the development of insurance law: the english & Indian experiences

DEVELOPMENT OF INSURANCE LAW

CHANAKYA NATIONAL LAW UNIVERSITY

PATNA

FINAL DRAFT

SUBJECT: -LAW OF INSURANCE

TOPIC: - THE DEVELOPMENT OF INSURANCE LAW:

THE ENGLISH AND INDIAN EXPERIENCES

Submitted by:-

TANYA RAJ

ROLL NO: - 632

VIIIth SEMESTER, 4th year.

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ACKNOWLEDGEMENT

It gives me incredible pleasure to present a research work on- “THE DEVELOPMENT OF

INSURANCE LAW: THE ENGLISH AND INDIAN EXPERIENCES”. I would like to

enlighten my readers regarding this topic and I hope I have tried my best to pave the way for

bringing more luminosity to this topic.

I am grateful to my faculty “DR. SHAIWAL SATYARTHI” who has given me the idea

and encouraged me to venture this project.

And, finally yet importantly I would like to thank my parents for the financial support.

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RESEARCH METHODOLOGY

Method of Research

The researcher has adopted a purely doctrinal method of research. The researcher has made

extensive use of the library at the Chanakya National Law University and also the internet

sources.

Aims and Objectives:

The aim of the project is to present a detailed study of the “THE DEVELOPMENT OF

INSURANCE LAW: THE ENGLISH AND INDIAN EXPERIENCES” as per Insurance Law.

Sources of Data:

The following secondary sources of data have been used in the project-

1. Books

2. Websites

Method of Writing:

The method of writing followed in the course of this research paper is primarily analytical.

Mode of Citation:

The researcher has followed a uniform mode of citation throughout the course of this research

paper.

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INDEX

INTRODUCTION……………………………………..………………………………………5-6

DEVELOPMENT OF INSURANCE LAW IN INGLAND….………………...……….…7-11

DEVELOPMENT OF INSURANCE IN INDIA…………..………………....……….…..12-14

ROLE OF REGULATORY AUTHORITY IN INDIA……………………...……………….15

CONCLUSION…………………………………………………………………………………16

BIBLIOGRAPHY…………………………………………………….....……………………..17

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INTRODUCTION

Life is a roller coaster ride and is full of twists and turns. Human life is exposed to many risks, which may result in heavy financial losses. Insurance is one of the devices by which risks may be reduced or eliminated in exchange for premium. Insurance policies are a safeguard against the uncertainties of life. As in all insurance, the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk of death of the insured in case of life insurance. Insurance policies cover the risk of life as well as other assets and valuables such as home, automobiles, jewelry etc. On the basis of the risk they cover, insurance policies can be classified into two categories:

(a) Life Insurance

(b)Non-Life Insurance or General Insurance

Life insurance products cover risk for the insurer against eventualities like death or disability. Non-life insurance products cover risks against natural calamities, burglary, etc. Insurance is system by which the losses suffered by a few are spread over many, exposed to similar risks. With the help of Insurance, large numbers of people exposed to a similar risk make contributions to a common fund out of which the losses suffered by the unfortunate few, due to accidental events, are made good. Insurance is a protection against financial loss arising on the happening of an unexpected event. Insurance policy helps in not only mitigating risks but also provides a financial cushion against adverse financial burdens suffered.

Insurance is defined as a co-operative device to spread the loss caused by a particular risk over a number of persons who are exposed to it and who agree to ensure themselves against that risk. Risk is uncertainty of a financial loss. Insurance is also defined as a social device to accumulate funds to meet the uncertain losses arising through a certain risk to a person injured against the risk. Insurance provides financial protection against a loss arising out of happening of an uncertain event. A person can avail this protection by paying premium to an insurance company. A pool is created through contributions made by persons seeking to protect themselves from common risk. Any loss to the insured in case of happening of an uncertain event is paid out of this pool. Life insurance has come a long way from the earlier days when it was originally conceived as a risk-covering medium for short periods of time, covering temporary risk situations, such as sea voyages. As life insurance became more established, it was realized what a useful tool it was for a number of situations that includes temporary needs, threats, savings, investment, retirement etc. Insurance is a contract between two parties whereby one party agrees to undertake the risk of another in exchange for consideration known as premium and promises to pay a fixed sum of money to the other party on happening of an uncertain event (death) or after the expiry of a certain period in case of life insurance or to indemnify the other party on

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happening of an uncertain event in case of general insurance. The party bearing the risk is known as the 'insurer' or 'assurer' and the party whose risk is covered is known as the 'insured' or 'assured'.

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DEVELOPMENT OF INSURANCE IN ENGLAND

The need to protect individuals against changes in fortune is as old as civilisation. People throughout the world and throughout history have developed different organisations and structures, such as the Roman colleges and Anglo Saxon gilds, to guarantee mutual protection in wealth and adversity1.

This brief history of the modern business of insurance focuses on how the industry developed beyond these early protective organisations by examining the growth of specific insurance organisations and the different forms of insurance they provided.

Marine insurance

The earliest identifiable class of insurance as a business was marine insurance. Early forms of modern marine policies have been traced back as far as the Italian city states of Genoa and Palermo in the 13th century. According to contemporary sources, marine insurance was available in France, Spain, Italy, Flanders and England by 1500, and early forms of marine policies are found in the records of the High Court of the Admiralty of England from 1547.

By 1574, there were 30 sworn brokers in London who produced policies underwritten by London merchants. Although this developing insurance market in London was subject to competition in the 17th century from Antwerp, Amsterdam and Hamburg, from the early 18th century it began to attract substantial international business. In 1719, it was calculated that the City of London’s overseas commitments in marine risks, which were underwritten by over 150 subscribers, amounted to several million pounds a year.

The first corporate marine insurers in Europe, as distinct from the individual marine underwriters, were the Royal Exchange Assurance and the London Assurance, both established in London in 1720. From this date until 1824 no other English corporate bodies were permitted to write marine insurance. This fostered the growth in London of individual underwriters who, by 1712, had adopted the name of Lloyds as a business address from the coffee house of Edward Lloyd, where such marine information was exchanged.

The first UK company to undertake marine business after the ending of the monopoly of the Royal Exchange and London Assurance was the Indemnity Mutual Marine Assurance Company.

1 http://www.jstor.org/stable/1109564?seq=1#page_scan_tab_contents

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Fire insurance

Although pre-dated by marine business, fire insurance was the first to achieve corporate status. Municipal or state-funded fire insurance originated in Germany in 1623, with the establishment of the Great Werder Fire Fund in Prussia, but the first fire insurance companies were established in England. Around 1681, the Fire Office was established in London by Dr Nicholas Barbon, followed by the Friendly Society in 1683 and the Hand-in-Hand Fire & Life Insurance Society (also known as the Contributors for insuring houses, chambers, or rooms, from loss by fire by amicable contribution) in 1720.

All of the early British fire insurance companies restricted their business to London and initially to buildings, only extending to include contents around 1708 and to accept business outside London from 1710. Some companies, such as the Phoenix Fire Office, were also exploiting business overseas before the end of the century, but most had to wait until the mid-19th century when the opportunity arose to expand overseas and establish agencies in the British colonies.

In the new world, the development of towns and cities and the appearance of European companies lead to the establishment of local insurance companies such as the New Zealand Insurance Company, the first underwriting company in New Zealand, which was established in 1859.

Life assurance

Policies offering insurance on lives were available from the late 16th century. The earliest recorded example in the UK dates from 1588 but, in other countries, such as the Netherlands and France, insurance of lives was prohibited until much later. Life assurance as a corporate business did not really develop until 1699 with the establishment in England of the Society of Assurance for Widows and Orphans, followed a year later by the Second Society of Assurance for Widows and Orphans, followed in 1706 by the Amicable Society.

The early societies insured a limited number of people, charging the same premium for each member and fixing them within a narrow age range, typically between 12 and 45. Having been turned down because his age fell outside this range, James Dodson developed a scientific selection rating that based premiums on age and life expectation. This led, in 1762, to the foundation of the Society for Equitable Assurances on Lives and Survivorships, which allowed all types of lives to be insured.

Although some were prudently making provision for dependants on their death, it is estimated that in the 1830s and 1840s between 30% and 50% of lives in the UK were assured by a third party either as business indemnities, partners protecting their interests or as a speculation. This

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form of betting on lives was outlawed in 1774, after which time anyone insuring the life of another person had to prove that they had an interest in the life or death of the person insured.

In the mid-19th century, the percentage of those with life assurance was still relatively small – the majority came from the landed, professional and commercial classes. The first UK group life assurance scheme was established by the Provident Clerks’ Mutual Benefit Association in 1846. This served to open up the market, allowing companies to pay the premiums for providing life assurance to their employees as a benefit of employment.

In 1852, industrial policies were introduced by the Family Friendly Society that provided life cover in exchange for small weekly payments and made life insurance accessible to all.

Pensions and annuities

The 1706 charter of the Amicable Society permitted the company to grant annuities, although these were not used in the way annuities are today. Starting in the first quarter of the 18th century, annuity societies such as Beech Oil Annuities and the Brotherly Society of Annuitants operated schemes intended to allow provision of an income for dependants. These schemes were particularly recommended to those whose income was purely based on their profession rather than on an estate or a business, which could be passed on through inheritance.

Annuity experts consider it likely that even in the early stages of their development annuities were used by some as a form of pension provision as we understand it today. The earliest references advising people to take out an annuity to guard against old age and infirmity date from the 1830s, but investigations into the sex and average age of annuitants of the Norwich Union Society for Insurances on Lives and Survivorships in 1822 suggest that, by this date, about one third of annuities were being used to provide what we would now think of as pensions.

Occupational pension schemes existed by the 1880s when the Norwich Union Fire Insurance Society first instituted a superannuation scheme for its own staff. However, these schemes only really became popular in the 1920s and 1930s.

Accident Insurance

The term accident insurance is used to describe all types of commercial insurance other than marine, aviation, fire and life. Specialist companies developed to answer the changing needs of everyday lives and almost all were later absorbed into the more established fire and life companies to form the great composite offices which appeared in the first quarter of the 20th century.

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Hailstorms

Among the earliest accident insurers were those established to insure against damage caused by hailstorms, a form of insurance pioneered by the Mecklenburg Hail Insurance Association, established in Germany in 1797. This form of insurance began in France in 1822 and came into the UK in the 1840s with the establishment of the Farmers’ and Gardeners’ Hailstorm Insurance Company in 1842.

Livestock

Livestock insurance, the protection of farmers from loss caused by disease in their animals, originated in northern Germany in the 1720s. It existed in Denmark by 1774 but was only successfully introduced in Britain in the mid-19th century with the establishment of firms such as the Farmers’ and Graziers' Cattle Insurance Company in 1844 and the Norfolk Farmers’ Cattle Insurance Society in 1849.

Plate glass

Plate glass insurance, particularly intended to protect shopkeepers from the high expense of repairing large shop windows, originated in France in 1829 with the establishment of La Parisienne. Its development in the UK was inhibited by the window tax levied until 1851. The first UK plate glass insurer, the Plate Glass Universal Insurance Company was not established until 1852.

Fidelity

Fidelity insurance was the earliest form of accident insurance successfully offered by corporate bodies in the UK. It was instituted in 1840 by the Guarantee Society, which was established to protect employers from fraud or embezzlement by staff. The society appears to precede the foundation of fidelity insurers elsewhere in Europe2.

Personal accident

Personal accident insurance – the insurance against death or injury caused by accidents – developed during the railway age and originated in England with the successful establishment of the Universal Railway Casualty Compensation Company in 1848. It was followed a year later by

2http://www.jstor.org/stable/1109564?seq=1#page_scan_tab_contents

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the first Accidental Death Insurance Company, which insured against death and injury caused by accidents of all kinds, not limiting itself to those caused by railway travel.

The idea was taken to the United States by James G Batterson who established the Travellers in 1863 having got the idea after buying a Railway Passengers journey ticket in 1859. Three years later, personal accident insurance was introduced into Australia and France.

Steam boilers

The insurance of steam boilers, or more accurately the insurance of their owners against loss of life or damage caused by boiler explosions, was another popular class of accident insurance. It appears to have originated in the UK, which, in the 1850s, contained the largest concentration of steam boilers in the world. The Steam Boiler Assurance Company, established in 1858, pioneered this class of insurance, followed by the Midland Steam Boiler Inspection and Assurance Company in 1862.

Employers’ liability

Employers’ liability insurance also appears to have originated in the UK. In 1880, in response to the Employers Liability Act, the Employers Liability Assurance Corporation was established to insure employers against losses caused by claims from employees injured at work. The company introduced this form of insurance to America six years later.

Burglary

Burglary insurance originated at Lloyds in London in 1887. The first company to issue policies was the Mercantile Accident & Guarantee Company of Glasgow in 1889.

Motor

The fastest growing sector of accident insurance in the 20th century was motor insurance. It was introduced into the UK around 1896. Both the Scottish Employers’ Liability and Accident Assurance Company and the General Accident Fire & Life Assurance Corporation claim to have been the first in the field, although neither can provide evidence of policies issued at this date.

Early motor policies were based on those previously used for horse-drawn vehicles and the first motor insurance based on variable premiums depending on the horse power, age and type of vehicle was introduced by the Red Cross Indemnity Assurance Company in 1906.

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DEVELOPMENT OF INSURANCE IN INDIA

The concept of insurance has been prevalent in India since ancient times amongst Hindus. Overseas traders practiced a system of marine insurance. The joint family system, peculiar to India, was a method of social insurance of every member of the family on his life. The law r elating to insurance has gradually developed, undergoing several phases from nationalization of the insurance industry to the recent reforms permitting entry of private players and foreign investment in the insurance industry.

The Constitution of India is federal in nature in as much there is division of powers between the Centre and the States. Insurance is included in the Union List, w herein the subjects included in this list are of the exclusive legislative competence of the Centre. The Central Legislature is empowered to regulate the insurance industry in India and hence the law in this regard is uniform throughout the territories of India3.

The development and growth of the insurance industry in India has gone through three distinct stages.

1. Formation of the Insurance Industry in India

Insurance law in India had its origins in the United Kingdom with the establishment of a British firm, the Oriental Life Insurance Company in 1818 in Calcutta, followed by the Bombay Life Assurance Company in 1823, the Madras Equitable Life Insurance Society in 1829 and the Oriental Life Assurance Company in 1874. However, till the establishment of the Bombay Mutual Life Assurance Society in 1871, Indians were charged an extra premium of up to 20% as compared to the British. The first statutory measure in India to regulate the life insurance business was in 1912 with the passing of the Indian Life Assurance Companies Act, 1912 (“Act of 1912”) (which was based on the English Act of 1909). Other classes of insurance business were left out of the scope of the Act of 1912, as such kinds of insurance were still in rudimentary form and legislative controls were not considered necessary.

General insurance on the other hand also has its origins in the United Kingdom. The first general insurance company Triton Insurance Company Ltd. was promoted in 1850 by British nationals in Calcutta. The first general insurance company established by an Indian was Indian Mercantile Insurance Company Ltd. in Bombay in 1907. Eventually, with the growth of fire, accident and marine insurance, the need was felt to bring such kinds of insurance within the purview of the Act of 1912. While there were a number of attempts to introduce such legislation over the years, non-life insurance was finally regulated in 1938 through the passing of the Insurance Act, 1938

3 http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Insurance_Law_-_Regulations_in_India.pdf

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(“Act of 1938”). The Act of 1938 along with various amendments over the years continues till date to be the definitive piece of legislation on insurance and controls both life insurance and general insurance. General insurance, in turn, has been defined to include “fire insurance business”4, “marine insurance business”5 and “miscellaneous insurance business”6, whether singly or in combination with any of them.

2. Nationalization of the Insurance Business in India

On January 19, 1956, the management of life insurance business of two hundred and forty five Indian and foreign insurers and provident societies then operating in India was taken over by the Central Government. The Life Insurance Corporation (“LIC”) was formed in Sept ember 1956 by the Life Insurance Corporation Act, 1956 (“LIC Act”) which granted LIC the exclusive privilege to conduct life insurance business in India. However, an exception was made in the case of any company, firm or persons intending to carry on life insurance business in India in respect of the lives of “persons ordinarily resident outside India”, provided the approval of the Central Government was obtained. The exception was however not absolute and a curious prohibition existed7. Such company, firm or person would not be permitted to insure the life of any “person ordinarily resident outside India”, during any period of their temporary residence in India. However, the LIC Act, 1956 left outside its purview the Post Of fire Life Insurance Fund, any Family Pension Scheme framed under the Coal Mines Provident Fund, Family Pension and Bonus Schemes Act, 1948 or the Employees' Provident Funds and the Family Pension Fund Act, 1952.

The general insurance business was also nationalised with effect from January 1, 1973, through the introduction of the General Insurance Business (Nationalisation) Act, 1972 (“GIC Act”). Under the provisions of the GIC Act, the shares of the existing Indian general insurance companies and undertakings of other existing insurers were transferred to the General Insurance Corporation (“GIC”) to secure the development of the general insurance business in India and for the regulation and control of such business. The GIC was established by the Central Government in accordance with the provisions of the Companies Act, 1956 (“Companies Act”) in November 1972 and it commenced business on January 1, 1973. Prior to 1973, there were a hundred and seven companies, including foreign companies, offering general insurance in India. These companies were amalgamated and grouped into four subsidiary companies of GIC v iz. the National Insurance Company Ltd. (“National Co.”), the New India Assurance Company Ltd. (“New India Co.”), the Oriental Insurance Company Ltd. (“Oriental Co.”), and the United India

4 Section 2(6-A), Insurance Act, 1938: “Fire Insurance business”.5 Section 2(13-A), Insurance Act, 1938: “Marine Insurance Business”.6 Section 2(13-B), Insurance Act, 1938: “Miscellaneous insurance business” means the business of effecting contracts of insurance which is not principally or wholly of any kind or kinds included in Section 2 (6-A), (11) and (13-A) of the Insurance Act, 1938.”7 http://www.jstor.org/stable/1109564?seq=1#page_scan_tab_contents

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Assurance Company Ltd. (“United Co.”). GIC undertakes mainly re-insurance business apart from aviation insurance. The bulk of the general insurance business of fire, marine, motor and miscellaneous insurance business is under taken by the four subsidiaries.

3. Entry of Private Players

Since 1956, with the nationalization of insurance industry, the LIC held the monopoly in India's life insurance sector. GIC, with its four subsidiaries, enjoyed the monopoly for general insurance business. Both LIC and GIC have played a significant role in the development of the insurance market in India and in providing insurance coverage in India through an extensive network. For example, currently, the LIC has a network of 7 zones, 100 divisions and over 2,000 branches. LIC has over 550,000 agents and over 100 million lives are covered.

From 1991 onwards, the Indian Government introduced various reforms in the financial sector paving the way for the liberalization of the Indian economy. It was a matter of time before this liberalization affected the insurance sector. A huge gap in the funds required for infrastructure was felt particularly since much of these funds could be filled by life insurance funds, being long tenure funds.

Consequently, in 1993, the Government of India set up an eight-member committee chaired by Mr. R. N. Malhotra, a former Governor of India's apex bank, the Reserve Bank of India to review the prevailing structure of regulation and supervision of the insurance sector and to make recommendations for strengthening and modernizing the regulatory system. The Committee submitted its report to the Indian Government in January 1994. Two of the key recommendations of the Committee included the privatization of the insurance sector by permitting the entry of private players to enter the business of life and general insurance and the establishment of an Insurance Regulatory Authority8.

It took a number of years for the Indian Government to implement the recommendations of the Malhotra Committee. The Indian Parliament passed the Insurance Regulator y and Development Act, 1999 (“IRD Act”) on December 2, 1999 with the aim “to provide for the establishment of an Authority, to protect the interests of the policy holders, to regulate, promote and ensure orderly growth of the insurance industry and to amend the Insurance Act, 1938, the Life Insurance Corporation Act, 1956 and the General Insurance Business (Nationalization) Act, 1972”.

ROLE OF REGULATORY AUTHORITY IN INDIA

8 https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2

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The IRD Act has established the Insurance Regulatory and Development Authority (“IRDA” or “Authority”) as a statutory regulator to regulate and promote the insurance industry in India and to protect the interests of holders of insurance policies. The IRD Act also carried out a series of amendments to the Act of 1938 and conferred the powers of the Controller of Insurance on the IRDA9.

The members of the IRDA are appointed by the Central Government from amongst persons of ability, integrity and standing who have knowledge or experience in life insurance, general insurance, actuarial science, finance, economics, law, accountancy, administration etc. The Authority consists of a chairperson, not more than five whole-time members and not more than four part-time members.

Powers, Duty and Functions of the Authority

The Authority has been entrusted with the duty to regulate, promote and ensure the orderly growth of the insurance and re-insurance business in India. In furtherance of this responsibility, it has been conferred with numerous powers and functions which include prescribing regulations on the investments of funds by insurance companies, regulating maintenance of the margin of solvency, adjudication of disputes between insurers and intermediaries, supervising the functioning of the Tariff Advisory Committee, specifying the percentage of premium income of the insurer to finance schemes for promoting and regulating professional organizations and specifying the percentage of life insurance business and general insurance business to be undertaken by the insurer in the rural or social sector.

TARIFF ADVISORY COMMITTEE

The Tariff Advisory Committee (“Advisory Committee”) is a body corporate, which controls and regulates the rates, advantages, terms and conditions offered by insurers in the general insurance business. The Advisory Committee has the authority to require any insurer to supply such information or statements necessary for discharge of its functions. Any insurer f ailing to comply with such provisions shall be deemed to have contravened the provisions of the Insurance Act. Every insurer is required to make an annual payment of fees to the Advisory Committee of an amount not exceeding in case of reinsurance business in India, one percent of the total premiums in respect of facultative insurance accepted by him in India; and in case of any other insurance business, one percent of the total gross premium written direct by him in India.

CONCLUSION

9https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx?page=PageNo4&mid=2

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Life is a roller coaster ride and is full of twists and turns. Human life is exposed to many risks, which may result in heavy financial losses. Insurance is one of the devices by which risks may be reduced or eliminated in exchange for premium. Insurance policies are a safeguard against the uncertainties of life. As in all insurance, the insured transfers a risk to the insurer, receiving a policy and paying a premium in exchange. The risk assumed by the insurer is the risk of death of the insured in case of life insurance. Insurance policies cover the risk of life as well as other assets and valuables such as home, automobiles, jewelry etc.

The need to protect individuals against changes in fortune is as old as civilisation. People throughout the world and throughout history have developed different organisations and structures, such as the Roman colleges and Anglo Saxon gilds, to guarantee mutual protection in wealth and adversity.

This brief history of the modern business of insurance focuses on how the industry developed beyond these early protective organisations by examining the growth of specific insurance organisations and the different forms of insurance they provided.

Insurance is a co-operative device of distributing losses, falling on an individual or his family over large number of persons each bearing a nominal expenditure and feeling secure against heavy loss.

Insurance may be defined as a contract consisting of one party (the insurer) who agrees to pay to other party (the insured) or his beneficiary, a certain sum upon a given contingency against which insurance is sought. Insurance is a contract in which a sum of money is paid by the assured in consideration of the insurer's incurring the risk of paying larger sum upon a given contingency. In its legal aspects it is a contract whereby one person agrees to indemnify another against a loss which may happen or to pay a sum of money to him on the occurring of a particular event.

BIBLIOGRAPHY

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Primary Source

Prudential Insurance Company of England, ed. The Documentary History of Insurance, 1000 B. C. - 1875 A. D. (1915)

GOI. "IRDA ACT 1999"

Secondary Source

http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Insurance_Law_-_Regulations_in_India.pdf

https://nls.ac.in/resources/ded/.../1-DevelopmentofInsuranceLaw.pdf www.jstor.org/stable/1109564 https://www.irda.gov.in/ADMINCMS/cms/NormalData_Layout.aspx www.randmark40.com/index.php?option=com_content&view https://www.google.co.in/url?sa https:/ /Insurance_Law_-_Regulations_in_India.pdf

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the development of insurance law: the english & Indian experiences

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