INSURANCE SECTOR IN INDIA | Current Affairs | Vision IAS
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    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 10th 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.
    • Tags :
    • Insurance Regulatory and Development Authority of India (IRDAI)
    • Insurance
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