Insurance Act 1938
To regulate the activities of these Insurance Companies, and prevent them from becoming speculative, and force them to act on soundÂ Actuarial principles, the Life Insurance Companies Act was passed in 1912.Â But this Act discriminated between Indian Companies and the foreign Companies.
The Indian Companies were required to make deposits with the Government while the foreign companies were exempted.Â Thus resentment grew among the Indian insurance companies and the independence movement, the non-cooperation movement of Mahatma Gandhi added strength to the Indian Insurance Companies.
Indian Insurance Companies became a symbol of Swadeshi Movement – â€˜Be Indian Buy Indianâ€™.Â The total insurance business which was Rs 22.44 crore in 1914 grew to Rs 298 crore by 1938 and the number of insurance companies grew from 44 to 176 during the same period.Â Many of these companies failed soon after.
The Government of India appointed a committee to study the problem and suggest measures.Â As a result The Insurance Act 1938 was passed. It was the first comprehensive legislation governing both life and Â non-life companies providing strict control over insurance Â business.Â The salient features of this Act were as follows :
- Constituting a Department of Insurance to supervise and controlÂ insurance business.
- Compulsory registration of insurance companies & submission of annual financial returns.
- Provision for initial deposits to allow only serious players in the field.
- Compulsory investment of life fund to the extent of 55% in Government approved securities.
- Prohibiting rebating, restriction on payment of commission and licensing of agents were other important provisions to bring in a sort of professionalism in to this business.
- Periodical Valuation was made compulsory to assess financial viability of the insurance companies.
- Provision was made for policyholdersâ€™ director in the Board.
- Policy formats were standardised and premium tables were to be certified by an Actuary.
As a result of this legislation, weaker elements were weeded out; indiscriminate promotion was checked and speculative insurance was eliminated; mortalityÂ of the insurance companies was reduced.
In courseÂ ofÂ time,Â variousÂ shortcomingsÂ wereÂ notedÂ inÂ theÂ Act and consequentÂ amendmentsÂ relatingÂ to deposits,Â rebating, investment etcÂ wereÂ broughtÂ in.Â TheÂ partitionÂ ofÂ theÂ countryÂ inÂ 1947Â hamperedÂ theÂ InsuranceÂ business.Â Â Large Â Scale bloodshed ledÂ toÂ aÂ nationalÂ tragedyÂ whichÂ affected manyÂ insuranceÂ companies.
TheÂ foreignÂ companiesÂ found it difficult to function andÂ byÂ 1955,Â theirÂ shareÂ ofÂ totalÂ newÂ businessÂ wasÂ hardlyÂ 7%. OutÂ ofÂ theÂ totalÂ 105 foreign companies, only 15 transacted life business.
In 1950, the Â Insurance Act was Â further amended.Â The superintendent of Insurance was redesignated Â as Â Controller of Insurance with wide powers, even to inspect the books ofÂ insurer.Â The provision relating to investmentÂ ofÂ lifeÂ fundÂ wasÂ amended,Â whileÂ the investment in GovernmentÂ andÂ approvedÂ securitiesÂ wasÂ reduced to 50%, restrictionÂ was placed on the nature of investment of the balance funds.Â Only 15% of the funds could be invested in the open market.
In 1947, IndiaÂ becameÂ independentÂ andÂ theÂ GovernmentÂ ofÂ IndiaÂ underÂ theÂ PrimeÂ MinistershipÂ of Sri JawaharlalÂ Nehru optedÂ forÂ aÂ plannedÂ andÂ mixedÂ economy.Â Â The PlanningÂ Committee observed way back in 1946 – â€œInsurance even today is not looked upon in India, as a public utility service.Â It should extend to and embrace all forms of risk to which an individualâ€™s life, business, property etc. may be exposed and which may, therefore, be owned and conducted very closely by the government in the public interest.â€
Jai Prakash Narain strongly advocated nationalisation of insurance business.Â The Avadi Congress in Jan. 1955Â approved the aboveÂ view.Â TheÂ ImperialÂ BankÂ was nationalised in 1955 to become State Bank of India. Â With this step taken, the nationalisation of Insurance business could not wait long.
With many discordant notes, the broad appraisal of insurance business showed that the insurance business was managed neither efficiently, nor withÂ adequate sense of responsibility.Â The industry was not playing the role expected of insurance in a modern state and it was felt that any further legislation would not be successful any more than in the past.
Some of the deficiencies noted in the private conduct of insurance business were as follows :-
1. Â Â Â Â Premium rates were high.
2. Â Â Â Â Investment rules were violated defiantly.Â Loans were granted, without security.Â Policyholdersâ€™Â moneyÂ wasÂ divertedÂ to enterprisesÂ without intrinsic merit. Investment in useless debentures led to irrecoverable loss.Â Speculation with insurance money was rampant.Â Shares were bought first.
If the transaction resulted in profit,Â itÂ wentÂ toÂ theÂ ownerÂ andÂ ifÂ itÂ resulted in loss, it was entered inÂ theÂ name of the insurance company. Â BetweenÂ 1945Â toÂ 1955, 25 companiesÂ wentÂ into liquidation.Â 75 companiesÂ didÂ notÂ declareÂ anyÂ bonusÂ inÂ 1953-54.Â TheÂ with-profitÂ policiesÂ became without profit policies, thoughÂ bonusÂ loadingÂ wasÂ collectedÂ fromÂ theÂ policyholders.Â Insurance business remained urban-centred.Â The agents were encouraged to indulge in dishonest practices and the insuring public lost faith in the insuring companies.
New India reduced premium Â rateÂ by 15 % in 1954Â and this resulted in the rate warÂ leading to high lapsation and surrender of policies.Â This was followed by â€˜bonus warâ€™. C.D. Deshmukh, the then Finance Minister and Sri H. M. Patel, the then Economic Secretary drew up a plan of nationalisation of insurance business and kept ready for being put into effect at short notice.Â Nationalisation couldnot be effected by adherence to normal procedure as that would have given ample opportunity to unscrupulous management to divert the policyholders funds to their private coffers.
The ordinance to take over the management and control of life insurance business by the Central Government was promulgated even without the prior approval of the cabinet to maintain absolute secrecy on the evening of the 19th Jan, 1956.Â Nationalisation of insurance business was necessary it was claimed, to organise the whole mechanism of finance which involved banking, insurance, stock exchanges and other forms of investment.
The nationalisation, theÂ Finance Minister said, wouldÂ notÂ affectÂ the interest ofÂ the policyholders adversely and the staff andÂ theÂ managementÂ wouldÂ beÂ dulyÂ compensated.Â Sri C. D. Deshmukh declared over All India Radio at 8.30 p.m. on the 19th Jan 1956, justifying the nationalisation of insurance business – â€œInto the lives of the millions in the rural areas, it will introduce a new sense of awareness of building for future in the spirit of calm confidence which insurance alone can give.Â It is a measure conceived in a genuine spirit of service to the people.Â It will be for the people to respond, confound the doubters and make it a resounding success”.
For the next seven months and twelve days (i.e., 20th Jan 1956 to the 31st Aug, 1956)Â the Government managed insurance business, a yeomen’s job was done by the Department of Insurance and the 43 custodians whoÂ tookÂ over the insurance companies.Â TheÂ problemÂ ofÂ integratingÂ the large number of companies related to their procedure and systems, their people with varied aspirations, their financial standing andÂ accountingÂ systems,Â etc. Pay scales of different companies needed to be standardised,Â detailedÂ accounting, underwriting and policy servicingÂ manual hadÂ toÂ be prepared, functions and powers of the different authorities in the new set up had to be determined.
The field staff called Inspectors, had started working in some companies, about two years prior to nationalisation. They were like chief agents working on prorata basis. Many of them were absorbed as salaried employees. Officers wereÂ selectedÂ outÂ ofÂ theÂ existing officers on the basis of qualification and seniority. The salary and other benefits enjoyed by staff were protected.Â The multiple head offices of the insurance companies were integratedÂ in a limited number of administrative units.Â The motto â€œYogakshema Vahamyahamâ€ and the logo- protective hands around a luminousÂ flame of a lamp, were found and the Life Insurance Corporation of India, as an autonomous body came to be set up on the 1st Sept. 1956.
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