India plans major reforms in insurance sector

Source: The post India plans major reforms in insurance sector has been created, based on the article “Reprioritising issues in insurance sector” published in “Businessline” on 9 May 2025. India plans major reforms in insurance sector.

UPSC Syllabus Topic: GS Paper 3- Inclusive Growth

Context: India plans to allow 100% FDI in insurance to boost competition, widen rural access, and channel funds for infrastructure. Despite growth in premiums and insurers since liberalisation in 2000, insurance penetration remains low, and significant reforms are needed to address existing structural challenges.

For detailed information on Insurance Regulatory and Development Authority of India (IRDAI) read this article here

Sector Growth and Persistent Gaps

1. Rapid Expansion Since 2000: India’s insurance landscape has grown from four to 34 non-life/health insurers and from a LIC monopoly to 26 life insurers. Premiums have surged: non-life from ₹11,808 crore in 2001-02 to ₹3.07 lakh crore in FY2025; life from ₹56,000 crore to ₹9 lakh crore.
2. Asset Growth vs Penetration: Assets under management reached ₹67 lakh crore in 2024. Yet, insurance penetration is only 4% of GDP, well below the global average of 6.4%.
3. Coverage Gaps Remain: High out-of-pocket medical costs and poor disaster coverage persist, indicating the need for deeper market reforms.

Proposed Reforms and Caution Points

1. Capital Requirements and FDI Limitations: Initial capital norms of ₹100 crore (now ₹363 crore, inflation-adjusted) aimed to ensure financial soundness. FDI has risen from 26% in 2000 to 74% in 2021, but utilisation remains modest—20.29% in non-life and 35.23% in life. Only four life insurers have hit the 74% limit.
2. Composite Licensing Risks: Allowing firms to operate both life and non-life under one license raises solvency and regulatory concerns. Structural differences between product lines necessitate ring-fenced entities, not merged operations.
3. Lower Capital Thresholds in Select Cases: Licensing under reduced capital norms may aid rural coverage but must be carefully managed to avoid market fragmentation and systemic risks.

Strategic Agenda 2025–2030

1. Moving to Risk-Based Supervision: IRDAI is shifting to a risk-based capital and supervision system, focusing on innovation, operational flexibility, and distribution reform.
2. Underwriting Losses and Cost Inefficiencies: Combined ratios over 100% show continued losses. FY24 expenses were ₹78,254 crore in non-life and ₹1.4 lakh crore in life. PSU insurers have lost ₹15 crore daily since FY2020, mainly due to underpriced group health policies.
3. Investor Trust and Market Listings: Valuation gaps, restated accounts, and lack of IRDAI-certified data hurt investor confidence. Regulatory gaps under Section 34 of the Companies Act require attention.

Enabling Transparency and Oversight

1. Inter-Agency Coordination: RBI, SEBI, and MoRTH must ensure transparent pricing, disclosures, and value retention across insurer transactions.
2. Enhanced Disclosures and Data Reforms: Insurers should publish expense and cash flow reports. Formalising the Insurance Information Bureau into a utility will help stakeholders.
3. Avoiding Market Concentration: Market power among private players must be monitored using accounting and GST data, similar to the 2004 US Eliot Spitzer investigation.

Way Forward

1. Encouraging New Entrants: Historical figures—107 non-life insurers in 1971, 243 life in 1956—support the case for more licenses to boost innovation and resilience.
2. Long-Term Planning: A five-year roadmap and a 2047 vision must guide reforms, anchored in data, transparency, and inclusive market development.

Question for practice:

Examine the key reforms proposed to improve insurance penetration and transparency in India’s insurance sector.