Regulating the Insurance Sector

HS 411 Course Project

GROUP 3

Ankit Kumar (160040010)

Keshav Vaishnav (160040040)
Shoaib Aman Bhati (160020060)
What is Insurance?
● Insurance is a protection against financial loss arising due to occurrence of
an unexpected event.
● A purchaser of insurance pays a fixed premium in exchange for a promise of
compensation in the event of some specified loss.
● Insurance has been classified broadly into two parts:
○ Life Insurance: It is a written contract between the insured and the insurer, that provides
for the payment of the insured sum on the date of the maturity of the contract or on the
unfortunate death of the insured, whichever occurs earlier.
○ General Insurance: This category of insurance virtually covers all forms of insurance except
life e.g. insurance of property against fire, burglary, theft; personal insurance covering health,
travel and accidents; and liability insurance covering legal liabilities.
Structure of Indian Insurance Sector

Legislative Body:

Ministry of Finance

Regulatory Body:

Insurance Regulatory and Development

Authority (IRDA)
Brief history of Insurance sector in India
1870: The first insurance company is formed, Bombay Mutual Life Insurance Society

1912: Life insurance companies Act and the pension Fund Act of 1912 is passed. Led to start of formal
insurance regulations for the first time in India.

1956: LIC Act of 1956 is passed.The central government took over 245 Indian/foreign life insurance
companies were nationalised to form LIC in 1956 to increase penetration and protect policyholders from
mismanagement.

1972: The non-life insurance business was nationalised to form GIC in 1972

1993-2000: Malhotra Committee recommended opening up the insurance sector to private players
IRDA, LIC and GIC Acts were passed in 1999, making IRDA the statutory regulatory of LIC and GIC.
LIC and GIC - “The two Monopolies”
Life Insurance Corporation of India (LIC)- In 1956, 245 Indian and foreign insurers and provident
societies that were prevalent in India were taken over by the central government and passed the Life
Insurance of India Act,1956 that nationalised the private insurance industry in India to form the Life
Insurance Corporation of India (LIC) with a contribution of Rs.5 crore from the Government of India.

General Insurance Corporation of India (GIC)- The General Insurance business in India was
nationalized with effect from 1.1.1973 by the General Insurance Business (Nationalization) Act,
1972 and a Government company known as General Insurance Corporation of India was formed. GIC
was formed to control and operate the business of general insurance in India. It was the sole
reinsurance company in the Indian insurance market until the insurance market was open to foreign
reinsurance players.
Malhotra Committee and IRDA formation
In 1993, the Government set up a committee under the chairmanship of RN
Malhotra, former Governor of RBI, to propose recommendations for reforms in
the insurance sector to complement the economic liberalisation in India.

Major points from the report submitted are follows:

● Private companies should be included in the insurance sector.

● Foreign companies be allowed to enter the insurance sector, preferably
through joint ventures with Indian partners.
● The Insurance Regulatory and Development Authority (IRDA) be constituted
as an autonomous body to regulate and develop the insurance sector.
Functions of IRDA
● The IRDA issues, modifies, renews, suspends, withdraws and cancels all certificate of registration
for all parties that apply.
● They are responsible for the protection of the interests of the policy holders in matters concerning
assigning of policy, nomination by policyholders, insurable interest, settlement of insurance claim,
surrender value of policy and other terms and conditions of contracts of insurance.
● It regulates investment of funds by insurance companies and the maintenance of margin of
solvency.
● The other function is that of adjudication of disputes between insurers and intermediaries or
insurance intermediaries.
● It will also be responsible for the control and regulation of the rates, advantages, terms and
conditions that may be offered by insurers.

https://www.irdai.gov.in/
Challenges faced by the Insurance Sector
Cut Throat Competition: Earlier, LIC and GIC were the monopoly insurance providers in India.
Liberalization created acute competition in the insurance market. Fierce competition to increase volume
and market share will continue as more players join Indian insurance sector.

Customer Relationship Management: The Customer behavior will be influenced by socio economic
factors, inputs of insurance advisors, the company’s efforts to manage customer satisfaction and
experience.

Untapped Market Segments: Semi-urban and rural areas offers a huge potential.

Human Resource Management: The insurance market is now filled with players, who are mature,
globally prominent and big players in competitive global competitive insurance market.

Managing the Regulatory Authority: The regulators have a duel responsibility. They has to ensure
that the insure adhere to sound insurance principles and practices as well as maintain adequate
financial resources to meet their liabilities
Current Scenario
A growing middle-class segment, rising income, increasing insurance awareness,
rising investments and infrastructure spending, have laid a strong foundation to
extend insurance services in India.

By 2020,it is expected to account

for 35% of India’s total savings.

https://www.irdai.gov.in/
Increasing penetration and density of insurance sector

● At 3.69 per cent, India was ranked 41st in 2017 in terms of insurance penetration with life
insurance penetration 2.76 % and non-life insurance penetration at 0.93 per cent.

https://www.irdai.gov.in/
● In terms of insurance density India was ranked 73rd in 2017 with overall density at US$ 73.

https://www.irdai.gov.in/
Share of public and private sector activity in Life Insurance segment

● Over the years, share of private sector in life insurance segment has grown from around 2 per cent
in FY03 to 33.51 per cent in FY19 (up to December 2018).

https://www.irdai.gov.in/
Share of public and private sector activity in Non-Life Insurance
segment

● The market share of private sector companies in non-life insurance segment rose from 15 per cent
in FY04 to 46.6 per cent in FY18.

https://www.irdai.gov.in/
LIC Continues to dominate life insurance segment:
● As of FY19 (up to Nov’18), life insurance sector had 23 private players in comparison to only four in
FY02.With a 66.49% share new business market share in FY19 (up to Dec’18), LIC of India, the only
public sector life insurer in the country, continues to be the market leader.

https://www.irdai.gov.
in/
STRONG GROWTH IN NON-LIFE INSURANCE MARKET
● Gross direct premiums of non-life insurers in India reached Rs1.51 trillion (US$ 23.38 billion) in
FY18. In FY19 (up to Dec’18), gross direct premiums reached Rs1.23 trillion (US$ 17.05 billion),
showing a year-on-year growth rate of 13.14%.The number of policies issued increased from 65.55
million in FY08 to 182.8 million in FY18, at a CAGR of 10.8%.

*www.ibef.org
SHARES IN NON-LIFE INSURANCE MARKET: MOTOR INSURANCE LEADS
● In FY18, Motor insurance constituted 39.40 per cent of the non-life insurance market in India.

*www.ibef.org
STRONG POTENTIAL IN CROP INSURANCE
● Crop insurance market in India is the largest in the world. Over 47.9 million famers were benefited
under Pradhan Mantri Fasal Bima Yojana (PMFBY) in 2017-18.In September 2018, Government of
India increased the number of risks to be covered in the Pradhan Mantri Fasal Bima Yojana
(PMFBY)

*www.ibef.org
Growth drivers for Insurance Sector
● India’s robust economy and Growth in Financial Industry
Per capita GDP of India is expected to reach US$ 3,274 in 2023 from US$
2,135 in 2018.
Higher personal disposable incomes will result in higher household savings
that will be getting channelized into different financial savings products like
insurance and pension policies.
*https://data.worldbank.org/country/india
● Innovation and Efficiency
Increase in potential insurance customers –individuals and companies
across different industries, small and medium enterprises,multinational
companies.
● Competition
Increasing number of insurance providers with various sophisticated
products at competitive prices.
● Tax incentives
Insurance products are covered under the exempt, exempt, exempt (EEE)
method of taxation. In 2015, Tax deduction under Health Insurance Scheme
has been increased to US$409.43 from US$245.66.
Growth in specific segments
● Increase in micro insurance due to increased focus of government on
financial inclusion.Increase in demand of motor insurance as a by-product of
rapidly expanding auto industry.Increase in health insurance due to focus on
improvement in healthcare.

Approval of increase in FDI limit and revival package

● Revival package by government will help companies get faster product
clearances, tax incentives and ease in investment norms. FDI limit for
insurance company has been raised from 26 % to 49 %, providing safeguard
and ownership control to Indian owners.

www.ibef.org
Union Budget 2018-19
● In September 2018, National Health Protection Scheme was launched which
provided coverage of up to Rs 500,000 to more than 100 million vulnerable
families. The scheme is expected to increase penetration of health insurance
in India from 34 per cent to 50 per cent.

Life insurance companies allowed to go public

● IRDA recently allowed life insurance companies that have completed 10
years of operations to raise capital through Initial Public Offerings (IPOs).
Contribution of Insurance Sector to the Economy
Insurance has had a very positive impact on India’s economic development. The sector is gradually
increasing its contribution to the country’s GDP.

Contribution of insurance to infrastructure: Countries with strong insurance industries have a

robust infrastructure and strong capital formation. Insurance generates long-term capital, which is
required to build infrastructure projects that have a long gestation period. Concurrently, insurance
protects individuals and businesses from sudden unfavorable events.

Contribution of insurance to FDI: The insurance sector, by virtue of attracting long-term funds, is best
placed to channelize long-term funds toward the productive sectors of the economy. The FDI policy, at
present, allows 49 per cent foreign investment in the insurance sector that encompasses insurance
broking, insurance companies, third party administrators, surveyors and loss assessors as defined by the
Department of Industrial Policy and Promotion (DIPP).
Contribution of insurance
to employment: Insurance
helps create both direct and
indirect employment in the
economy. Alongside regular
jobs in insurance, there is
always demand for a range of
associated professionals such
as brokers, insurance advisors,
agents, underwriters, claims
managers and actuaries.

*Source: IRDA, “National Income Statistics,” July 2010, CMIE

Conclusion
India is poised to experience major changes in its insurance markets as insurers operate in an
increasingly deregulated and liberalized environment.

For consumers, the opening up of the insurance sector is indicative of new products, increased product
variants and improved customer service. Product innovation and channel diversification would gain
momentum, in line with the global trend of the convergence of financial services.

For the government, insurance, especially life insurance,can complement state-security programs. It can
relieve pressure on social welfare systems and allow individuals to customize their security programs in
accordance with their own preferences.

The sector is likely to witness an increase in the usage of technology in distribution channels. Moreover,
a shift from the agency model of distribution to models, such as bancassurance, brokers, etc., will help
increase reach and reduce costs.