Can there be and is there compulsion for taking insurance? Does it exist? If yes, how and in what ways does it operate? Should government make insurance compulsory?
The labour department of the government of Maharashtra is said to have issued a draft notification making it compulsory for shops and establishments to take insurance. It currently awaits stakeholders’ objections and suggestions. If this comes through, then the state of Maharashtra would be the first in the country to introduce a system of compulsory insurance for commercial establishments. It would then only be a matter of time before other states also come out with similar rules.
Origins of insurance and compulsion
The question now is, does compulsion operate in the insurance field and if so, how? A small anecdote on the origins of modem form of insurance would perhaps indicate that insurance was not meant to be a compulsion. Back then, in London port, there was a coffee house by the name of Lloyds coffee house. Mariners, shippers, financiers used to meet for a hot cup of coffee. Naturally with the presence of such a crowd it was only to be expected that they will talk about arrivals and departures of ships and their voyages. The owner decided to put a board on ship movements into and out of the port. Soon enough, this became a point of attraction and along with that, financiers and underwriters started betting on the success of various voyages. This was the humble beginning of the Lloyds of London which held sway over the insurance market for centuries.
Insurance, thus started with marine insurance. There was no compulsion and it came into being with the popular usage of automobiles and also with the evolution of the law of torts and liability. The need was felt for compensating third party victims of an accident caused by motor vehicles. Thus, came into being a law, making it essential for owners of motor vehicles to necessarily take an insurance for meeting third party liabilities. In India too, this became compulsory with it being recognised statutorily in the Motor Vehicles Act.
The second case of compulsion, perhaps less known, came into being after the infamous Bhopal gas tragedy. The government came up with the public liability Insurance Act of 1991, which states that each owner associated with the production or handling of any hazardous chemicals should have an insurance policy, to provide immediate relief to victims and persons (other than work men) affected by accidents occurring while handling hazardous substances through the insurance amount paid by the owner of the hazardous substance.
When the pandemic hit and there was disputes and confusion about the amounts payable under a health insurance policy and also to take care of employees who would be affected by COVID, the government issued instructions to all employers to take a policy device especially for COVID patients.
These are some areas where the law insists on compulsory insurance. However, governments may include insurance as part of contracts it enters into, like commercial contracts. Then there are regulatory bodies like SEBI or IRDAI etc., which may specify insurances to be taken by bodies coming under jurisdiction.
Both the central and state governments too have many insurance schemes covering crores of persons against personal accident, life, crop insurance, health insurance, etc. The premium involved runs into thousands of crores, in some are paid by individuals, while in others, the government pays the premium amount. The government in all these cases acts as facilitators. The point to be noted is that there is no compulsion and is left to the individuals’ interest.
Effect of this compulsion
This notification may have been propelled by good intentions. Losses due to fire, floods, storms and other natural causes have become frequent. Many of the smaller commercial establishments do not have any insurance to cover such calamities. This results in grave losses when an accident happens and the act can protect them from losses.
Apart from third party motor insurance, government has not mandated any. If this trend continues, the next could be to make it mandatory for travel insurance, overseas medical insurance, personal insurance and so on. The question is, should the government compel on availing insurance. If it is considered essential, then the government should work with the insurance industry and the regulator to devise a policy that is simple and covers all aspects at a reasonable price.
Till now, the insurance industry focused mostly on easy pickings and that is the reason, even after two decades plus, of the opening up of the sector, penetration and density are moving at a tardy pace. The Chairmen of IRDAI has also repeatedly expressed anguish about this.
The question is, should the government adopt this posture? Or should it continue with its hands off approach, using its authority sparingly and taking on more the mantle of a facilitator, as it has been doing of late.
