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Insurance Sector Reforms

In 1993, Malhotra Committee, headed by former Finance Secretary and RBI Governor R.N. Malhotra, was formed to evaluate the Indian insurance industry and recommend its future direction.
The Malhotra committee was set up with the objective of complementing the reforms initiated in the financial sector. The reforms were aimed at "creating a more efficient and competitive financial system suitable for the requirements of the economy keeping in mind the structural changes currently underway and recognizing that insurance is an important part of the overall financial system where it was necessary to address the need for similar reforms."
In 1994, the committee submitted the report and some of the key recommendations included:
  1. Structure
    • Government stake in the insurance Companies to be brought down to 50%.
    • Government should take over the holdings of GIC and its subsidiaries so that these subsidiaries can act as independent corporations.
    • All the insurance companies should be given greater freedom to operate.
  2. Competition 
    • Private Companies with a minimum paid up capital of Rs.1bn should be allowed to enter the industry.
    • No Company should deal in both Life and General Insurance through a single entity.
    • Foreign companies may be allowed to enter the industry in collaboration with the domestic companies.
    • Postal Life Insurance should be allowed to operate in the rural market.
    • Only One State Level Life Insurance Company should be allowed to operate in each state.
  3. Regulatory Body
    • The Insurance Act should be changed.
    • An Insurance Regulatory body should be set up.
    • Controller of Insurance (Currently a part from the Finance Ministry) should be made independent.
  4. Investments
    • Mandatory Investments of LIC Life Fund in government securities to be reduced from 75% to 50%.
    • GIC and its subsidiaries are not to hold more than 5% in any company (There current holdings to be brought down to this level over a period of time).
  5. Customer Service
    • LIC should pay interest on delays in payments beyond 30 days.
    • Insurance companies must be encouraged to set up unit linked pension plans.
    • Computerization of operations and updating of technology to be carried out in the insurance industry. The committee emphasized that in order to improve the customer services and increase the coverage of the insurance industry should be opened up to competition.
But at the same time, the committee felt the need to exercise caution as any failure on the part of new players could ruin the public confidence in the industry. Hence, it was decided to allow competition in a limited way by stipulating the minimum capital requirement of Rs.100 crores. The committee felt the need to provide greater autonomy to insurance companies in order to improve their performance and enable them to act as independent companies with economic motives. For this purpose, it had proposed setting up an independent regulatory body.

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