Insurance Reforms: Need for a Balanced Approach

Syllabus: GS3/Economy

Context

• Recently, the Insur­ance Reg­u­lat­ory and Devel­op­ment Author­ity of India (IRDAI), in a con­sulta­tion paper, pro­posed a slew of dis­tri­bu­tion reforms.

Key Highlights

• Aim: The reg­u­la­tion would put in place a cus­tomer­cent­ric, com­pet­it­ive, effi­cient and trans­par­ent dis­tri­bu­tion eco­sys­tem, while enabling bet­ter and sus­tain­able out­comes for poli­cy­hold­ers, insurers and dis­trib­ut­ors.
• The key pro­pos­als include recal­ib­ra­tion of expenses of man­age­ment (EoM) through lower lim­its with a phased glide path. 
  • Expenses of Management (EoM) refer to the total operational, administrative, and distribution costs incurred by an insurance company to run its business. 
• For life insurers, the EoM limit would move to a com­pany­ level basis linked to Gross Direct Premium Income (GDPI), with the limit pro­posed at 15% within two years and 12.5% within five years. 
• For gen­eral insurers, the basis would shift from Gross Writ­ten Premium (GWP) to domestic Gross Dir­ect Premium Income (GDPI), with the EoM limit redu­cing from 30% of GWP to 20% of GDPI within five years.
• Other Reforms: The proposals include revising commission norms, easing entry and capital requirements, removing restrictions on non-insurance business opportunities for intermediaries and curbing regulatory arbitrage.
• Simplified Distribution Structure: Existing arrangements would be reorganised into three categories: Insurance Distribution Entities (IDEs), Insurance Distribution Persons (IDPs) and Market Infrastructure Institutions (MIIs).

Concerns Raised by the Insurance Industry

• Insurance Companies: Insurers have expressed reservations about the potential adverse impact of the proposed changes on their operations and business models.
• Employment and Competition: Insurance Brokers Association of India (IBAI) has warned that the proposed reforms could lead to job losses, slower industry growth and reduced competition.
• Demand for Impact Assessment: IBAI has urged the government to ensure that no commission or expense-limit regulations are notified without a published impact assessment covering policyholders, employment, public-sector insurers and foreign investment.
  • It has also argued that the existing 2023 framework should continue until its scheduled review in 2028.

Indian Insurance Sector (FY24)

• Market Performance: Total insurance premium grew by 7.7%, reaching ₹11.2 lakh crore in FY24. Reflects continued momentum despite global and domestic economic volatility.
• Insurance Penetration: Overall insurance penetration declined slightly from 4.0% in FY23 to 3.7% in FY24. Life Insurance Penetration dropped from 3.0% to 2.8%.
  • Non-Life Insurance Penetration remained stable at 1.0%.

• Future Outlook: The Swiss Re Institute has projected India’s insurance sector to grow at a rate of 11.1% and is expected to become the fastest-growing market among the G20 nations over the next five years (2024-2028).
  • An expanding middle class, technological advancements, and supportive regulatory measures will likely drive this growth.
• Insurance Companies: At present, there are 24 life insurance companies, and 34 general insurers in the country.
  • Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company. 
  • In addition to these, there is a sole national re-insurer, namely General Insurance Corporation of India (GIC Re).

Challenges Faced by the Sector

• Low Penetration: With an overall insurance penetration rate of 3.7 per cent, below the global average of 7 per cent, there is a notable gap in coverage that presents opportunities for insurers to expand their reach.
• Claims Settlement Issues: Delays, rejections, and lack of transparency in the claims process create customer dissatisfaction.
• Distribution Limitations: There is limited reach in rural areas, and insurance distribution remains urban-centric, relying heavily on agents.
• Affordability: High premiums and the underpricing of certain products affect accessibility for low-income groups.
• Fraud and Mis-selling: Fraudulent claims and mis-selling by agents are common problems, damaging customer trust.
• Rising Costs: Increasing medical and claims costs impact affordability and profitability for insurers.

Initiatives Taken by the Government of India

• Sabka Bima, Sabki Raksha (Amendment of Insurance Laws) Act, 2025: The amendment raises the FDI limit in Indian insurance companies from 74% to 100%.
  • GST exemption is granted on all individual life insurance policies and health insurance policies (including family floater) along with reinsurance w.e.f. 2025.
• Shortening of Moratorium Period: Moratorium period in health insurance is a fixed timeframe after which insurance companies cannot deny claims on the grounds of non-disclosure except on grounds of established fraud.
  • IRDAI reduced the moratorium period from 8 years to 60 months (5 years) in 2024. 
• Standardized 30-day free-look period: IRDAI introduced a standard 30-day free-look-period for policies with a term of one year or more. The free-look-period is the period given to a policyholder to assess and review the policy document.
• Third-Party Administrators (TPA) Performance Monitoring: To increase the accountability of TPAs, performance monitoring is done by insurers to ensure efficient and effective service delivery by them.

• Bima Sugam initiative: It aims to empower all insurance stakeholders by connecting them all through a single platform.
  • The platform uses advanced technology to simplify processes for insurance companies, policy holders’, intermediaries, insurance repositories and external data sources etc.
• Bima Vahak: Focus on last-mile delivery of insurance in rural areas through trained agents (Bima Vahaks).
• Mandatory e-insurance: IRDAI mandated the digitisation of insurance policies across all categories to streamline processes, enhance efficiency, and improve accessibility for policyholders.
• IRDAI has decreased the health insurance waiting period from 48 months to 36 months.
  • The waiting period refers to the duration during which policyholders are not eligible to claim benefits for any pre-existing health conditions they might have during the purchase of the insurance policy.

Way Ahead

• By targeting tier 2 and 3 cities and rural areas where awareness and accessibility are limited, insurers can tap into new customer segments and stimulate growth.
• Increase Financial Literacy: Conduct educational programs to enhance understanding of insurance products among the population.
• Simplify Regulations: Streamline regulatory processes to make product approvals faster and less complex, while ensuring consumer protection.
• Improve Claims Settlement: Ensure faster, transparent, and more efficient claims processing to build trust and reduce disputes.
• Expand Distribution Networks: Leverage digital platforms and mobile technology to reach underserved rural and semi-urban areas.
• Enhance Health Coverage: Expand coverage to include critical illnesses, hospitalization, and post-treatment care.

Source: TH