The insurance industry affects money, capital markets and the real sectors in an economy, making insurance facility necessary to ensure the completeness of a market. It is an industry with strategic importance for any country as it contributes to the financial sector (and hence the GDP) as well as confers social benefits on the society. At the micro-level, an insurance policy protects the buyer against financial loss arising from a specified set of risks at some cost. It thus reduces anxiety and promotes financial stability by providing a much needed social security net, especially in times of crumbling family ties and nuclear households in developing countries. Despite the obvious advantages of insurance, India was one of the least insured countries in the last few decades of the 20th century. In 1999 per capita insurance premium in developed countries was very high ($ 4800 for Japan, $ 887 for Singapore and $ 144 for Malaysia), whereas in India it was only $8. The premium as a percentage of GDP stood at 2% for India whereas it was 14% for Japan, 13% for South Africa and 9% for UK (Vijayakumar, 2007).
It was evident that something needed to be done to tap the potential for further growth. With privatization of traditional public sector businesses like banking, power, telecom and airlines gaining momentum in 1991, the Government also realized that the opening up of the insurance sector could lead to enhancement of insurance penetration within the country by leveraging on the rising per capital incomes and rising literacy rates. The life insurance sector was thus opened for private entry in the year 2000 with the passing of the IRDA Act. Opening of the sector to private firms was aimed at fostering competition and innovation through a greater variety of products. It w ...