INSURANCE SECTOR IN INDIA

Posted 15 Mar 2024

4 min read

Why in the news?

The Standing Committee on Finance presented a report on the Performance Review and Regulation of the Insurance Sector to the Lok Sabha.

Status of Insurance Sector in India

Insurance penetration: Insurance penetration increased from 2.71% in 2001-02 to 4.2% in 2021-22.
- The global average was 7% in 2021-22.
Insurance density: Insurance density has increased from $11.5 in 2001-02 to $91 in 2021-22.
- The global average was $874 in 2021-22.
Insurance business: India ranked 10^th in the global insurance business with a market share of 1.85% in 2021.
- Number of insurers registered increased from 6 in 2000 to 70 in June 2023.
Sector concentration: Indian insurance sector is heavily tilted towards the life insurance segment which has a share of 76%.
- Globally, the share of the life insurance business in total premiums was 43.7% in 2021.

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Regulation of the Insurance Sector in India

Insurance Act 1938: It provides the legislative framework for the functioning of insurance businesses and regulates the relationship between an insurer, its policyholders, its shareholders, and the regulator.
Insurance Regulatory and Development Authority of India (IRDAI): It is a statutory body, established under the provisions of the Insurance Regulatory and Development Authority Act, 1999.
- Its functions include regulation, promotion and ensuring orderly growth of the insurance business and reinsurance business.
- It also certifies insurance companies, protects the interests of policyholders, and adjudicates disputes.
Insurance Division: Insurance Division of the Department of Financial Services, the Ministry of Finance is responsible for policy formulation and administration of the following Acts:
- The Insurance Act, 1938,
- The Life Insurance Corporation Act, 1956,
- The General Insurance Business (Nationalisation) Act, 1972
- The IRDA Act, 1999,
- The Actuaries Act, 2006

Issues and Recommendations highlighted by the Committee

Parameters	Issues and Challenges	Recommendations
Microinsurance distribution	Small size of installments coupled with high transaction and service delivery costs. Absence of a business model that can attract good intermediaries. Lack of knowledge regarding insurance.	New affordable microinsurance products need to be developed for the financial protection and security of the low-income and vulnerable sections of society. It may require encouraging smaller, niche players in various geographic areas with reduction in capital requirement of Rs. 100 crores for such players.
Composite Licensing	Regulations of IRDAI do not allow composite licensing i.e., for an insurer to undertake life, general, or health insurance under one entity. Presently, life insurers can only offer life insurance products, while general insurers can offer non-life insurance products etc.	Allow composite licensing, enabling a single insurance entity to offer both life and non-life insurance products. Composite licensing can cut costs and compliance hassles for insurers. Composite licensing can boost insurance reach and awareness in India, as customers can get all-in-one insurance from one provider, with lower premiums and easier claims.
Health Insurance	According to NITI Aayog report, around 30% of the population is devoid of health insurance. This uncovered population is termed as the ‘missing middle’.	Steps such as developing simple and standardized health insurance products, sharing government data and infrastructure, and partial financing of health insurance should be initiated.
Performance of Public Sector Insurance Companies	They lack adequate capital and have lagging insolvency ratios. Causes for performance decline include overexposure in health insurance business, wage revisions, Covid-19 losses etc.	An appropriate strategic roadmap should be adopted to improve their competitiveness and enable them to attract sufficient capital and talent.
Government Insurance Schemes	There are issues such as delay in processing of claim settlement, high premium rates, etc.	Effective mechanism should be devised to expedite the process of claim settlement and premium should be made more affordable.

Other recommendations

Awareness: There is an imminent need to create mass-level awareness about the need and benefits of having necessary insurance protection of diverse insurance products, not just life insurance.
- Such campaign can be similar to the successful campaign by Association of Mutual Funds of India (AMFI).
Open Architecture: Introduce ‘open architecture’ concept for insurance agents, which enables agents to associate with multiple insurance companies.
- It can result in higher insurance penetration, financial inclusion and lower distribution costs.
Goods and Services Tax (GST): Rationalize GST rate on insurance products, especially health and term insurance, which is 18% at present.
- High GST rate results in a high premium burden, which acts as a deterrent to getting insurance policies.
Unclaimed policies: A central portal like UDGAM (RBI portal for claiming unclaimed deposits) be created as there are a significant number of unclaimed policies that are currently being transferred to the Senior Citizen Fund.
Capital requirement: RBI, on behalf of the Government of India, can issue ‘on-tap’ bonds of up to 50 years (current maximum tenure – 40 years) for investment by insurance companies.