Insurance Act 1938

To regulate the activities of these Insurance Companies, and prevent them from becoming speculative, and force them to act on sound  Actuarial principles, the Life Insurance Companies Act was passed in 1912.  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.  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 – ‘Be Indian Buy Indian’.  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.  Many of these companies failed soon after.

The Government of India appointed a committee to study the problem and suggest measures.  As a result The Insurance Act 1938 was passed. It was the first comprehensive legislation governing both life and   non-life companies providing strict control over insurance   business.  The salient features of this Act were as follows :

• Constituting a Department of Insurance to supervise and control  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 policyholders’ 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; mortality  of the insurance companies was reduced.

In course  of  time,  various  shortcomings  were  noted  in  the  Act and consequent  amendments  relating  to deposits,  rebating, investment etc  were  brought  in.  The  partition  of  the  country  in  1947  hampered  the  Insurance  business.   Large  Scale bloodshed led  to  a  national  tragedy  which  affected many  insurance  companies.

The  foreign  companies  found it difficult to function and  by  1955,  their  share  of  total  new  business  was  hardly  7%. Out  of  the  total  105 foreign companies, only 15 transacted life business.

In 1950, the   Insurance Act was   further amended.  The superintendent of Insurance was redesignated   as   Controller of Insurance with wide powers, even to inspect the books of  insurer.  The provision relating to investment  of  life  fund  was  amended,  while  the investment in Government  and  approved  securities  was  reduced to 50%, restriction  was placed on the nature of investment of the balance funds.  Only 15% of the funds could be invested in the open market.

In 1947, India  became  independent  and  the  Government  of  India  under  the  Prime  Ministership  of Sri Jawaharlal  Nehru opted  for  a  planned  and  mixed  economy.   The Planning  Committee observed way back in 1946 – “Insurance even today is not looked upon in India, as a public utility service.  It should extend to and embrace all forms of risk to which an individual’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.”

Jai Prakash Narain strongly advocated nationalisation of insurance business.  The Avadi Congress in Jan. 1955  approved the above  view.  The  Imperial  Bank  was nationalised in 1955 to become State Bank of India.  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 with  adequate sense of responsibility.  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.         Premium rates were high.

2.         Investment rules were violated defiantly.  Loans were granted, without security.  Policyholders’  money  was  diverted  to enterprises  without intrinsic merit. Investment in useless debentures led to irrecoverable loss.  Speculation with insurance money was rampant.  Shares were bought first.

If the transaction resulted in profit,  it  went  to  the  owner  and  if  it  resulted in loss, it was entered in  the  name of the insurance company.   Between  1945  to  1955, 25 companies  went  into liquidation.  75 companies  did  not  declare  any  bonus  in  1953-54.  The  with-profit  policies  became without profit policies, though  bonus  loading  was  collected  from  the  policyholders.  Insurance business remained urban-centred.  The agents were encouraged to indulge in dishonest practices and the insuring public lost faith in the insuring companies.

New India reduced premium  rate  by 15 % in 1954  and this resulted in the rate war  leading to high lapsation and surrender of policies.  This was followed by ‘bonus war’. 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.  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.  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, the  Finance Minister said, would  not  affect  the interest of  the policyholders adversely and the staff and  the  management  would  be  duly  compensated.  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 – “Into 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.  It is a measure conceived in a genuine spirit of service to the people.  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)  the Government managed insurance business, a yeomen’s job was done by the Department of Insurance and the 43 custodians who  took  over the insurance companies.  The  problem  of  integrating  the large number of companies related to their procedure and systems, their people with varied aspirations, their financial standing and  accounting  systems,  etc. Pay scales of different companies needed to be standardised,  detailed  accounting, underwriting and policy servicing  manual had  to  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 were  selected  out  of  the  existing officers on the basis of qualification and seniority. The salary and other benefits enjoyed by staff were protected.  The multiple head offices of the insurance companies were integrated  in a limited number of administrative units.  The motto “Yogakshema Vahamyaham” and the logo- protective hands around a luminous  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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