Insurance Regulatory Authority Act 2000

   The four Indian Government owned Insurance Companies are faced with prospects of competition as a liberalized India opens its doors to private insurance. From the perspective of being a vehicle for channelling savings of the society into productive areas, the insurance industry will head towards larger functional autonomy. India is making a great effort to integrate with global trends as part of its globalization program. India has a market for insurance related services. However the full potential has not yet been tapped. There is a vacuum and new player will fill this. The presence of competition will make the insurance industry more efficient in our operations. The cost structure in the Indian public sector owned companies would have to be down-sized to make it competitive. The consumer will have more options and better range of services catering to his requirement.

   It has been clarified by the Indian Government that an Indian partner in an insurance joint venture will be deemed to be a `foreign majorī.

   The Central bank in India - The Reserve Bank of India (RBI) has issued draft guidelines that will disqualify all the large banking and non-banking companies from entering this industry. The apex bank has stipulated that all prospective entrants need to have a net worth of Rs. 5000 million, a criterion which will eliminate all private banks. The RBI has stipulated that banks and financial players will not be allowed to hold more than 49% in these ventures and will be forced  to bring another Indian partner along with the foreign partner. Foreign players will be allowed to hold only 26% in new insurance ventures and even if the Indian partner holds 49%, there will be a 25% equity gap that will have to be plugged in by a third Indian partner. The net non-performing asset (NPA) of financial players who will be allowed to enter the insurance sector will have to be reasonable and be subject to approval by the Reserve Bank of India. This means that several banks and financial institutions with net NPA lower than the industry average stand at about 7.5% at present - will be eliminated. The list of players with over 7.5% NPA levels include the State Bank of India, the Industrial Credit and Investment Corporation of India, the Industrial Development Bank of India. Banks which are not eligible as JV participants can make a one-time investment upto 10% of their net worth in or Rs. 500 million whichever is lower in providing infrastructural and support services in the insurance sector.

   The Insurance Regulatory and Development Authority (IRDA) Act has already received Presidential assent. The guidelines for operating an insurance company are in the offing. Hurdles exist. These include cancellation of post nationalization notifications that prevent payment of insurance commission on corporate businesses. This restriction will come in the way of giving brokers and agents a meaningful role in the new paradigm. It is opined that banks who are the best placed intermediaries to sell insurance products are disabled by virtue of section 6 of the Banking Regulation Act. This Act specifies areas where Banks can do business. Insurance contracts would have been ideally suited for e-commerce. However, cyber laws are still not in force to make online submissions and acceptance of proposals. Moreover, purchasing insurance online would require acceptance of payment through credit cards. This however is impossible  as the Insurance Act forbids such contracts and makes it imperative that an insurer receives premium in advance before taking a risk. This will prevent foreign capital investment from corporates abroad.

REQUIREMENTS FOR INSURANCE FORAY TO BE MET
 

  • Net worth of bank should not be less than Rs. 5,000 million.
  • The level of Non Performing Asset should be reasonable and subject to RBI approval.
  • Maximum equity contribution in JV must not exceed 30%. No additional stake by subsidiaries allowed.
  • CAR of not less than 10%.