, accident benefit, medical etc. As a result, consumers will be able to get insurance benefits in old age or when they are unable to work.
    • Good and reliable service – A result of privatization will also be that good and reliable insurance services will be available to the consumer.
    • More employment opportunities – Due to privatization many new institutions will be established in the insurance sector. In these, more employment opportunities will be available to the public.
  4. Benefits to employees – Labor unions and employees often oppose privatization in the insurance sector, but they will also definitely get the benefits of privatization. The possible benefits they will receive are as follows:
    • Training and Development – Privatization in the insurance sector will provide new knowledge and educational training facilities to the employees in the insurance sector.
    • Knowledge of latest methodology – Continuous information about the modern functioning and technology of insurance will continue to be available to the employees. This would be possible by maintaining constant contact with the international market.
    • More opportunities for work – Privatization in the insurance sector will lead to the establishment of many insurance institutions. This will provide more work opportunities to the existing employees.
    • Promotion and Development Opportunities – Establishment of many institutions due to privatization and expansion of insurance services will provide many new opportunities for promotion and development to the existing insurance employees.
    • Higher Productivity – More education – training facilities, knowledge of latest technology and wider opportunities of work will increase the productivity of the employees. They will be able to do more and better quality work than before.
    • Higher Remuneration – Due to more productivity, promotion, etc., employees will be able to get more remuneration than before.
    • Support of professional management – Due to privatization, professional managers will develop in the insurance industry. Hence the employees will get an opportunity to work and learn from qualified professional managers. This will not only give mental satisfaction to the employees, but will also lead to their professional development.
  5. Drawbacks of privatization in the insurance sector – The process of privatization in the insurance sector is also opposed. Opponents are worried about its side effects. Generally, due to its opposition, the side effects of privatization are considered as follows:-
    • Cutthroat competition – Privatization in the insurance sector will lead to fierce cutthroat competition in the insurance market. Therefore, those who oppose it argue that such competition is never in the interest of any industry or consumers or country. Due to this, many insurance institutions will be drowned and the insured will have to face serious consequences.
    • End of state monopoly – With privatization, the state monopoly that has been going on till now in the insurance sector will end.
    • Shortage of funds for social / public sector – At present Life Insurance Corporation and General Insurance Corporation and its four subsidiary companies together are providing about 90,000 crore rupees for public / social sector. In other words, Life Insurance Corporation is providing 80 to 85 percent of its total funds and General Insurance Corporation and its subsidiary companies are providing 60 to 70 percent of their total funds to the public/social sector. Although the government is also making such rules that private sector companies will also invest a certain percentage of the premium received in the social sector, but it cannot be said with certainty that such large funds will be available.
    • Domination of external institutions – There is also a fear of privatization that the insurance sector will be dominated by external institutions. It is argued that foreign insurance companies are richer in insurance technology, prestige and experience. So there is doubt whether Indian companies will be able to stand in front of them.
    • Large amount insured – Insurance companies will issue only large amount of insured certificate, whereas at present it is Rs. 10,000. Insurance certificates are also issued. Due to this, economically weak people will not be able to take advantage of insurance.
    • More focus on profitable insurance policies – Due to privatization, private sector insurance companies will develop more insurance policies in which they have to bear less risk and are profitable for them. They will ignore the interests of the general public. Will not take special interest in insuring high risk lives like women, handicapped etc.
    • Neglect of rural areas – Those opposing privatization in the insurance sector also give an argument that domestic and foreign private sector companies will ignore rural areas. They will focus more on getting insurance business in urban areas than expanding insurance in villages. This is because the average cost of an insurance policy is lower in urban areas.
    • Difficulty in controlling insurance institutions – There will be difficulty in controlling private sector domestic and foreign companies. They can charge arbitrary premium after establishing their business. It would be a very difficult task to take strict action against them for non-payment of claims in time or non-compliance of the codes of conduct.
    • Tendency of Speculation – Due to privatization, the tendency of betting will flourish in the private sector companies. They will start making insurance policies and rates of premiums in the spirit of speculation instead of real facts. This will increase the tendency to earn profit in the short term. Therefore, such companies may become bankrupt in the long run. The history of the world also confirms this fact.
    • Privatization under external pressure – Those opposing privatization also argue that privatization is being done under external pressure. Government is doing privatization under the pressure of GATT.
    • Fulfillment of budget deficit – Some also argue that the government is adopting a policy of privatization in the insurance industry to reduce the budget deficit. This argument is because if the government disinvests half of the shares of Life Insurance Corporation and General Insurance Corporation, then it will get several billion rupees and with that amount the budget deficit can be met. But now this argument is not effective, because the government has announced in the Parliament not to disinvest the shares of Life Insurance Corporation of India and General Insurance Corporation of India.
    • Incomplete utilization of organizations – Life Insurance Corporation of India and General Insurance Corporation of India have created a huge organization structure in the entire country during their tenure. After opening up the insurance sector to the private sector, no doubt the business of corporations will decrease in the first few years. As a result, the corporation will not be in a position to make full use of its employees and the physical resources of the office.
    • Exodus of employees – There are many good talents in both the insurance corporations of the country. He is rich in his knowledge and experience in the field of insurance. Private sector companies will attract such persons by offering them more attractive remuneration. As a result they can leave the corporations. This can cause heavy damage to them. Realizing the importance of this argument against privatization, the Insurance Regulatory and Development Authority has made such rules that now some employees (high officials) of the corporation will not be able to leave the service of the corporation easily.
    • Lack of Government Guarantee – The insurance papers of corporations are guaranteed by the Central Government whereas there will be no such guarantee on the insureds of private sector companies. As a result, the insured will remain in the circle of insecurity.
    • Grant on insurance papers of rural areas and poor is not possible – Both corporations till now have been providing some amount of their profits for those insurance papers which are issued for rural areas and poor. But, there are doubts that private sector companies will do so. Even if they do, it will not be possible immediately. This is because they will not be able to make such a grant unless they have a substantial advantage over other insurance policies.
    • Fear to employees – The employees of insurance corporations fear that their jobs will be threatened by the process of privatization. Corporations can also lay off more employees than necessary. In conclusion, one and many benefits of liberalization and privatization in the insurance sector are cited while on the other hand its dangers are also made aware. However, its dangers can be avoided with effective regulatory system, it can be hoped.

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