Major reforms for the Insurance sector

One of the most critical aspects of the development of India is the Indian financial system. The assistance and amenities that are provided by several institutions like- banks, pensions, insurance organizations, and companies, among others- all constitute the financial system. 

The market and financial institution expansion is facilitated by the financial systems. Capital formation is one of the fundamental characteristics of the financial system in the country. The Indian Financial system looks at the circulation of funds between commercial, business, and household sectors.

The financial sector reforms in India refer to the changes made in the market system and the banking systems. As an efficient and balanced banking system helps in the well functioning of the economy. The high rate of investments and savings are the most crucial element of economic growth in the country. Proceeding the year of liberalization, privatization, and globalization, there had been several deficiencies concerning the quality, efficiency, and operations of the financial sector.  

Reforms- Financial Sector

The issues of the banking and financial systems were analyzed by several committees in the year 1991 and the committees on the financial sector reforms in India were headed by Narasimham. The committee analyzed that the system of banking in India is equally over-regulated as well as under-regulated. To understand the financial sector reform in India can be better understood with the help of the recommendations of several committees. 

Financial services help in possessing the required funds and making sure that these funds are invested efficiently. These services include banking services, investment services, insurance services, and foreign exchange services. Before moving on with our discussion on the major reforms for insurance sector of the financial system in the country, let us briefly look at the meaning and principles of insurance. 

Principle of Insurance

Insurance is a contract between two individual parties. This contract is based on several principles of Insurance. To ensure the proper functioning of the insurance companies, these principles are held. These principles are-

• Proximate Causes: This principle focuses on the nearest and looks at the loss that is resulted from two or more causes. 
• Utmost Good Faith: The principle ensures that the insurance builds good faith between the contracting parties. 
• Interest in Insurance: It points to the need of having a fixed financial gain through the contract. 
• Indemnity: This principle deals with the loss coverage of the contract.
• Subrogation: The principal points out that once the loss of the party is compensated, the property ownership goes directly to the insurance company. 
• Contribution: The principle makes sure that the insured party should make gains through the claiming of loss of one subject concerning another. 
• Minimization of Loss: The principle makes sure that the insurance company must try to minimize the fore-headed loss. 

Now, let us look at the major reforms for the insurance sector in the country. 

Insurance sector and financial reforms

The insurance sector is one of the vital sectors when it comes to the development of the country economically. It helps in stabilizing the financial market within the country. This sector was an open market full of competition, which was nationalized later. However, it was liberalized again and made into and competitive market after the process of liberalization in 1991. 

In the 1980s, then Prime Minister Rajiv Gandhi came up with certain reforms. However, the economic and financial conditions of the country pushed it to make alterations to the previously brought reforms. Hence, massive economic reforms were launched in the year 1991. Therefore, with this, the major reforms for insurance sector were brought in too. 

The reform in insurance sector committee was headed by M. N. Malhotra. This committee was commonly known as the Malhotra Committee. The crucial objective of the major reforms for insurance sector was the creation of an effective, efficient, and competitive financial system in the country. 

Let us look at the key reforms suggested by the reform in insurance sector committee-

• Competition: It was suggested that companies should not deal with general and life insurance, altogether, with the help of a single entity. In addition to this, the private companies must have a minimum of Rs. One Billion Capital. 
• Structure: The structure of the insurance company must be such that the government must have 50 percent of the company’s stake. 
• Investments: Investments of Life Fund (LIC) concerning the Government securities must be reduced from 75 percent to 50 percent. 

Conclusion

One of the most critical aspects of the development of India is the Indian financial system. The market and financial institution expansion is facilitated by the financial systems. Capital formation is one of the fundamental characteristics of the financial system in the country. Insurance is a contract between two individual parties. This contract is based on several principles of Insurance. Financial services help in possessing the required funds and making sure that these funds are invested efficiently. These services include banking services, investment services, insurance services, and foreign exchange services.