Insurance Penetration and Density

Internationally, the growth of the insurance industry is measured by the standard of insurance penetration. The definition of insurance penetration is the ratio of premiums written in a given year to the Gross Domestic Product (GDP). Similarly, insurance density is a widely recognized metric that is defined as the ratio of premiums underwritten to the population in a given year (measured in US dollars for the convenience of comparison). Historically, the Indian insurance industry has been underdeveloped, with low levels of insurance penetration.

At present (the calendar year 2018), the insurance penetration and density of India, are as given below—

• Compared to the global average of 3.31 percent, insurance penetration is at 3.71 percent (2.74 percent for the life segment and 0.97 percent for the non-life segment). Comparatively, the figures for Malaysia, Thailand, and China for the same time frame were 4.84, 5.56, and 4.40, respectively. In the case of India, it was 2.71 in 2001 and 5.20 in 2009, a record high. The penetration for the life segment has decreased since 2011, when it was 3.40 percent, while the penetration for the non-life segment has risen since 2011 when it was 0.70 percent.
• Insurance density is at US$ 74 (US$ 55 for life and US$ 19 for non-life) against the global average of US$ 682. The comparative figures for Malaysia, Thailand, and China during the same period were US$ 518, US$ 385, and US$ 406 respectively. It was US$ 11 in 2001 for India.

According to the various volumes of the Annual Reports published by the Insurance Regulatory and Development Authority (IRDA) and other government documents, there have been numerous reasons for the underdevelopment of 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; and
• Less vibrancy in the regulatory framework.

The recently enacted Insurance Laws (Amendment) Act, 2015 is supposed to have a positive impact on regulatory framework as well as insurance penetration.

Policy Initiatives

Following the recommendations of the Malhotra Committee Report (1993), the Government of India has taken the following policy initiatives22 in recent years to expand and strengthen the insurance industry in the country:

Healthcare Coverage

The Insurance Regulatory Development Authority (IRDA) has taken a number of proactive measures as part of its health insurance expansion initiatives. In 2003, it established the National Health Insurance Working Group, which provided a forum for the various stakeholders in the health insurance industry to collaborate and propose solutions on a range of pertinent issues. The IRDA is also coordinating with and supporting initiatives by the insurance industry to standardise certain key terminology used in health insurance documents, for the benefit of policyholders and better comprehension.

The General Insurance Council, comprised of all non-life insurers, reached a consensus on a uniform definition of ‘pre-existing diseases’ and its exclusion language, which had previously been a term with numerous definitions, interpretations, and complaints. This standardization, which goes into effect on 1 June 2008, will benefit the insured by reducing ambiguity and improving the comparability of health insurance products. In addition, as of October 1, 2011, portability in health insurance was implemented, allowing an insured to switch insurers while retaining the benefits (especially for pre-existing conditions) of her/his existing policy if dissatisfied with the insurer’s services or product.

Micro Insurance

The IRDA’s micro-insurance regulations have given a boost to the development of microinsurance as a concept. With the positive and facilitative approach adopted by the microinsurance regulations, it is anticipated that all insurance companies will adopt a progressive business strategy and advance the spirit of the regulations, thereby expanding insurance coverage to all segments of society. Currently, 10,482 micro-insurance agents are active in the microinsurance industry.

New Reform Initiatives

The government has enacted the Insurance Laws (Amendment) Act, 2015 with the intention of removing obsolete and redundant provisions from the insurance laws, empowering the Insurance Regulatory and Development Authority (IRDA) to enable more effective regulation, and increasing the foreign equity investment cap in an Indian insurance company while protecting Indian ownership and control.

The Act laid the groundwork for significant reform-related amendments to the Insurance Act of 1938, the General Insurance Business (Nationalization) Act of 1972, and the Insurance Regulatory and Development Authority (IRDA) Act of 1999. It gives the IRDAI more authority so that the insurance regulatory framework can become more flexible, effective, and efficient. Listed below are the most important amendments to the Act:

Promotion of Foreign Investment

Indian ownership and control of an Indian insurance company increased to 49 percent (from 26 percent) as a result. Greater access to capital in the capital-intensive insurance sector would result in a greater distribution reach to under-or unserved areas, more innovative product formulations to meet the diverse insurance needs of citizens, efficient service delivery through enhanced distribution technology, and improved customer service standards.

Capital Requirements in Government Companies

Currently required by the General Insurance Business (Nationalisation) Act of 1972 to be 100 percent government-owned, the four public sector general insurance companies are now permitted to raise capital. This will allow them to obtain additional capital for business expansion in the rural/social sectors and increased competitiveness. Government of India ownership must be maintained at a minimum of 51%.

Consumer Welfare

It will better serve the interests of consumers through provisions such as those allowing penalties for intermediaries/insurance companies for misconduct and prohibiting multi-level marketing of insurance products to prevent mis-selling. The amended law contains several provisions for the imposition of fines ranging from Rs1 crore to Rs25 crore for violations such as mis-selling and misrepresentation by insurance agents and companies.

In order to better serve the interests of policyholders, the period during which a policy can be repudiated for any reason, including misrepresentation of facts, etc., will be limited to three years from the policy’s inception, and no policy will be challenged for any reason after three years. The amendments facilitate payment to the nominee of the policyholder by relieving the insurer of its legal obligations once the payment has been made to the nominee.

According to IRDAI regulations, it is now required by law for insurance companies to underwrite third-party auto insurance. Insurers’ responsibilities in the rural and social sectors are retained under the amended laws.

Empowerment of IRDAI

The Act will entrust the responsibility of appointing insurance agents to insurers and provides for IRDAI to regulate their eligibility, qualifications, and other aspects. It enables agents to work more broadly across companies in various business categories, with the assurance that IRDAI will prohibit conflicts of interest through the implementation of suitable regulations.

IRDAI is authorized to regulate key aspects of insurance company operations, such as solvency, investments, expenses, and commissions, and to formulate regulations for commission payment and expense control. It grants the Authority the ability to regulate the functions, code of conduct, etc. of surveyors and loss assessors. It also broadens the definition of insurance intermediaries to include insurance brokers, reinsurance brokers, insurance consultants, corporate agents, third party administrators, surveyors and loss assessors, and such other entities as the Authority may from time to time notify.

Further, properties in India can now be insured with a foreign insurer with the prior permission from IRDAI; which was earlier to be done with the approval of the Central

Health Insurance

The Act defines “health insurance business” to include travel and personal accident coverage and discourages non-serious players by keeping capital requirements for health insurers at Rs.100 crore, paving the way for the promotion of health insurance as a separate vertical.

Promoting Reinsurance Business in India

It permits foreign reinsurers to establish branches in India and defines insurance’ as ‘the insurance of a portion of one insurer’s risk by another insurer who accepts the risk for a mutually acceptable premium’, thus excluding the possibility of 100 percent risk ceding to a re-insurer, which could lead to companies acting as fronts for other insurers.

Strengthening of Industry Councils

The Life Insurance Council and General Insurance Council have been made self-regulatory by granting them the authority to establish bylaws for elections, meetings, and the imposition and collection of fees, etc. from its members. Inclusion of self-help group and insurance cooperative society representatives in insurance councils has also broadened the representation on these Councils.

Robust Appellate Process

The amended law stipulates that any insurer or insurance intermediary aggrieved by an IRDAI order must file an appeal with the Securities Appellate Tribunal (SAT) (SAT).

Capital Market Reforms

In March 2019, the Insurance Regulatory and Development Authority (IRDA) released revised initial public offering (IPO) guidelines for insurance companies seeking to sell equity via the IPO route. Now, insurance companies may invest up to 10% of their assets in additional Tier 1 bonds issued by banks (which are raising capital to comply with Basel III norms).

Thus, the amendments include enhancements to the insurance laws in accordance with the evolving insurance sector landscape and global regulatory practices. The amendments will allow the regulator to establish a framework for greater innovation, competition, and transparency in order to meet the insurance needs of citizens in a more comprehensive and user-friendly manner. The amendments are anticipated to allow the sector to realize its full growth potential and contribute to economic expansion and job creation.

Third-Party Insurance

Non-life insurance companies provide ‘third-party’ coverage for vehicles. This insurance covers risks on parties other than the ‘two parties (e.g., the car and its owner) covered by an insurance policy. The policy provides coverage for the insured’s legal liability for death/disability of third-party loss or damage to third-party property but provides no benefit to the insured. This coverage is also known as “act only” insurance. Under the Motor Vehicle Amendment Act, 2019, in India, all new two-wheelers are required to have third-party insurance for five years, while cars and commercial vehicles are required to have third-party insurance for three years.

Damage claims are more frequent than third-party claims, so the cost of a comprehensive policy is several times that of a third-party-only policy. Previously, the premium for motor third-party insurance was determined using a rate schedule provided by the Tariff Advisory Committee, an arm of the IRDAI (the insurance regulator). However, IRDA has eliminated the motor tariff. The victim’s earning capacity has a significant impact on the amount of compensation awarded.

To make vehicle insurance policies more affordable, insurance companies have been charging extremely low premiums. As a result, insurance companies have been slow to settle third-party insurance claims (the majority of cases going into litigation). In contrast, the IRDAI has taken numerous steps in recent years to strengthen this segment of non-life insurance. By early 2020-21, the IRDAI will implement a market-linked increase in third-party insurance premiums and a more stringent regulatory regime to expedite the settlement of third-party claims.

New Insurance Schemes

Up until April 2020, the Indian government had launched a handful of new insurance programs aimed at establishing a universal social security system for all Indians, especially the poor and disadvantaged. These schemes’ salient characteristics are briefly discussed below:

PMSBY (Pradhan Mantri Suraksha Bima Yojana): For a premium of Rs.12 per annum per subscriber, it provides a renewable one-year accidental death-cum-disability cover to bank account holders between the ages of 18 and 70. The available risk coverage will be two lakh rupees for accidental death and permanent total disability and one lakh rupees for permanent partial disability for a one-year period beginning on 1 June and ending on 31 May.

PMJJBY (Pradhan Mantri Jeevan 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, the Government of India launched the National Health Protection Scheme (NHPS) under Ayushman Bharat to provide coverage for up to 5 lakh to more than 50 crore vulnerable families (10 crore families). The scheme is anticipated to increase health insurance penetration in India from 34% to 50%. 

Road Ahead

The future looks promising for the life insurance industry with several changes in the regulatory framework which will lead to further change in the way the industry conducts its business and engages with its customers:

• At present (latest for 2018), India’s share in the global insurance market is 2 percent however, the total insurance premium in India increased by 10.4 percent whereas the global insurance premium increased by 1.4 percent only.23
• 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 percent and 10 percent respectively for the next five years.24

Demographic factors such as the growing middle class, young insurable population, and growing awareness of the need for protection and retirement planning will support the growth of the Indian insurance industry.