Ramesh Singh Summary: Insurance in India- 1 | Indian Economy for UPSC CSE PDF Download

Definition

In economic terms, insurance refers to any measure taken to reduce risk.

 In everyday language, insurance is provided by insurance companies, which offer coverage for either a person's life (life insurance) or for loss of assets or property (non-life or general insurance). Insurance policies are bought with fixed premiums.

Insurance Industry

 LIC

• The life insurance business/industry in the country was nationalised by the Government of India in 1956 and a fully government-owned company, the Life Insurance Corporation of India (LIC) was set up.
• Opening of private life insurance companies was prohibited at that time. The LIC was called an investment institution by the government.
• The nationalisation was motivated by twin objectives—first, to spread the message of life insurance for greater social security and secondly, to mobilise people's savings (collected as premiums) for nation building.
• The LIC had been the biggest investor in the government's process of planned development purchasing government securities (G-Secs.) and equities of the big asset Public Sector Undertakings (PSUs).

GIC

In 1971, the government nationalised the private sector companies (107 Indian and foreign companies) playing in the general insurance segment and a government company, the General Insurance Corporation of India (GIC) was formed in 1972.
The GIC started operation on January 1,1973 with its four holding companies :
(i) National Insurance Company Ltd.
(ii) New India Assurance Company Ltd.
(iii) Oriental Fire and Insurance Company Ltd.
(iv) United India Insurance Company Ltd.
In the era of economic reforms, two major changes took place in this area—
(i) In November 2000, the GIC was notified as the Indian Reinsurer
(ii) In March 2002 the GIC was withdrawn from holding company status of the four public sector general insurance companies.

AICIL

• The public sector insurance company, Agriculture Insurance Company of India Limited (AICIL) was set up by the Government of India in December 2002 (commenced its business in April 2003).
• This is a dedicated agri-insurance company and aims “to serve the needs of farmers better and to move towards a sustainable actuarial regime".
• This company was responsible to look after the National Agriculture Insurance Scheme (NAIS) which was launched in 1999. Since January 2016, the company is looking after the newly launched PMFBY (Prime Minister Fasal Bima Yojana) which subsumed the existing agri-insurance schemes— the NAIS and the Modified NAIS (of 2010). 
• the AICIL was not set up, the agri-insurance responsibility of the government was being looked after by the General Insurance Corporation (GIC).
• AICIL is jointly promoted by public sector insurance companies and development financial institutions—majority shares owned by the GIC (35 per cent) and NABARD (30 per cent) while the four public sector general insurance companies own 8.75 per cent each in it.

Insurance Reforms

IRDA

• The Insurance Regulatory and Development Authority (IRDA) was set up in 2000 (the Act was passed in 1999) with one chairman and five members (two as full time and three as part-time members) appointed and nominated by the government.
• The authority is responsible for the regulation, development and supervision of the Indian insurance industry.
• Today, 57 insurance companies are operating in India of which 24 are in life segment while 33 in non-life segment— 1 public sector life insurer (LIC), 4public sector general insurer, 2 specialised insurers (AICIL and ECGC), 1 public sector re-insurer (GICRe) and 4 foreign reinsurers. India allows 49 per cent FDI in insurance sector under automatic route (by early 2020, the Government was considering to enhance it to 100 per cent).
• By late 2019, the Government allowed 100 per cent FDI in insurance intermediaries.

Reinsurance

• The insurance companies offer insurance to its clients, they themselves get exposed to very high financial risks. Re-insurance business emerged out of this reality. When an insurance company buys insurance cover for its insurance business, a new segment comes into being i.e., re-insurance.
• Experts believe that in absence of re-insurance, insurance industry in a country will not grow to the level of the social requirement— as insurance companies will either not provide insurance cover in several areas or they will charge very high premiums on the policies they offer.
• Reinsurance industry has a very low penetration in India. Lack of competition has been cited as a major factor behind it— it has only one player by now. To promote competition and vibrancy the IRDA announced (late 2015 ) to open up the industry for the entry of foreign companies. In March 2016, the IRDA gave initial approval) to four foreign reinsurance companies.

Deposit Insurance and Credit Guarantee Corporation (DICGC)

• DICGC was set up by merging the Deposit Insurance Corporation (1962) and the Credit Guarantee Corporation (1971) in 1978.
• While Deposit Insurance had been introduced in India out of concerns to protect depositors, ensure financial stability, instil confidence in the banking system and help mobilise deposits, the establishment of the Credit Guarantee Corporation was essentially in the realm of affirmative action to ensure that the credit needs of the hitherto neglected sectors and weaker sections were met.
• The essential concern was to persuade banks to make available credit to not so creditworthy clients. After the merger, the focus of the DICGC had shifted on to credit guarantees. This owed in part to the fact that most large banks were nationalised.
• The essential concern was to persuade banks to make available credit to not so creditworthy clients. After the merger, the focus of the DICGC had shifted on to credit guarantees. This owed in part to the fact that most large banks were nationalised.

Export Credit Guarantee Corporation (ECGC)

• (ECGC) under the Ministry of Commerce and Industry, for medium-and long-term exports. But owing to its own limitations, at times it is difficult for ECGC to cover pure commercial risks in issues like long repayment period, the large value of contracts, difficult economic and political conditions of the importing country, together with the fact that reinsurance cover is generally not available for such projects.
• Many times such projects look necessary considering the economic and political relationship of India with the proposed importing country.
• It means that in the absence of credit insurance cover, the ability of Indian exporters to go for such export projects is hampered. It should be noted that in many developed economies such projects a recovered and underwritten on government account.

National Export Insurance Account (NEIA)

• For facilitating the service of the ECGC (discussed above), the Government of India did set up the National Export Insurance Account (NEIA) in March 2006 to promote medium-and long term export by providing credit insurance support in the cases where ECGC was not able to provide credit cover on its own.
• The NEIA can cover projects which fulfil the following criteria :
  (i) The project by itself should be commercially viable;
  (ii) The project should be strategically important for India, with regard to economic and political relationship of India with the importing country;
  (iii) The exporter should be capable of executing the contract, as evident from his previous track record.
• The use and benefits of the NEIA need to be publicised among its beneficiaries. Mean while, many export projects pertaining to Indonesia, Vietnam, Iran, Sudan, etc ., are underway. The NEIA will facilitate potential project exporters to enter the international trade area, as it is expected to be so.

THE CHALLENGE AHEAD

• As per various estimates, only 20 per cent of the insurable Indian population is life insured ; the share of India in global life insurance is just 0.66 per cent; and life insurance penetration is at present 2.53 per cent (2004) in the country.
• The message of life insurance needs to be publicised among the population, specially in the rural areas. Moreover, social security schemes should be expanded to cover the poor masses who lack the premium-paying capacity.
• Experts suggest that health insurance could emerge among the most important factors of improving human development in the country if expanded in a focussed way and via an action plan.
• It is estimated that around 15 per cent of the Indian population is covered under some form of pre-payment on healthcare which includes employees and beneficiaries covered under ESIS, CGHS, Armed forces, Central Police organisations, Railways, employer self-funded schemes.
• After the general insurance industry was opened up (2000) for the private sector participation, the experience has been positive. Its growth compares favourably with that of many other emerging markets and is in line with global benchmark of two to three times the growth in GDP.
• People in their lives experience financial difficulties that can affect the entire family negatively, this is more true about the poor masses in India. This is why experts suggested for the provision of micro insurance. A relatively new concept, micro insurance is today provided to the beneficiaries of micro finance covering the finance amount, reducing the risk of the clients as well as the micro-finance institutions (MFIs).
• Almost all of the private insurance companies in India have been demanding that the government-owned insurance companies should be converted into private sector companies. Their reasons are logical as in comparison with the government-owned insurance companies, private companies are always ready with highly attractive and lucrative insurance schemes, but they have not been able to attract the clients for them.

Insurance Penetration and Density

• The growth in the insurance sector is internationally measured based on the standard of insurance penetration. Insurance penetration is defined as the ratio of premium underwritten in a given year to the Gross Domestic Product (GDP).
• Likewise, insurance density is another well recognised benchmark and is defined as the ratio of premium underwritten in a given year to total population .
• The Indian insurance business has in the past remained under-developed with low levels of insurance penetration.

Reasons for underdevelopment of insurance :
As per the various volumes of the Annual Reports published by the IRDA and other Government documents, there have been several reasons responsible for the underdevelopment of the insurance penetration and density in the country—

• Complex and delayed claim settlement procedures;
• Vague and incomprehensible rules and regulations of the insurance companies;
• Lack of education and awareness among the masses;
• Lower income levels of the population;
• Socio-cultural factors;
• Lack of level playing field in the industry
• Less vibrancy in the regulatory framework.

Policy Initiatives
Committed to expand and strengthen, the insurance industry in the country (following the recommendations of the Malhotra Committee Report, 1993), the Government of India has taken the following policy initiatives in recent years:

• Health Insurance : The Insurance Regulatory Development Authority (IRDA) has been taking a number of proactive steps as part of the initiatives for the spread of health insurance.
• Micro Insurance : Micro insurance regulations issued by the IRDA have provided a fillip to propagating micro insurance as a conceptual issue. With the positive and facilitative approach adopted under the micro insurance regulations, it is expected that all insurance companies would come out with a progressive business approach and carry forward the spirit of regulations thereby extending insurance penetration to all segments of the society.

New Reform Initiatives

• The Insurance Regulatory and Development Authority (IRDA) to enable more effective regulation, and enhancing the foreign equity investment cap in an Indian insurance company with the safeguard of Indian ownership and control, the government has implemented the Insurance Laws (Amendment) Act, 2015.
• The Act paved the way for major reform related amendments in the Insurance Act, 1938, the General Insurance Business (Nationalization) Act, 1972 and the Insurance Regulatory and Development Authority (IRDA) Act, 1999. It provides greater powers to the IRDAI by which the insurance regulatory framework is supposed to become more flexible, effective and efficient.
• Major changes as per the Act are given below :
  (i) Promotion of Foreign Investment : In an Indian Insurance Company increased from to 49 per cent (from 26 per cent) with the safeguard of Indian ownership and control.
  (ii) Capital Requirement in Government Companies : The public sector general insurance companies (four), presently required as per the General Insurance Business (Nationalisation) Act, 1972 to be 100 per cent government owned, are now allowed to raise capital.
  (iii) Consumer Welfare : It will enable the interests of consumers to be better served through provisions like those enabling penalties on intermediaries/insurance companies for misconduct and disallowing multi-level marketing of insurance products in order to curtail the practice of misselling.
  (iv) Empowerment of IRDAI : The Act will entrust responsibility of appointing insurance agents to insurers and provides for IRDAI to regulate their eligibility, qualifications.
  (v) Health Insurance : The Act defines 'health insurance business' inclusive of travel and personal accident cover and discourages non-serious players by retaining capital requirements for health insurers at the level of =tl00 crore, thereby paving the way for promotion of health insurance as a separate vertical.
  (vi) Promoting Reinsurance Business in India : It enables foreign reinsurers to set up branches in India and defines 're-insurance' to mean 'the insurance of part of one insurer's risk by another insurer who accepts the risk for a mutually acceptable premium'.
  (vii) Strengthening of Industry Councils : The Life Insurance Council and General Insurance Council have now been made self-regulating bodies by empowering them to frame byelaws for elections, meetings and levy and collect fees, etc.
  (viii) Robust Appellate Process : Appeals against the orders of IRDAI are to be preferred to SAT as the amended law provides for any insurer or insurance intermediary aggrieved by any order made by IRDAI to prefer an appeal to the Securities Appellate Tribunal (SAT).
  (ix) Capital Market Reforms : In March 2019, the IRDA announced the redesigned initial public offering (IPO) guidelines for insurance companies which are looking to divest equity through the IPO route.

THIRD PARTY INSURANCE

• The 'third-party' insurance is provided by non-life insurance companies on vehicles. This insurance covers the risk on other than the 'two parties' involved in an insurance policy.
• The policy does not provide any benefit to the insured; however, it covers the insured's legal liability for death/disability of third-party loss or damage to the third-party property. This insurance is also known as 'act only' cover. 
• In India, it is mandatory (under the Motor Vehicle Amendment Act, 2019) for all new two wheelers to have a five-year third-party insurance and cars and commercial vehicles to have a three-year third-party insurance.

NEW INSURANCE SCHEMES

• PMSBY (Pradhan Mantri Suraksha Bima Yojana) : It offers a renewable one-year accidental-death-cumdisability cover to all subscribing bank account holders in the age group of 18 to 70 years for a premium of ₹12 per annum per subscriber. The risk coverage available will be rupees two lakh for accidental death and permanent total disability and rupees one lakh for permanent partial disability, for a one-year period stretching from 1 June to 31 May.
• PMITBY (Pradhan Mantri leevan Jyoti Bima Yojana) : The scheme offers a renewable one-year term life cover of rupees two lakh to all subscribing bank account holders in the age group of 18 to 50 years.
• NHPS (National Health Protection Scheme) : In September 2018, Government launched the NHPS under Ayushman Bharat to provide coverage of up to ₹5 lakh to more than 50 crore vulnerable families (10 crore families). The scheme is expected to increase penetration of health insurance in India from 34 per cent to 50 per cent.

ROAD AHEAD

• The future looks promising for the life insurance industry with several changes in regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers :
  (i) At present (latest for 2018), India's share in global insurance market is 2 per cent however, the total insurance premium in India increased by 10.4 per cent whereas global insurance premium increased by 1.4 per cent only.
  (ii) India's insurance industry is expected to reach US$ 280 billion by 2020—life insurance and non-life insurance industries in the country are expected to grow annually by 13 per cent and 10 per cent respectively for the next five years.