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- GS 3 || Economy || Banking & Financial Sector || Financial Inclusion
Why in the news?
The Insurance Amendment Bill 2021 sought to increase the FDI limit up to 74% in the insurance sector. This is just one more addition to the ongoing reforms measures in the sector.
Insurance sector: Introduction
- The role of insurance activities in macroeconomic development has been described by the UNCTAD in the best possible manner in the proceedings of the United Nations Conference on Trade and Development (UNCTAD). It recognised the significance of the sector in following words::
- “A sound national insurance and reinsurance market is an essential characteristic of economic growth”
- Also, ‘Insurance’ is listed in the Seventh Schedule as a Union List subject in the Constitution of India meaning it can only be legislated by the Central Government. The State governments have no jurisdiction to legislate over it.
Insurance sector in India: Origin and evolution
- The insurance industry in India has been growing dynamically, with total insurance premiums increasing rapidly compared with its global counterparts.
- The insurance business in India started in the 19th century. At that time, only a few British insurance companies served the market and were located in the larger cities of India.
- The Insurance Act, 1938 was the first comprehensive act that brought together and amended earlier legislations with a view to protecting the interests of the insurance public with provisions for effective control over the activities of insurers.
- Prior to independence, the sector was dominated by foreign insurers.
- In the period following 1956, the insurance products sold by the state owned LIC were mostly tax saving tools.
- On 1st September, 1956, with the issuance of an ordinance by the Government of India, 245 units were merged into a government-owned LIC.
- This decision was taken against the backdrop of a rising number of insurance companies, high competition, and allegations of unfair trade practices.
- Thereafter, the general insurance sector was also nationalised in 1972 by the General Insurance Business (Nationalisation) Act, 1972.
- Subsequently, the General Insurance Corporation (GIC) was formed as a private company under the Companies Act,1956.
- In 1993, the government set up a high-powered committee, headed by former RBI Governor, R. N. Malhotra, to evaluate the Indian insurance sector.
- Based on the recommendations of the Malhotra Committee, the IRDA was constituted as an autonomous body in 1999 and as a statutory body in 2000.
- The monopoly accorded to the Life Insurance Corporation in 1956 and the General Insurance Corporation in 1972 was revoked with the enforcement of the IRDA Act, 1999.
- In August 2000, the sector was opened up to private and foreign players and foreign companies were allowed ownership of 26 per cent
- The insurance sector was further liberalised in 2015 with the passing of the Insurance Laws (Amendment) Bill. It Increased the foreign investment cap to 49% from 26% in 2015.
- The sector has now transitioned from being an exclusive state monopoly to a competitive market.
Insurance sector in India: Present Status
- Post-liberalisation, India’s insurance industry has recorded a significant growth.
- The Indian insurance sector is dominated by the public sector insurers, even though the sector has been opened up to private and foreign players and the private sector insurers are gradually increasing their presence.
- Life insurance continues to dominate with its enormous market share.
- In the past twenty years, the insurance sector of India has risen at a compound annual growth rate (CAGR) of 16.5 per cent.
- Gross premium collected by life insurance companies in India increased from Rs. 2.56 trillion in 2012-13 to Rs. 7.31 trillion in 2020-21.
- During 2020-21, premium from new business of life insurance companies in India increased at a 15% CAGR to reach Rs. 2.13 trillion 2020.
- There are 24 life insurance and 33 non-life insurance companies in the Indian market who compete on price and services to attract customers, whereas, there are two reinsurance companies. There are six public sector insurers in the non-life insurance segment.
- The market share of private sector companies in the non-life insurance market rose from 15% in 2004-05 to 56% in 2020. In the life insurance segment, private players had a market share of 31.3% in new business in
- In India, the overall market size of the insurance sector is expected to US$ 310 billion in 2022.
- Low penetration and density rates: Low levels of penetration and density of insurance in India clearly imply that a large section of the population is still uninsured. A report by the World Economic Forum in 2018 points to an enormous insurance gap of USD 27 billion in absolute terms in India.
- Skewed focus on urban areas: It was expected that along with the growth in insurance penetration and density, liberalisation will spread insurance to rural areas and social sectors via micro insurance, this has not happened. Even after liberalisation, insurance companies in India have been ignoring rural markets.
- Less investment by households in insurance products: The Parliamentary Standing Committee has found out that an average Indian household holds 77 per cent of its total assets in real estate”, 7 per cent in other durable goods,11 per cent in gold, and the residual 5 per cent in financial assets such as deposits and savings accounts, publicly traded shares, mutual funds, life insurance, and retirement accounts. This meagre investment by households in insurance is substituted by non-institutional debt, as it serves as a high-cost, imperfect form of insurance.
- Inadequate access to insurance products: Accessibility of insurance products is related to affordability and comprehension of the product. Low financial inclusion and lack of financial literacy is limiting the accessibility to financial products. Saral Jeewan Bima launched by IRDA would provide broad contours of a standard individual term life insurance product which must be adhered by insurance companies.
- Deteriorating financial health of insurers: The life insurance industry has reported a marginal fall in profits from last fiscal, as the profits fell to Rs 8,435.81 crore in 2018-19 from Rs 8,511.99 crore in 2017-18.However, exposure to downgraded debt instruments, swelling non-performing assets (NPAs), and falling investment yield are some of the factors casting shadows on the growth of the sector.
- Public sector dominance and depressed private participation: The dominant position of state owned insurers in the insurance sector is proving to be a cause for concern for private sector insurers as well as foreign insurers.
- Lack of capital: By its very nature, insurance is a capital consuming financial service and growing insurance companies require on-tap capital. Insurers in India are capital starved.
- Regulation and supervision: The regulation and supervisory role is very important. At present, IRDA, the insurance regulatory authority in India lacks expertise and capacities in this regard.
Malhotra Committee (1993) Recommendations:
The Government set up a committee in 1993 under the chairmanship of RN Malhotra, former Governor of RBI, to propose recommendations for reforms in the insurance sector. The objective was to complement the reforms initiated in the financial sector. The committee submitted its report in 1994.
The salient recommendations are as following:
- Raising the capital base of LIC and GIC up to Rs. 200 crore, half retained by the government and the rest sold to the public at large, with suitable reservations for its employees.
- Government to bring down its stake in insurance companies to 50 per cent.
- Private sector to be allowed to enter the insurance industry with a minimum paid up capital of Rs. 100 crore.
- Foreign insurance be allowed to enter by floating an Indian company, preferably a joint venture with Indian partners.
- No single company is allowed to transact business in both life and general insurance.
- Market expansion: The International Financial Services Centres Authority (IFSCA) has recently obtained membership of International Association of Insurance Supervisors (IAIS). It will give a push to expansion of the insurance sector in India.
- Adoption of technology based solutions: The insurance companies are rapidly adopting the technology to bring innovative insurance products and better their services. For eg: LIC has recently launched its first software application, ANANDA, an acronym for ‘Atmanirbhar Agents New Business Digital App’.
- Level playing field for private and public sector companies: In order to create a level-playing field for all insurance companies, the Financial Sector Legislative Reforms Committee had recommended eliminating the government guarantee of LIC liabilities and transforming it into a Companies Act company. Government needs to further reform the sector to bring a level playing field for all sectors.
- More liberalisation in the sector: As per Union Budget 2019-20, 100% foreign direct investment (FDI) was permitted for insurance intermediaries.
- Rural Centric Approach: Insurance companies in India will have to show long-term commitment to the rural sector and will have to design products which are suitable for rural people. Government insurance schemes such as Pradhan Mantri Jan Arogya Yojana, Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Pradhan Mantri Jeevan Jyoti Bima Yojana are notable steps in right direction.
- Need For Awareness Program: There is a need for complementary thrust to spread awareness and improve financial literacy, particularly the concept of insurance, and its importance.
- Strengthen the regulatory and supervisory capacity of State: The regulatory body needs to be strengthened in terms of manpower, expertise, resources training etc.
Model Mains Question:
- Discuss the main impediments in realising the full potential of the insurance sector in India. Suggest measures to help the sector to grow with full potential and improve the socio-economic conditions in the country.