Ramesh Singh Summary Insurance in India- 1 - Indian Economy for UPSC CSE

Table of Contents
1. Definition
2. Scope and Functions of Insurance
3. History and Structure of the Insurance Industry in India
4. Insurance Reforms and Regulation
5. Reinsurance
6. Deposit Insurance and Credit Guarantee
7. Export Credit Insurance and National Export Insurance Account
8. Insurance Penetration and Density
9. Policy Initiatives and Sectoral Measures
10. New Reform Initiatives and Legislative Changes
11. Third-Party Motor Insurance
12. Important Social and Government Insurance Schemes
13. Challenges Ahead
14. Recent Performance and Outlook
15. Practical Implications for Policy and Implementation
16. Final Summary
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Definition

Insurance in economic terms refers to any organised measure taken to reduce, pool and manage risk. In everyday usage, insurance is a contract provided by an insurer (an insurance company) that transfers specified risks from an individual or an organisation (the insured) to the insurer in return for a fixed payment called the premium. Broadly, insurance in India is classified into life insurance (protection linked to human life) and non-life or general insurance (covering assets, liabilities and other contingencies).

Scope and Functions of Insurance

• Risk pooling and risk transfer: Insurance spreads individual risks across a large group of policy-holders.
• Financial protection and social security: Insurance provides compensation on occurrence of insured contingencies, thereby providing financial security.
• Mobilisation of savings: Premiums collected by insurers are an important source of long-term funds for the economy and are invested in government securities, corporate bonds and equities.
• Encouraging entrepreneurship: By reducing the cost of risk, insurance helps businesses undertake productive economic activities.

History and Structure of the Insurance Industry in India

Life Insurance and 

LIC

• The life insurance industry in India was nationalised in 1956 and the Life Insurance Corporation of India (LIC) was established as a fully government-owned corporation.
• Private participation in life insurance was prohibited at that time. The objectives of nationalisation were to spread life insurance for social security and to mobilise savings for planned national development.
• LIC became a major institutional investor in the Indian economy, purchasing government securities and equities of public sector undertakings (PSUs).

General Insurance and 

GIC

• In 1971 the government nationalised the private general insurance industry; the General Insurance Corporation of India (GIC) was established in 1972 and began operations on 1 January 1973.
• Initially GIC acted as a holding company for four subsidiaries:
  • National Insurance Company Ltd.
  • New India Assurance Company Ltd.
  • Oriental Fire and Insurance Company Ltd.
  • United India Insurance Company Ltd.
• Two major changes in the reform era were:
  • In November 2000, GIC was notified as the Indian reinsurer.
  • In March 2002, GIC was withdrawn from the holding company status of the four public sector general insurance companies.

Agriculture Insurance Company of India Limited (AICIL)

• AICIL was set up by the Government of India in December 2002 and commenced business in April 2003 as a specialised agri-insurance company.
• AICIL was formed to improve service to farmers and move towards a sustainable actuarial regime in agricultural insurance. It administered the National Agricultural Insurance Scheme (NAIS) launched in 1999 and from January 2016 administers the Pradhan Mantri Fasal Bima Yojana (PMFBY), which subsumed the NAIS and modified NAIS.
• Shareholding pattern: AICIL is jointly promoted by public sector insurers and development financial institutions; major shareholders include GIC (35%) and NABARD (30%), while the four public sector general insurers hold 8.75% each.
• Prior to AICIL's formation, agricultural insurance responsibilities were handled by GIC.

Insurance Reforms and Regulation

Malhotra Committee (1993)

• An Insurance Reforms Committee was constituted in April 1993 under the chairmanship of ex-RBI Governor R. N. Malhotra. The committee submitted its report in January 1994, recommending deregulation and the introduction of private participation with appropriate regulatory oversight.

IRDA / IRDAI

• The Insurance Regulatory and Development Authority was established following the IRDA Act, passed in 1999, and the authority began functioning in 2000. It is the statutory regulator responsible for the regulation, development and supervision of the Indian insurance industry.
• Key regulatory functions include licensing insurers and intermediaries, protecting policy-holder interests, ensuring solvency, and promoting orderly growth of insurance markets.
• By the late 2010s, India had around 57 insurance companies-approximately 24 life insurers and 33 non-life insurers, including: 1 public sector life insurer (LIC), 4 public sector general insurers, 2 specialised insurers (AICIL and ECGC), 1 public sector reinsurer (GICRe) and a number of foreign reinsurers and private players.
• Foreign direct investment (FDI) rules evolved under reforms. The Insurance Laws (Amendment) Act, 2015 raised the foreign equity cap in Indian insurers to 49% from 26%. By late 2019, the government allowed 100% FDI in insurance intermediaries.

Reinsurance

• Reinsurance is the practice where an insurer cedes part of its risk to another insurer (the reinsurer) to reduce its own exposure to large or catastrophic losses.
• Reinsurance is essential for the growth and stability of the insurance sector; without it, primary insurers would either restrict coverage or charge prohibitively high premiums.
• Reinsurance penetration in India has historically been low and relatively concentrated. To promote competition, IRDA announced reforms in the mid-2010s to permit foreign reinsurers to establish operations in India; in March 2016 the regulator gave initial approvals to foreign reinsurers to enter the Indian market.

Deposit Insurance and Credit Guarantee

Deposit Insurance and Credit Guarantee Corporation (DICGC)

• The DICGC was formed in 1978 by merging the Deposit Insurance Corporation (established 1962) and the Credit Guarantee Corporation (established 1971).
• Deposit insurance was introduced to protect small depositors, maintain confidence in the banking system and support deposit mobilisation. The Credit Guarantee Corporation was intended to encourage banks to lend to previously neglected sectors and weaker sections by providing credit guarantees.
• After the merger, the focus of the corporation shifted more towards credit guarantees, partly because of the nationalisation of major banks and the greater need to support credit flow to priority sectors.

Export Credit Insurance and National Export Insurance Account

Export Credit Guarantee Corporation (ECGC)

• ECGC operates under the Ministry of Commerce and Industry to provide credit insurance and guarantees to Indian exporters, particularly for medium- and long-term export projects.
• ECGC faces constraints in covering pure commercial risks for very large projects, long repayment periods, or adverse political/economic conditions in importing countries where reinsurance cover is unavailable. In such cases, government support or special arrangements are sometimes required to enable exporters to undertake strategic projects.

National Export Insurance Account (NEIA)

• The NEIA was set up in March 2006 to supplement ECGC by providing credit insurance support for medium- and long-term export projects that ECGC alone could not cover.
• NEIA covers projects subject to criteria such as:
  • the project must be commercially viable;
  • the project should be strategically important for India's economic or political relationship with the importing country;
  • the exporter should have the capability to execute the contract as evidenced by past performance.
• NEIA has been used to support projects in countries such as Indonesia, Vietnam, Iran and Sudan, thereby facilitating strategic export opportunities.

Insurance Penetration and Density

• Insurance penetration is measured as the ratio of total insurance premiums underwritten in a year to Gross Domestic Product (GDP).
• Insurance density is measured as total insurance premiums underwritten in a year divided by the total population (premium per capita).
• Historically, India has exhibited low insurance penetration and density relative to many advanced and emerging economies.

Reasons for Underdevelopment

• Complex and delayed claim settlement procedures.
• Vague or incomprehensible policy terms and documentation.
• Lack of awareness and insurance education among large sections of the population.
• Lower income levels and limited premium-paying capacity.
• Socio-cultural beliefs and mistrust of formal financial products.
• Historical lack of a level playing field and limited competition in some segments.
• Regulatory and institutional rigidities that reduced vibrancy.

Policy Initiatives and Sectoral Measures

• Health Insurance: IRDA and the government have taken proactive measures to expand health insurance coverage and design appropriate products to increase accessibility and affordability.
• Microinsurance: IRDA introduced microinsurance regulations to enable and encourage insurers to design low-cost, simple insurance products for low-income and vulnerable populations. Microinsurance is commonly delivered through banks, post offices, self-help groups and microfinance institutions (MFIs).
• Promotion of competition and product innovation by permitting private and foreign participation under regulated limits has been a central policy thrust since the 1990s reforms.

New Reform Initiatives and Legislative Changes

• The Insurance Laws (Amendment) Act, 2015 amended key statutes-the Insurance Act, 1938; the General Insurance Business (Nationalisation) Act, 1972; and the IRDA Act, 1999-to modernise the regulatory framework and facilitate growth. Major features include:
• (i) Promotion of Foreign Investment: foreign equity limit in an Indian insurance company was raised to 49% (from 26%) while retaining safeguards on Indian ownership and control.
• (ii) Capital Raising for Government Companies: the four public sector general insurers were allowed to raise capital, relaxing the earlier requirement of 100% government ownership.
• (iii) Consumer Protection: provisions to penalise misconduct by insurers and intermediaries and to curb multi-level marketing and misselling practices.
• (iv) Empowerment of the Regulator: IRDAI's role in regulating agent appointment, eligibility and qualifications was strengthened.
• (v) Health Insurance: the Act clarifies and defines health insurance business (including travel and personal accident covers) and retains capital requirements for health insurers to discourage non-serious entrants.
• (vi) Promoting Reinsurance in India: foreign reinsurers were permitted to set up branches in India and the Act provided a clear definition of re-insurance.
• (vii) Strengthening Industry Councils: the Life Insurance Council and General Insurance Council were given enhanced self-regulatory powers to frame byelaws for their functioning.
• (viii) Robust Appellate Process: appeals against IRDAI orders were provided for before the Securities Appellate Tribunal (SAT).
• (ix) Capital Market and Listing Reforms: IRDA announced redesigned initial public offering (IPO) guidelines for insurers seeking to divest equity through the stock market (notably the IPO guidelines redesign announced in March 2019).

Third-Party Motor Insurance

• Third-party insurance is provided by non-life insurers to cover legal liability arising from injury, death or property damage to a third party caused by the insured vehicle. It does not compensate the policyholder for their own vehicle's damage.
• It is also called an 'act only' cover, as it principally satisfies legal liability under motor vehicle laws.
• Under the Motor Vehicles (Amendment) Act, 2019 (as per the regulatory prescriptions stated in the Act and related rules), longer-duration third-party policies were prescribed for new vehicles; for example, new two-wheelers were required to have a five-year third-party insurance and cars and commercial vehicles a three-year third-party insurance (as per prescriptions in the Act and subsequent rules/regulations).

Important Social and Government Insurance Schemes

• PMSBY (Pradhan Mantri Suraksha Bima Yojana): a renewable one-year accidental death and disability cover available to subscribing bank account holders aged 18-70 years; the premium (historically) is ₹12 per annum per subscriber. The risk coverage is typically ₹2 lakh for accidental death and permanent total disability and ₹1 lakh for permanent partial disability for the one-year period.
• PMJJBY (Pradhan Mantri Jeevan Jyoti Bima Yojana): a renewable one-year term life cover scheme offered to subscribing bank account holders, covering eligible age groups with a standard sum insured (commonly described as ₹2 lakh in government documentation for the basic cover), designed to provide affordable life cover to a large population.
• NHPS / PM-JAY (National Health Protection Scheme under Ayushman Bharat): launched in September 2018, the scheme (PM-JAY) provides health coverage up to ₹5 lakh per family per year for eligible families identified by socioeconomic criteria. The programme targets approximately 10 crore poor and vulnerable families, covering around 50 crore beneficiaries, and is intended to substantially increase health insurance penetration among vulnerable groups.

Challenges Ahead

• Low penetration and density: historical estimates have pointed to low life insurance penetration and modest share in global life insurance (for example, past estimates indicated life insurance penetration around 2-3% and India's share in global life insurance below 1% in earlier decades).
• Large uninsured population, particularly in rural areas, requiring better outreach, financial literacy and affordable product design.
• Need for expansion of social security and public health financing to cover the poor and those with limited premium-paying capacity.
• Health insurance expansion is a priority area; focused policy action can improve human development outcomes if coverage is extended effectively.
• Microinsurance: promoting microinsurance via microfinance institutions and community channels can protect poor households from shocks and reduce distress sales of assets.
• Calls for privatisation or corporatisation of government insurance companies: private insurers argue that private players are more flexible and innovative in designing attractive schemes, but public companies retain wide outreach and social objectives.

Recent Performance and Outlook

• After opening the general insurance segment to private participation from 2000, the industry experienced robust growth. In the late 2010s India's share in the global insurance market rose (estimates around 2% by 2018) and industry premium growth outpaced global averages in some years (for example, premium growth cited at about 10.4% in a recent year versus a global average near 1.4% in that period).
• Forecasts made in the late 2010s projected rapid expansion of the Indian insurance market, with estimates of the industry reaching approximately US$280 billion by 2020 and expected compound annual growth in the medium term (life and non-life segments) in the low-to-teens. Such projections depend on regulatory continuity, product innovation, financial literacy and macroeconomic conditions.

Practical Implications for Policy and Implementation

• Strengthen claim settlement mechanisms and standardise policy documentation to build public trust.
• Expand financial literacy and awareness campaigns, especially in rural areas, to increase voluntary uptake of insurance products.
• Promote digital distribution channels and bancassurance to widen reach at lower distribution costs.
• Encourage public-private partnerships and targeted subsidies or reinsurance support for socially important risks such as health and agriculture.
• Support microinsurance and index-based crop insurance products to provide timely relief and reduce administrative costs.
• Ensure a competitive reinsurance market in India to retain more premium and risks domestically while building domestic capacity.

Final Summary

Insurance in India has evolved from a largely nationalised and under-penetrated sector to a more diverse and regulated market with significant private and foreign participation under IRDAI supervision. Key challenges remain-low penetration, limited awareness, health coverage gaps and the need for a vibrant reinsurance market. Recent legislative reforms, social insurance schemes and regulatory initiatives aim to deepen coverage, protect consumers and enable the industry to mobilise long-term savings for national development while extending financial protection to vulnerable sections of society.