Insurance Reforms

In April 1993, the former RBI Governor R. N. Malhotra presided over the formation of the Insurance Reforms Committee (IRC) as part of the economic reforms process. The committee’s report (January 1994) included the recommendations.

Decontrolling the insurance sector, i.e., allowing Indian as well as foreign private sector insurance companies to enter the sector (the government did it in 1999 by passing the IRDA Act). Restructuring the LIC and the GIC and reducing the government’s stake in them to 50% (no follow-up as of yet, but the private insurance companies are anxiously requesting it.

Insurance Reforms in previous governments

The NDA administration had taken action in this area, whereas the UPA administration has no such plans.) Late in 2012, the government initiated the sale of LIC shares to public sector undertakings, which was viewed as a positive development. Delinking GIC and its four subsidiaries (which was done in 2000). Discarding the system of licensing of surveyors by the controller of Insurance. Restructuring the Tariff Advisory Committee. Setting up a regulatory authority for the insurance industry (the IRDA was set up in 2000).


The Insurance Regulatory and Development Authority (IRDA) was established in 2000 (the Act was passed in 1999) with a government-appointed chairman and five members (two full-time and three part-time members). The authority is in charge of the regulation, growth, and oversight of the Indian insurance industry.

There are currently 57 insurance companies in India, 24 of which are in the life segment and 33 in the non-life segment. There is one public sector life insurer (LIC), four public sector general insurers, two specialized insurers (AICIL and ECGC), one public sector re-insurer (GIC Re), and four foreign re-insurers. India allows 49% FDI in the insurance sector through the automatic route (by early 2020, the Government was considering enhancing it to 100 percent). By the end of 2019, the government permitted 100% FDI in insurance intermediaries. 


Insurance is a highly hazardous industry. While insurance companies provide coverage for their clients, they are exposed to extremely high financial risks. Consequently, the reinsurance industry was born. When an insurance company purchases insurance coverage for its insurance business, re-insurance is created.

Experts believe that in the absence of reinsurance, the insurance industry in a country will not grow to meet the level of social demand, as insurance companies will either not offer coverage in several areas or charge extremely high premiums for the policies they offer (to neutralize the risk).

Keeping this in mind, the Indian government decided to convert the existing public sector general insurer, GIC, into a re-insurance company (in 2000). GIC Re remained the sole reinsurance company in the country until recently. This emerged as a major player in the global reinsurance industry over time. The IRDA regulates the reinsurance industry in the country.

India’s reinsurance industry has a very low market penetration

India’s reinsurance industry has a very low market penetration. A lack of competition has been cited as a major cause; there is currently only one player. To encourage competition and vitality, the IRDA announced (in late 2015) that the industry would be open to foreign companies. Four foreign reinsurance companies were granted initial approval (known as R1 in regulatory parlance) by the IRDA in March 2016.

Two of them are German (Munich Re and Hannover), and one each is Swiss and French (Swiss Re and French Re) (SCOR). Munich Re is the largest reinsurance provider in the world, followed by Swiss Re and Hannover. Two additional foreign companies (Reinsurance Group of America of the United States and XL Catlin of the United Kingdom) are awaiting the initial approval. After receiving the final approval, these businesses will begin operations (known as R2).

Deposit Insurance And Credit Guarantee Corporation (DICGC)

In 1978, the Deposit Insurance Corporation (1962) and the Credit Guarantee Corporation (1971) merged to form the DICGC. While Deposit Insurance was introduced in India out of concern for the protection of depositors, the maintenance of financial stability, the installation of confidence in the banking system, and the mobilization of deposits, the Credit Guarantee Corporation was established as an affirmative action measure to ensure that the credit needs of the previously neglected sectors and weaker sections were met. The primary objective was to convince banks to extend credit to less-than-creditworthy clients.

After the merger, the DICGC shifted its focus to credit guarantees. This was due in part to the nationalization of the majority of large banks. Credit guarantees have been gradually phased out as a result of the 1990s financial sector reforms, and the Corporation’s focus has shifted back to its core function of Deposit Insurance, with the goals of preventing panics, reducing systemic risk, and ensuring financial stability.

The government increased the insurance coverage

The Government increased the insurance coverage available on bank deposits from 1 lakh to lakhs on February 1, 2020. The move announced in the Union Budget 202021 was likely a response to the recent crisis involving the PMC, a Mumbai-based urban cooperative bank (Punjab and Maharashtra Cooperative). For deposit insurance, depositors pay no premium; instead, the DICGC collects a nominal premium from banks.

The scheme applies to all banks operating in India, including the private sector, co-operative, and even branches of foreign banks in India, with the exception of foreign government deposits, central/state government deposits, and inter-bank deposits. The clause of the bill that allowed “writing down of the failed bank’s liabilities” was criticized. Stakeholders interpreted this clause as the “bail-in” clause (when financial assistance comes from within the bank/financial institution). Additionally, the Joint Parliamentary Committee had some related concerns. In July of 2018, the government withdrew the bill, citing the need for additional time to examine related issues.

Since 1991, the deposit insurance limit has not exceeded one million dollars. After the global financial crisis of 2008, many countries revised their deposit insurance limits. The limit was raised to $2.5 million in the U.S. and $1.15 million in the U.K. (set around 3-4 times the per capita income of these economies). This limit is set at nine times the per capita income of emerging economies such as Brazil and China. Regarding India, it was still slightly higher than its per capita income (which was estimated to be Rs.1,11,782 at constant market price, as per the Economic Survey 2017-18).

Export Credit Guarantee Corporation (ECGC)

In the importing countries, Indian companies’ overseas projects are exposed to a number of political and economic risks. For medium- and long-term exports, the government has established the Export Credit Guarantee Corporation of India Ltd. (ECGC) under the Ministry of Commerce and Industry to provide firms with adequate credit insurance coverage. Due to its own limitations, however, it is sometimes difficult for ECGC to cover pure commercial risks, such as a longer repayment period, a high contract value, and difficult economic and political conditions in the importing country, in addition to the fact that reinsurance coverage for such projects is generally unavailable.

Considering the economic and political ties between India and the proposed importing country, such projects are frequently deemed necessary. In the absence of credit insurance, Indian exporters are hampered in their ability to pursue such export projects. It should be noted that such projects are covered and insured by the government in many developed economies.

Practice Questions for UPSC Prelims

Ques 1: What are the main functions performed by the IRDA?
[A] Protect the rights of policyholders
[B] Adjudication on insurance-related matters
[C] Promoting insurance business
[D] All of these

Answer: Option D

Explanation: All of these functions of IRDA are:
1. Protect the rights of policyholders
2. Provide registration certification to life insurance companies
3. Renew, Modify, Cancel or Suspend this registration certificate as and when appropriate.
4. Promoting efficiency in the conduct of insurance business;
5. Promoting and regulating professional organizations connected with the insurance and reinsurance business
6. Regulating investment of funds by insurance companies;
7. Adjudication of disputes between insurers and intermediaries or insurance intermediaries.

Ques 2: If an insurance policyholder is not satisfied with the award of the insurance ombudsman, he/she can approach__?
[A] Courts of law
[B] Consumer forums
[C] Either a or b
[D] The award of the insurance ombudsman can not be challenged

Answer: Option C

Explanation: The Insurance Ombudsman is created by the Government of India for individual policyholders to have their complaints settled out of the courts in an impartial, efficient and cost- effective way. There are 12 Insurance Ombudsman in different locations in India that an insured person can approach regarding their complaints related to insurance policy. If the policy holder is not satisfied with the award of the insurance ombudsman he can approach to other venues viz. Consumer Forums and Courts of law for redressal of his grievances.

Ques 3: Regarding ‘Atal Pension Yojana, which of the following statements is/are correct? [UPSC 2016]

1. It is a minimum guaranteed pension scheme mainly targeted at unorganized sector workers.

2. Only one member of a family can join the scheme.

3. The same amount of pension is guaranteed for the spouse for life after the subscriber’s death.

Select the correct answer using the code given below.

[A] 1 only

[B] 2 and 3 only

[C] 1 and 3 only

[D] 1, 2 and 3

Answer: Option C


  • Atal Pension Yojana is a pension scheme introduced by the Government of India in 2015–16.
  • The objective of the scheme is to provide pension benefits to individuals in the unorganized sector. Hence statement 1 is correct.
  • Atal Pension Yojana (APY) is open to all bank account holders who are not members of any statutory social security scheme. Hence statement 2 is incorrect.
  • Atal Pension Yojana scheme is regulated and controlled by the Pension Funds Regulatory Authority of India (PFRDA).
  • Beneficiaries of the scheme can choose to receive a periodic pension of Rs. 1000, Rs. 2000, Rs. 3000, Rs. 4000, or Rs. 5000, depending on their monthly contributions.
  • Individuals who are above 18 years and below 40 years of age are eligible to invest in the Atal Pension Yojana.
  • In the case of a beneficiary’s death, before he/she reaches 60 years of age, his/her spouse shall be entitled to receive a pension. As such, the spouse has an option to either exit the scheme with the corpus or continue to receive pension benefits.
  • The spouse of the subscriber shall be entitled to receive the same pension amount even after the subscriber’s death. Hence statement 3 is correct.

Quick Questions on Insurance Reforms for UPSC Preparation

The first insurance company in India is founded in year 1906 named National Insurance Company. The Government of India nationalized Insurance sector in India in year 1956. Life Insurance of India (LIC) came into existence in the same year.

The LIC i.e. Life Insurance Corporation of India is the largest insurance company in India. LIC is government sector company having the largest share of insurance in India. HDFC Standard Life Insurance Co. Ltd is trailing behind LIC.

The Insurance Regulatory and Development Authority (IRDA) was established in 2000 (the Act was passed in 1999) with a government-appointed chairman and five members (two full-time and three part-time members). The authority is in charge of the regulation, growth, and oversight of the Indian insurance industry.

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