Which committee recommended the establishment of IRDA (And Why?)

The Insurance Regulatory and Development Authority (IRDA) was recommended by The Malhotra Committee in the year 1999. The purpose of The Malhotra Committee (headed by R.N Malhotra) was to recommend the Government the best course of action pertaining to the growth, regulation, and structure of the Indian Insurance Sector.

The committee was formed in 1993 and provided its recommendations in 1999.

Recommendations of the Malhotra Committee

Let us briefly list the most important recommendations of this committee:

• Liberalization of the Indian Insurance Industry.
• The formation of a governing body (IRDA).
• Divestment of Government Insurance companies up to 50%.
• Amendments to the Indian Insurance Act.
• Foreign entrants into the domestic insurance sector.
• Digitalization and computerization of the insurance business.

Why was the formation of IRDA recommended?

The Malhotra Committee wanted the governance and regulation of the insurance sector to move away from the finance ministry to an independent governing body (which would later be the IRDA). This recommendation was made with the understanding that an industry specific institution would better regulate the industry due to its specialized nature.

The IRDA was formed in 1999 under the watchful eye of the Indian Parliament through the IRDAI Act, 1999.
The committee also recommended certain primary functions of The IRDA which we will touch upon below.

Primary functions of The IRDA

• Regulate the insurance sector by having the ability to disburse or reject the license of any insurance company.
• Regulating insurance premiums.
• To safeguard and protect the interest of policyholders.
• Increasing transparency and trust within the industry.
• Eliminating malpractices
• Increasing insurance penetration in India.
• Growing the insurance market sustainably.
• Conducting audits of insurance companies.
• Recommendations of margins to be kept by insurance companies to ensure financial integrity of an insurance company.
• Penalize non-complying insurance companies.

Formation of the IRDA along with the liberalization of the Indian Insurance Sector were two major inflection points that unleashed the explosive potential of the insurance sector in India.