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This case provides the history of General Insurance corporation of India (GIC’ since nationalization. GIC’S role has been significant in the indian insurance industry and it is currently the sole national reinsurer. GIC is also aspiring to be a global player in reinsurance. It is evolving itself as an effective reinsurance solutions partner for the Afro- Asian region. In addition to that, it has also started leading reinsurance programmes for several insurance companies in SAARC countries, South EastAsia, Middle East and Africa.

Insurance has always been a growth-oriented industry globally. On the Indian scene too, the insurance industry has always recorded noticeable growth vis-a-vis other Indian industries. In 1850, the first general insurance company, Triton Insurance Co. Ltd., was established in India and the shares of the company were mainly held by the British. The first Indian general insurance company, lndias Mercantile Insurance Co. Ltd., was set up in 1907. After independence, General Insurance Council, a wing of Insurance Association of India, framed a code c conduct for ensuring fair conduct and sound business practices in the area ct general insurance. The Insurance Act was amended and tariff advisory committee was set up in 1968. In 1972, general insurance industry was nationalized through the promulgation of General Insurance Business (Nationalisation) Act. Around 55 insurers were amalgamated and general insurance business undertaken by the General Insurance Corporation of India (GJC) and it subs Oriental Insurance

Company Limited, New India Assurance Company Limited, National Insurance Company Limited and United Insurance Company Limited.

The Indian insurance industry saw a new sun when the Insurance

Regulatory. And Development Authority (JRDA) invited the application for registration for insurers in August, 2000. General Insurance Corporation of india and subsidiaries have been the erstwhile monarch of non-life insurance for almost three decades. After donning the role of ‘the national reinsurer’, by GIC, delink of its subsidiaries and entry of foreign players through joint ventures have changed the outlook of the whole general insurance industry and forced GIC to enter arena of competition.

GIC and its four subsidiaries functioned through a huge network of 4,167 offices spread cross the country. The main customer interface for these units were in agents, development officers and employees at branch, divisional and region. offices in various parts of the country. The total workforce of GIC and its subsidiaries was around 85,000. GIC has made a huge

contribution to the overall development of the nation, through investments in the socially-oriented sectors. The Government of India had entrusted to, GIC, the administration of various social welfare schemes, such as personal accident insurance and hut insurance schemes operated all over the country.

in addition to this, its joint ventures in the form of GIC mutual fund and GIC housing finance have contributed not only to the development of the nation

History — How was it Formed?

The general insurance industry was nationalized through General Insurance Business (Nationalization) Act, 1972 (GIBNA). The Government of India took over the shares of 55 Indian insurance companies and 52 insurance companies carrying on general insurance business. GIC was formed in pursuance of Section 9(1) of GIBNA. Incorporated on November 22, 1972, under the Companies Act, 1956, GIC was formed for the purpose of

superintending, controlling and carrying on the business of general

insurance. After the formation of GIC, the central government transferred all the shares held by it of various general insurance companies to GIC, Thus, after the whole process of mergers and acquisitions in the insurance

industry, the whole business was transferred to General Insurance Corporation and its four subsidiaries.

Among its four subsidiaries, National Insurance Company was incorporated in the year 1906. As a subsidiary of the GIC, it operates general insurance business in India with its head office located at Kolkata. New India

Assurance Company was formed in the year 1919 and operates general insurance business in India with its head office at Mumbai. New India Assurance company is considered as the most successful company in the field of general insurance. Oriental Insurance Company was established in the year 1947 and its head office is located in New Delhi. United India Insurance Company operating its general insurance business with its head office at Chennai.

What Went Wrong?

General Insurance Corporation recorded a net premium of $1.3 billion in the year 1995-96. Its claim settlement ratio was 74% higher than the global average of 10%. So, what went wrong for this public sector monolith? GIC and its subsidiaries faltered, when it came to customer satisfaction. Large scale of operations, public sector bureaucracies and cumbersome procedures hampered the progress of not only GIC, but also LIC (Life Insurance

Corporation of India). The huge staff of agents of GIC and its four subsidiary companies failed to penetrate into the rural hinterland to sell general insurance whether it was crop insurance or any other form of personal line insurance. As evident from the condition of farmers in the country, GIC has failed in its object to provide insurance cover to the needy, which really required the much-needed financial security. The nationalized insurers, both GIC and LIC employ almost half-a-million employees. They are the highest paid but still the both organizations suffer from low

productivity, corruption, indiscipline and total ignorance of the basic principles of the insurance business. GIC suffered due to corruption within its own specific business divisions motor insurance and mediclaim policy.

Collusion between the surveyors and customers also bled GIC, leading to low morale among the employees and public discontentment

The main reason for such a pathetic condition lies within the management of these public sector companies. The management of these units is strongly

of the country lagged behind in meeting customer expectations in products and services.

Malhotra Committee

As the process of liberalization started from the year 1991, reforms were targeted various sectors of the economy. In the same league, insurance sector had to wait almost nine years before, reforms were implemented. The whole process starts with the setting up of the Malhotra Committee in 1993, headed by R N Malhotra former governor of Reserve Bank of India. Although the achievement of LIC CIC in spreading insurance awareness and mobilizing savings for national development and financing core social sectors was acknowledged, the committee gave a concise report on the Indian insurance industry dominated by the public sector. l report indicated that both the LIC and GIC were overstaffed and faced no competition at all. Thus, consumers were deprived of wider range of products efficient service and lower-priced insurance products.

The report indicated that net premium income in general insurance hush had grown from Rs.222 crore in 1973 to Rs.3,863 crore in 1992-93. In addition this, investments also increased from Rs.355 crore to Rs.7,328 crore over the said period. GIC also acquired high reputation in the international

reinsurance market But there was the other side of the coin. Excessive control coupled with absence competition led to stagnation of both the public sector units hampering the improvement and operational efficiency.

Insurance industry’s funds were mainly invested in government-mandated investments with low yield, which affected the financial performance of the

savings invested in insurance. In addition to that, due to absence of competition, there was laxity among the insurers to perform well and improve customer satisfaction.

Thus, Malhotra Committee made a number of recommendations for the well-being of the Indian insurance industry. The committee recommended proper training of insurance agents, adequate pricing of insurance products and periodic review of premium rates. Malhotra Committee recommended for establishing a strong and effective authority for the insurance sector similar to the Securities and Exchange Board of India (SEBI). In addition to this, the committee also recommended that all the four subsidiaries of GIC should function as independent companies and GIC should cease to be the holding company.

Malhotra Committee Report submitted in 1994 gave various

recommendations for the insurance sector, such as capital investment in the insurer company should be increased to 100 crore for life insurance business or general insurance and Rs.200 crore for the reinsurance business. It also recommended that the share of the foreign investment to the total investment should not be more than 26% of the share capital in the insurance joint

venture company.

Recommendations Specific to GIC:

• The government should takeover the holdings of GIC and subsidiaries, so

Considering the above recommendations, the central government enacted,

“The Insurance Regulatory and Development Authority Act, 1999”. The Act is applicable to all states except Jammu and Kashmir, for which this Act is applicable with modifications made by the government.

IRDA Act

The Insurance Regulatory and Development Authority Act, 1999, is the product of a Bill submitted to the Parliament in December 1999. Insurance Regulatory and Development Authority Bill was passed on December 2, 1999. The IRDA Bill opened the Indian insurance sector to the rest of the world, through the entry of competitive players in the insurance sector and the inflow of long-term capital. The IRDA Bill provided for the

establishment of Insurance Regulatory and Development Authority, as an authority to protect the interests of the holders of insurance policies and for the regulation and promotion of Indian insurance industry. The IRDA Act provides statutory status to the regulator. The IRDA Bill has amended the Insurance Act, 1938, the Life Insurance Act, 1956, and the General

Insurance Business (Nationalization) Act, 1972. The Bill allowed foreign participation in the insurance sector. The foreign companies could have an equitystake up to 26% of the total paid-up capital.

IRDA Act also fixed minimum capital requirement for life and general insurance at Rs.100 crore and for reinsurance firms at Rs.200 crore. The minimum solvency margin for private insurers is Rs.500 million for life insurance companies, Rs.500 million or a sum equivalent to 20 percent of net premium income for general insurance and Rs.1 billion for reinsurance

companies. The Authority is a ten member team consisting of a chairman, a five whole-time members and four part-time members.

Breaking Up of GIC

The delinking of the four national subsidiaries of GIC was recommended by the Poddar committee. The committee also recommended transforming

‘GIC’ as a national re On August 7, 2002, the President of lndia later gave his assent to the Geural Insurance Business (Nationalization) Amendment Bill, 2002 and the Insu, nce (Amendment) Bill 2002. The General Insurance Business (Nationalization) Amendment Act, 2002, amended the General Insurance Business (Nationalization) Amendment Act, 1972, and delinked the General insurance Corporation (GIC) from its four subsidiaries — the National Insurance Company Ltd, the New India Assurance Company Ltd, the Oriental Insurance Company Ltd and the United India Insurance

Company Ltd. Thus, as per the amendment, General Insurance Corporation was required to carry on reinsurance business, as the ‘national reinsurer’ of the Indian insurance industry.

The subsidiaries were asked to increase their equity base to Rs.100 crore, to comply with the regulations of IRDA. All these public sector companies had an equity base of Rs.40 crore previously. The shares of these companies previously held by the dC, were transferred to the government. According to officials, hiking capital base is a part of an overall effort to restructure the

GIC — The National Reinsurer

Reinsurance business in India dates hack to the 1960s. After independence there rapid development of the insurance business, hut there was negligible presence reinsurance companies in India. Thus, the domestic requirement of reinsurance was netted mostly from foreign markets mainly British and continental. As undertaking reinsurance business by Indian companies meant huge outflow of foreign exchange and in 1956 Indian Reinsurance

Corporation was established. It formed as a professional reinsurance company by some general insurance companies. The company received voluntary quota share cessions from member companies. Later another reinsurance company, the Indian Guarantee and General Insurance Co. was formed in 1961. With this set up, a regulation was promulgated which made it statutory on the part of every insurer to cede 20% in Fire and Marine Cargo, 10 % in Marine hull and miscellaneous insurance, and five percent in credit solvency business.

Prior to nationalization, there were 55 non-life domestic insurers and each company had its own reinsurance arrangement. After nationalization, all these companies were brought under the aegnts of General Insurance Corporation and four subsidies were formed, with GIC as the holding company. With this backdrop, it has been a quantum jump for the Indian reinsurance market, with GIC being established as the ‘national reinsurer’.

Earlier insurance companies had to depend on foreign markets, but now after the IRDA Act has been passed, GIC has focused on competing with the best in the world.

GIC’s reinsurance business can be divided into two categories; domestic reinsurance and international reinsurance. On the domestic front, GIC

provides reinsurance to the direct general insurance companies in the Indian market. GIC receives statutory cession of 20% on each and every policy subject to certain according to the current statute It leads many of domestic companies programs and facultative placements. As the sole reinsurer of the d insurance market, GIC s capacity for each class of business on treaty and facultative ( business is given below:

GIC is also emerging as an international player in the global reinsurance evolving itself as an effective reinsurance solutions partner for the African region. In addition to that, it has also started leading reinsurance

programmes several insurance companies in SAARC countries, South East Asia, MidAfrica. GIC provides the following capacities for treaty and facultative the international market on risk emanating from international market 1 merits of the business.

General Insurance Corporation, as the ‘Indian Reinsurer,’ completed year on March 31, 2002. Although, there has been an increasing presence in

international markets, the focus of the Corporation’s operations continue domestic market, as it constitutes around 94% of it’s total portfolio. The Corporation increased to Rs.10,378.84 crore from Rs.7,773.67 cr0’

March 31, 2002. Similarly the total investments of the Corporation stood

Rs.7135.83 crores as against Rs.6,345.33 in the previous year. The total investment income of the corporation was Rs.961.80 crore as against Rs.873.40 crore in the previous year and gross direct premium income of GIC for the year amounted Rs.311.57 crore. According to industry sources, General Insurance Corporation (GIC) is targeting significant growth for its inward foreign reinsurance business. The reinsurer is planning to open its branch in Dubai in the near future. The reinsurance business

the Middle East region targeted by GIC ranges between Rs.3-5 million.

Around 23% of the total inward business for GIC comes from the Middle East countries. In addition to that GIC is planning to establish its presence in London, Moscow, China, Korea, and Malaysia. In 2002, GIC floated

Tarizlndia in Tanzania through Kenlndia, which is a joint venture with Life Insurance Corporation. At present it is also looking

a strategic partnership with African reinsurance major, East Africa Re.

On the domestic front, the “Indian Reinsurer,” plays the role of reinsurance facilitator for the Indian insurance companies. The Corporation continues to act as Manager of the Marine Hull Pool on behalf of the insurance industry.

The Corporation’s reinsurance program is designed to fulfill the objectives maximizing retention within the country, developing adequate capacity, security the best possible protection for the reinsurance costs incurred and simplifying ti administration of business.

vision. I January 2004, GIC has decided to exit its mutual fund arm, GIC Mutual Fund, so to focus on core reinsurance operations. The fund had been constantly underperforming for the last few years. In 2002 -2003, there has been whopping increase in the foreign inward reinsurance premium at

Rs.600 crore. This increase has pushed the total reinsurance premium to over Rs.3,800 crore. The India reinsurer, is willing to write more risks in the domestic market. The underwriting, losses fell below the Rs.500 crore-mark.

Though the severe drought, took its toll cii GIC’s underwriting with agricultural losses zooming to Rs.400 crore in 2002-03 The claims ratio reduced during the year from 94 to 86%. Though the quantum o foreign inward premium is low in the total premium income, the increase in it: share over the last one year is significant. In 2002-03, the share of foreign premiun has been over 15% compared to just 6% in the previous year.

International credit rating agency, A M Best, has given “A (Excellent)”

rating tc the corporation indicating it’s financial strength. The rating reflects not only th Corporation’s excellent financial position and conservative investment portfolio but also recognizes its leading position in the global insurance market. General Insurance Corporation has formulated plans to capitalize its strengths and capabilities in the international market and consolidate its operations in India to provide requisite expertise and technical skills to the domestic players. Thus, we can conclude that our

‘National Reinsurer’ has the requisite and inherent capability of meeting the future challenges and is ready to make strenuous efforts to achieve its

corporate vision of becoming leading international reinsurer in the years to come.

CONCLUSION

With the outster of such terrorist attacks, calamities and stiff competition the reinsurers have to fight with each other to grab their share of premium

market share this will be more stiffer and difficult in the times to come.

REFERENCES

Books

Reinsurance Concepts And Cases – Abhishek Agrawal, ICfai Press Practice of Reinsurance in Uk