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INSURANCE SECTOR

Origin of Insurance

• Insurance can be traced back to ancient times, specifically to the Mediterranean merchants in the fourth century B.C., who issued bottomry bonds. These bonds were essentially early forms of insurance policies that protected cargo and ships against the perils of the sea. The fundamental premise of insurance is to spread the financial impact of losses over a broad base, allowing the risk of significant financial loss from unforeseen events to be transferred from an individual or entity to a larger group, through the payment of premiums.
• In contemporary times, insurance has diversified into numerous categories, encompassing aspects such as business, auto, health, life, and travel insurance, each with its own set of sub-categories and divisions. This expansion signifies insurance’s integral role in providing financial security and risk management across various facets of daily life.

Risk and Hazard
Risk

• Risk is inherently associated with the uncertainty of a potential loss, reflecting the unpredictability of future outcomes that could result in adverse situations. It encompasses the possibility of loss or damage arising from a wide array of sources. Understanding risk is crucial for both insurers and the insured, as it forms the basis for determining the likelihood of an insured event occurring.

Hazard

Hazards contribute to or exacerbate the risk of loss, acting as factors that increase the likelihood or severity of an adverse event. Hazards are typically classified into two categories:

1. Physical Hazard: These are tangible or concrete conditions that increase the potential for loss, such as geographical location, structural issues, or environmental conditions.
2. Moral Hazard: Moral hazards stem from an individual’s actions or behaviors, particularly those that are dishonest or fraudulent, aimed at deliberately causing loss or exploiting the insurance for unjust gain.

Proximate Cause

• Proximate cause is a key principle in insurance that relates to the specific cause of loss or damage, initiating a sequence of events that leads to an insured event. It is the primary cause that sets off a chain reaction, resulting in the loss or damage covered by the policy. This principle helps in determining the extent of the insurer’s liability in the event of a claim.

Insurable Risks
Personal Risks

• Personal risks directly impact an individual’s life and well-being, including risks related to premature death, old age dependency, illness or disability, and job loss. These risks have profound implications on an individual’s financial security and quality of life, making them critical considerations for insurance coverage.

Property Risks

• Property risks concern the potential for damage, loss, or destruction of one’s property due to various perils such as fires, floods, and natural disasters. Insurance policies categorize losses into direct and consequential losses, covering the tangible damage to property and the resulting financial impact, respectively.

Liability Risks

• Liability risks emerge from legal liabilities where an individual’s actions cause harm or damage to another, potentially leading to significant financial compensation. This category underscores the importance of insurance in providing protection against legal and financial repercussions stemming from accidental harm inflicted on others.

Definition of Insurance

• Insurance is essentially a risk-transfer mechanism that allows individuals or entities to manage the potential financial consequences of unforeseen events. By entering into an insurance contract, the insured parties transfer the risk of financial loss to insurers, who, in return, promise to compensate them in the event of a specified loss. This system operates on the principle of pooling resources where the premiums paid by the many (the insured) cover the losses of the few.

Basic Characteristics of Insurance

• Risk Pooling: Insurance operates by pooling the risks of individuals, thereby spreading the financial impact of losses across a wider group. This transformation of actual loss into average loss stabilizes the financial impact on any single individual.
• Risk Transfer: The core of insurance lies in the transfer of risk from the insured to the insurer. This means the uncertainty of a financial outcome is shifted, with the insurer taking on the responsibility to indemnify the insured.
• Indemnification: The principle of indemnification ensures that the insured is restored to their financial position prior to the occurrence of the loss, without allowing for profit from the claim.

Basic Principles of Insurance

1. Contract: Insurance policies are formal contracts governed by legal frameworks, specifically the Contract Act, which outline the obligations and protections of the parties involved.
2. Utmost Good Faith (Uberrima Fides): Both parties are expected to disclose all relevant information truthfully to prevent fraud and ensure fairness.
3. Insurable Interest: The insured must have a financial stake in the insured item, ensuring they suffer a genuine loss if a peril occurs.
4. Indemnity: This principle ensures that the insured does not profit from their loss but is compensated to restore them to their pre-loss financial condition.
5. Subrogation: This allows insurers to step into the shoes of the insured to recover amounts paid from third parties responsible for the loss.
6. Contribution: In cases where multiple policies cover the same risk, insurers share the cost of a claim proportionately.
7. Proximate Cause: The cause of loss must be covered under the policy for the claim to be valid.
8. Deductibles: These are costs borne by the insured for each claim, which help to prevent minor claims and reduce premiums.

Insurance Sector in India: Data and Figures

• The Indian insurance sector has shown significant growth, contributing to the country’s GDP, yet it remains underpenetrated compared to global standards. With the largest number of life insurance policies in the world and a promising growth rate, the sector’s potential is immense. The government has also increased the FDI limit to 74% to attract foreign investment and enhance sector growth.

History and Evolution of the Insurance Sector

• The concept of insurance in India dates back to ancient times, with modern insurance beginning in the 19th century. The sector has undergone significant transformations, including the nationalization of the life insurance sector in 1956, to address issues of fraud and mismanagement and to better mobilize domestic savings.

Nationalization of the Insurance Sector

• The nationalization of life insurance in India was a pivotal move to regulate the sector more effectively, curb malpractices, and ensure that insurance funds were utilized in alignment with national economic objectives. The establishment of the Life Insurance Corporation of India marked a significant shift towards state control, aiming to provide reliable insurance coverage to the population while supporting broader economic goals.
• The insurance sector’s evolution from a rudimentary form of risk management into a sophisticated financial service reflects its vital role in economic stability and protection against uncertainty. Its principles and mechanisms underscore a commitment to fairness, risk mitigation, and financial security for individuals and businesses alike.
• The process of nationalizing the general insurance sector in India, initiated by the Government of India in 1972, marks a significant pivot in the country’s insurance landscape. This strategic move, occurring 16 years after the nationalization of life insurance, aimed to consolidate and regulate the general insurance business under governmental oversight.

Nationalization of General Insurance in 1972

Establishment of the General Insurance Corporation (GIC)

The Indian Government, in a decisive move in 1972, nationalized the general insurance business, leading to the establishment of the General Insurance Corporation of India (GIC). This step was taken to bring about more efficiency, transparency, and public accountability in the insurance sector. Unlike the Life Insurance Corporation of India (LIC), which operates as a singular entity, GIC was conceptualized as a holding company overseeing four subsidiaries:

• National Insurance Company Limited
• New India Assurance Company Limited
• Oriental Insurance Company Limited
• United India Insurance Company Limited

These subsidiaries were tasked with the business of general insurance, except for aircraft insurance, which was directly managed by GIC. Additionally, these companies were required to cede a portion of their business to GIC for reinsurance, establishing a symbiotic relationship within the public sector insurance framework.

Economic Reforms and Reopening of the Insurance Sector
Monopolization and Initial Challenges

• The nationalization of the insurance sector, both life and general, led to the creation of public sector monopolies. These entities strove for expansion and diversification of insurance coverage across India, yet they faced criticism for operating with bureaucratic inefficiencies and lacking in customer service orientation. Furthermore, the reluctance to adopt technological advancements and a modern corporate work culture was evident.

Response to Global Pressures and Internal Needs

• By the early 1990s, with the Indian economy opening up under the influence of global financial institutions and the pressures from the World Trade Organisation, there was a realization of the need to revitalize the insurance sector. This was further underscored by the recognition that insurance penetration in India was significantly low, presenting an untapped market for both national and international investors.

The Malhotra Committee

• In response, the Government of India, in 1993, appointed a committee under the chairmanship of Shri R.N. Malhotra to thoroughly assess the sector and recommend reforms. The Malhotra Committee’s report, released in 1994, suggested a series of radical reforms including the reduction of government stakes in LIC and GIC, the introduction of a minimum capital requirement for entering the insurance business, the limitation of foreign participation to joint ventures, and the emphasis on technological modernization and efficiency improvements among public sector insurers.

Differentiating Insurance from the Banking Sector

• The distinction between the insurance and banking sectors, while subtle, is crucial for understanding the financial ecosystem. Insurance policies are considered debt instruments, where the insurer assumes risk in exchange for premiums. Insurance companies function as risk-based financial intermediaries, operating under different regulatory and capital standards compared to banks. The calculation of policy premiums involves a complex interplay of statistics, probability theory, and market conditions, distinguishing it from the banking sector’s focus on deposits, loans, and monetary transactions.
• Through these reforms and operational distinctions, the nationalization of general insurance and the subsequent opening up of the sector have played pivotal roles in shaping India’s financial landscape, aiming for a balance between public welfare and economic efficiency.

Insurance plays a crucial role in financial planning, providing a safety net against unforeseen circumstances that can impact one’s financial stability. It is broadly categorized into two main types: General Insurance and Life Insurance. Each type caters to different needs and offers various policies designed to protect individuals and their assets.

General Insurance

• General Insurance encompasses policies that offer protection against losses and damages other than those covered by life insurance. The essence of general insurance is to provide financial security and peace of mind by covering the potential financial impact of unexpected events. It includes various types of insurance policies, each designed to safeguard against specific risks.

Types of General Insurance

Health Insurance

• Health insurance is critical for managing health-related expenses without depleting one’s savings. It covers hospitalization costs and medical bills, with policies available for individuals as well as family floater plans that cover the entire family under one policy. Moreover, critical illness insurance offers a lump sum on the diagnosis of serious diseases, covering significant medical expenses.

Home Insurance

• Home insurance protects your residence and its contents from damages caused by natural or man-made disasters. This coverage can extend to temporary living expenses if your home is uninhabitable due to ongoing repairs.

Travel Insurance

• Travel insurance is essential for mitigating the financial risks of traveling, such as lost luggage, flight delays, and trip cancellations. It can also provide coverage for medical emergencies abroad, including cashless hospitalization in some cases.

Motor Insurance

• Motor insurance safeguards against damages to your vehicle due to accidents, theft, natural calamities, and other perils. It is mandatory by law to have at least third-party insurance, which covers damages to others caused by your vehicle. Comprehensive policies offer broader protection, including damage to your own vehicle.

Life Insurance

• Life Insurance focuses on providing financial security to the insured’s beneficiaries in the event of the policyholder’s death. It ensures that the family of the deceased can maintain their standard of living, manage debts, and achieve their financial goals without the policyholder’s economic contribution.

Types of Life Insurance

Term Life Insurance

• Term life insurance offers pure protection without any investment component, providing a high coverage amount at a low cost. It pays a sum to the nominee if the insured dies within the policy term, with no benefits if the policyholder survives the term. Some policies now offer a return of premium option, refunding all premiums paid if the insured outlives the policy term.

Endowment Plans

• Endowment plans combine savings and protection, offering a lump sum on policy maturity or death. A portion of the premiums is allocated to the insured sum, while the rest is invested, often in low-risk investments.

Money-back Policies

• Money-back policies provide periodic payouts during the policy term, acting as a financial support mechanism. Upon maturity, the policy pays out the remaining sum assured along with any bonuses.

Unit Linked Insurance Plans (ULIPs)

• ULIPs offer a combination of investment and insurance. Premiums are partly used for life coverage and partly invested in various funds. Policyholders can choose their investment mix based on their risk appetite, with options for fund switching and partial withdrawals.

Whole Life Insurance

• Whole Life Insurance provides coverage for the insured’s entire lifespan, often up to 100 years. As long as premiums are paid, the policy remains active, offering peace of mind and financial security to the policyholder’s beneficiaries for an extended period.
• Each insurance type and policy has its unique features, benefits, and suitability, depending on an individual’s needs, financial goals, and life stage. Understanding these options allows for informed decision-making, ensuring that you and your assets are adequately protected.

Key Distinctions Between Life and General Insurance

FDI Reforms in LIC

• The Union Cabinet’s decision to amend the Foreign Direct Investment (FDI) Policy, allowing up to 20% FDI under the “automatic route” in the Life Insurance Corporation of India (LIC), marks a significant turning point for the insurance giant, especially in light of its upcoming Initial Public Offering (IPO). This strategic move is aimed at bolstering the government’s disinvestment objectives while ensuring that LIC remains a key player in the insurance sector, not only domestically but also on a global scale.

Context and Government’s Objective

FDI Policy Amendment and IPO Anticipation

• The amendment to the FDI policy to include LIC under the automatic route for foreign investment is a preparatory step for its much-anticipated IPO. This decision is expected to attract foreign investment, enhancing LIC’s financial robustness and market competitiveness.

Disinvestment Goals

• The government plans to raise between ₹63,000 to ₹66,000 crore through the proposed share sale in LIC, contributing significantly to its disinvestment target of ₹78,000 crore for the fiscal year 2021-22. This move is part of a broader strategy to monetize assets and reduce the fiscal deficit.

LIC at a Glance

Government Ownership and Market Dominance

• Founded in 1956 and fully owned by the Government of India, LIC has been a cornerstone of the Indian insurance market, commanding a majority share. Its establishment was a result of consolidating over 245 insurance companies and provident societies, aimed at nationalizing the insurance sector.

The Absence of FDI Provisions

• Until now, the FDI policy did not specifically cater to LIC, a statutory corporation established under the LIC Act of 1956. This amendment thus marks a significant policy shift, opening new avenues for foreign investment in LIC.

Disinvestment Strategy

Draft Document Submission and Share Sale

• The Union government’s initiative to sell 5% of its shares in LIC through an IPO, as outlined in the draft document submitted to the stock exchange regulator, is a clear indication of its disinvestment strategy. This offer for sale (OFS) approach, where the government sells part of its stake without LIC issuing new shares, signifies a strategic move to unlock the value of one of its crown jewels.

Impact Analysis

Benefits for the Government and Policyholders

• The listing of LIC is poised to be mutually beneficial for the government and policyholders alike. For the government, it represents an opportunity to capitalize on one of its last remaining profit-making enterprises. For policyholders, the move towards greater efficiency and competitiveness in LIC is expected to yield better returns and more innovative products and services.

Industry-wide Reforms

• The increased competitiveness of LIC post-listing is likely to spur innovation across the insurance sector, benefiting consumers with improved product offerings and service quality.

Financial Health and Policyholder Security

• Reduced government involvement is anticipated to bolster LIC’s financial position, making it more agile and responsive to market dynamics. Moreover, the continued sovereign guarantee ensures that policyholders’ interests remain protected, maintaining their confidence in the institution’s stability and reliability.

Employees’ State Insurance Corporation (ESIC)

• Commissioning of Prof. B.P. Adarkar: In March 1943, the Government of India tasked Prof. B.P. Adarkar with creating a report on establishing a health insurance system for industrial workers. This initiative marked the conceptual foundation of the ESI scheme.
• Formation of ESIC: Subsequently, the Employees’ State Insurance Corporation (ESIC) was established as an autonomous corporation under the Ministry of Labour and Employment, following the enactment of the Employees’ State Insurance Act in 1948.

The Employees’ State Insurance Act, 1948

• Purpose and Vision: The Act introduced a compulsory need-based social insurance scheme, aimed at safeguarding workers and their dependents against the economic impact of sickness, maternity, and disability due to injury at work. Additionally, it provides for medical care to the employees and their families.
• Easing Employer Responsibilities: By enacting this law, employers were relieved from their obligations under the Maternity Benefit Act of 1961 and the Workmen’s Compensation Act of 1923, as the ESI scheme offered comprehensive coverage encompassing these aspects.
• Alignment with International Norms: The benefits and the framework of the ESI Act are designed to be in compliance with the norms set by the International Labour Organization (ILO).
• Inclusivity and Expansion: Initially targeted at manufacturing sector workers, the Act has expanded its coverage to include enterprises with 10 or more employees, broadening the spectrum of beneficiaries.

Benefits Under the ESI Act

• Medical Benefit: Full medical care is provided to an insured person and their family members from the day the individual enters insurable employment.
• Sickness Benefit: Financial aid is offered in case of certified sickness lasting for a stipulated period.
• Maternity Benefit: Pregnant women are entitled to maternity benefits that are payable up to twenty-six weeks, which can be extended under certain conditions.
• Disability Benefit: In case of temporary or permanent physical disability, financial assistance is provided to compensate for the loss of wages or earning capacity.
• Dependents’ Benefit: In the event of the death of an insured person due to an employment injury, dependents are entitled to a monthly pension.
• Unemployment Cash Benefit: This benefit is extended under certain conditions, such as involuntary loss of employment.

Recent Amendments

• Wage Limit for Coverage: The monthly wage limit for eligibility under the ESI scheme was increased from INR 15,000 to INR 21,000, effective from January 1, 2017, allowing a broader workforce to avail the benefits.
• Contribution Rate Reduction: As of July 1, 2019, the contribution rate to the ESI scheme was reduced from 6.5% to 4% of an employee’s wages, with the employer contributing 3.25% and the employee contributing 0.75%. This reduction aimed to lessen the financial burden on employers and employees while ensuring the sustainability of the scheme.

Through these measures, the ESI scheme continues to play a vital role in the socio-economic welfare of India’s workforce, providing a safety net against the uncertainties of life and fostering a healthy work environment.

Deposit Insurance and Credit Guarantee Corporation (Dicgc)

The historical context and evolution of deposit insurance in India reflect a systematic approach to enhancing financial stability and protecting depositors’ interests. This journey, starting from the financial crises in Bengal in 1948 to the establishment and reform of the Deposit Insurance and Credit Guarantee Corporation (DICGC), outlines a crucial development in India’s financial regulatory framework.

Early Recognition of Deposit Safety

Post-1948 Bengal Financial Crisis

• The financial crisis in Bengal in 1948 served as a catalyst for the Indian government to consider the protection of bank deposits seriously. The instability highlighted the vulnerability of depositors in the event of a bank failure, sparking a nationwide debate on the need for deposit insurance.

Initial Deliberations and Recommendations

• In 1949, the idea of deposit insurance was revisited but was deferred pending the establishment of robust bank inspection systems by the Reserve Bank of India (RBI). The concept gained further support in 1950 from the Rural Banking Enquiry Committee, signaling growing consensus on the importance of safeguarding depositor funds.

Establishment of Deposit Insurance

The Deposit Insurance Corporation (DIC) Bill of 1961

• The legislative journey towards deposit insurance culminated with the introduction of the DIC Bill in Parliament on August 21, 1961. Following its enactment and the President’s assent on December 7, 1961, the Deposit Insurance Act of 1961 was implemented on January 1, 1962. This landmark act laid the foundation for deposit insurance in India, aiming to boost depositor confidence and enhance banking system stability.

Evolution into DICGC

Formation and Role

• In July 1978, under the Deposit Insurance and Credit Guarantee Corporation Act of 1961, the DIC was reconstituted into the DICGC. As a specialized division reporting to the RBI and the Ministry of Finance, the DICGC plays a pivotal role in insuring bank deposits and facilitating credit guarantees, thereby underpinning the safety and trust in India’s banking sector.

Deposit Insurance Coverage

• Initially, the DICGC insured bank deposits up to a certain limit, which has been periodically revised to reflect changing economic conditions and maintain depositor confidence. Following the 2020-21 budget, the insurance coverage was increased from ₹1 lakh to ₹5 lakhs per depositor per bank, significantly enhancing the safety net for individual depositors across the country.

Financial Sector Reforms

Financial Industry Legislative Reforms Commission (FSLRC)

• Established in March 2011, the FSLRC was tasked with overhauling the legal and institutional architecture of India’s financial sector. Advocating for a comprehensive regulatory framework, the FSLRC proposed a system of seven organizations, including a unified resolution corporation. This body would extend beyond traditional bank deposit insurance, covering a wide range of financial institutions and ensuring systemic stability.

Financial Resolution and Deposit Insurance Bill, 2017

• In line with the FSLRC’s recommendations, the Government of India introduced the Financial Resolution and Deposit Insurance Bill in 2017. This legislative proposal aimed to create a framework for resolving financial distress in banks, insurance companies, and other financial entities, marking a significant step toward a more resilient and inclusive financial system.
• The evolution of deposit insurance in India, from its conceptualization in the aftermath of the Bengal crisis to the contemporary framework embodied by the DICGC and proposed reforms, illustrates a dynamic response to the changing needs of the financial sector and its stakeholders. This ongoing process underscores India’s commitment to financial stability, depositor protection, and systemic resilience.

Export Credit Guarantee Corporation of India (ECGC)

The establishment and evolution of the Export Credit Guarantee Corporation of India Ltd (ECGC) illustrate a strategic approach by India to boost its export sector post-independence. The narrative of ECGC’s development reflects a broader effort to mitigate risks associated with international trade and finance for Indian exporters.

Post-Independence Export Marketing Needs

• Initial Need for Export Support: Shortly after gaining independence in 1947, India recognized the necessity of bolstering its export markets. This was a strategic move to enhance the country’s economic stability, generate foreign exchange, and establish a presence in global markets.

Establishment of Export Credit Guarantee Scheme

• Export Advisory Council Proposal (1953): The concept of an Export Credit Guarantee Scheme was proposed to support exporters against potential losses, thereby encouraging more active participation in international trade.
• Ministry of Commerce and Industry’s Review (1955): The proposal was meticulously examined for its merits and demerits, leading to a draft bill for establishing such a scheme.

Formation of Export Risk Insurance Corporation (ERIC)

• Inception of ERIC (1957): Following the Kapur Committee’s recommendations, ERIC was founded in Mumbai as a private limited company. This entity was poised to offer insurance products that would protect exporters against various risks.
• Capital Structure: ERIC was initiated with a paid-up capital of ₹25 lakhs and an authorized capital of ₹5 crores, marking a significant financial commitment towards export support.

Evolution and Rebranding

• Name Changes and Expansion: The corporation underwent several name changes—from ERIC to Export Credit & Guarantee Corporation Ltd in 1964, and later to Export Credit Guarantee Corporation of India Ltd in 1983, reflecting its evolving role and expanding scope of services. It was further abbreviated to ECGC Ltd in 2014.

Role and Functions of ECGC Ltd

• Export Credit Insurance: ECGC Ltd plays a crucial role in providing export credit insurance, covering exporters against losses due to the export of goods and services.
• Support to Banks and Financial Institutions: By offering guarantees, ECGC enables exporters to secure better financing terms, thus facilitating easier access to necessary funds for engaging in international trade.
• Overseas Investment Insurance: It also supports Indian businesses investing abroad through equity or loans by offering insurance against various risks.

Facilities Offered by ECGC

• Comprehensive Risk Coverage: ECGC provides insurance against payment risks, advises on export operations, and offers insights into the creditworthiness of overseas buyers.
• Facilitation of Export Financing: Through its services, ECGC makes it easier for exporters to obtain financing from banks and financial organizations, supports debt recovery, and mitigates risks associated with international transactions.

Need for Export Credit Insurance

• Mitigating Risks: Export transactions are susceptible to various risks, including political upheavals, economic difficulties, buyer insolvency, and extended defaults. Export credit insurance is designed to protect exporters from the fallout of these risks.
• Enhancing Confidence: By safeguarding against potential losses, export credit insurance empowers exporters to pursue international business opportunities with greater confidence and security.

In essence, the development and services of ECGC Ltd are central to India’s strategy for enhancing its export sector. By providing crucial support mechanisms, ECGC Ltd enables Indian exporters to navigate the complex landscape of international trade with reduced risk and increased competitiveness.

Regulatory Institutions: Pension Fund Regulatory and Development Authority (PFRDA)

The Old Age Social and Income Security (OASIS) project, commissioned by the Government of India in 1999, marked a pivotal moment in the reform of pension systems in India. This initiative aimed at evaluating and recommending improvements to old age income security led to significant changes in the pension landscape, notably the transition from a Defined Benefit Pension System to a Defined Contribution Pension System for new government employees, excluding the armed forces. This reform was rooted in the need for a more sustainable and equitable pension system that could better serve India’s aging population and respond to the financial realities of the time.

Establishment of the PFRDA

• The interim Pension Fund Regulatory and Development Authority (PFRDA) was established in August 2003 as a response to the OASIS project’s recommendations. Its creation was a strategic move by the government to oversee the development, promotion, and regulation of the pension sector in India. The National Pension System (NPS), introduced on January 1, 2004, for new government employees, marked the first major initiative managed under the PFRDA’s oversight.

Expansion of NPS

• The NPS was initially designed for new entrants to government service, but its scope was significantly broadened in May 2009 to include all citizens of India on a voluntary basis. This expansion aimed at extending the benefits of a regulated pension system to self-employed professionals and individuals in the unorganized sector, thereby promoting wider financial inclusion and security in old age. In October 2015, the NPS was further opened to Non-Resident Indians (NRIs), emphasizing the government’s commitment to providing a robust pension system accessible to Indians regardless of their location.

PFRDA Act 2013

• The formalization of the PFRDA’s role through the PFRDA Act, passed on September 19, 2013, solidified its mandate to regulate pension products offered by the government, state governments, private sector, and unorganized sectors. The Authority’s structure, composed of a Chairperson and up to six members (with at least three being full-time employees nominated by the Central Government), was established to ensure effective oversight and development of the pension sector.

National Pension System (NPS)

• The NPS represents a significant shift towards a contributory pension model, with its mandatory application for Central Government workers from January 1, 2004, and subsequent opening to all citizens, including the unorganized sector, on a voluntary basis from May 1, 2009. The inclusion of NRIs from October 29, 2015, further widened its reach, although OCI, PIO cardholders, and HUFs remain ineligible.

Minimum Assured Return Scheme (MARS)

• In a bid to attract more investors and cater to the risk-averse segment of the population, the PFRDA proposed the Minimum Assured Return Scheme (MARS), offering a guaranteed return on investments. This scheme is particularly significant as it represents the first of its kind under the PFRDA, providing a safety net for investors in the form of a guaranteed minimum rate of return, contrary to the existing NPS model where annual returns fluctuate based on market conditions.

Regulatory Institutions: Insurance Regulatory and Development Authority of India (IRDAI)

Early Regulation: The Indian Life Assurance Companies Act, 1912

• Introduction and Objectives: This Act was the first statutory attempt to regulate the life insurance industry in India. Its primary objective was to protect policyholders by ensuring that life insurance companies maintained transparency and operated in a financially sound manner.
• Key Provisions: The Act laid down the foundation for regulatory oversight, including requirements for the submission of detailed annual reports, solvency margins, and investment guidelines to ensure the security of the policyholders’ funds.

Expansion of Oversight: The Indian Insurance Companies Act, 1928

• Statistical Data Collection: Building on the groundwork laid by the 1912 Act, the 1928 legislation enabled the government to collect statistical data on the insurance business. This included life and non-life insurance operations conducted by both Indian and foreign insurers, as well as provident insurance organizations.
• Broader Scope: The act marked a significant step towards creating a comprehensive database on the insurance industry in India, facilitating better regulatory oversight and policy formulation.

Comprehensive Reform: The Insurance Act of 1938

• Unification and Revision of Laws: The Insurance Act of 1938 was a landmark legislation that consolidated and amended the existing laws relating to insurance companies. This Act aimed to provide a robust legal framework to govern the entire insurance sector, encompassing both life and non-life insurance businesses.
• Protection of Insurance Public: One of the Act’s primary objectives was to protect the interests of the insurance public. It introduced stringent measures to regulate the activities of insurers, ensuring their accountability and financial stability.
• Regulatory Measures: The Act introduced several regulatory measures, such as the requirement for the registration of insurance companies, the establishment of minimum capital requirements, and provisions for the appointment of controllers to oversee the companies’ operations. These measures were designed to ensure that insurance companies operated in a manner that was fair, transparent, and financially sound.
• Impact on the Industry: The 1938 Act significantly impacted the insurance industry in India. It enhanced the government’s ability to oversee insurance companies, ensuring that they met certain standards of operation and financial health. This, in turn, helped to build public trust in the insurance sector.

Nationalization of the Insurance Sector

• Disbanding of Mains Agencies: The Insurance Amendment Act of 1950 led to the disbandment of mains agencies, amid concerns over numerous insurance firms engaging in fierce competition and unethical business practices.
• Move Towards Nationalization: To combat these challenges and ensure the protection of policyholders, the Indian government decided to nationalize the insurance sector.
• Establishment of LIC: In January 1956, following an Ordinance, the life insurance business was nationalized, culminating in the creation of the Life Insurance Corporation. The LIC consolidated the sector, absorbing 245 entities, including 154 Indian insurers, 16 non-Indian insurers, and 75 provident societies. This consolidation effectively granted LIC a monopoly over the life insurance business in India until the sector was reopened to private competition in the late 1990s.

Introduction of IRDAI and Market Liberalization

• Malhotra Committee Recommendations: In response to the findings of the Malhotra Committee, which advocated for the liberalization of the insurance sector, the IRDAI was established in 1999 as an autonomous body. This was a significant move to reintroduce competition into the market.
• IRDAI as a Legislative Body: By April 2000, the IRDAI was formalized as a legislative organization with the enactment of the IRDA Act, 1999, marking a new era of insurance regulation in India.

Objectives and Structure of IRDAI

• Encouraging Competition: A key objective of the IRDAI is to foster competition within the insurance sector, aiming to enhance customer satisfaction by providing more choices and potentially lowering premium costs, all while ensuring the financial stability of the industry.
• Composition: The IRDAI is comprised of a ten-member committee, including a chairman, five full-time, and four part-time members, all appointed by the government of India.

Functions of IRDAI

Outlined in Section 14 of the IRDA Act, 1999, the functions of IRDAI encompass a broad range of regulatory and developmental roles:

• Regulation and Consumer Protection: Ensuring that the insurance market operates in a fair, transparent, and financially stable manner is central to IRDAI’s mission.
• Licensing and Standardization: The authority is responsible for issuing licenses to insurance intermediaries and standardizing insurance-related practices.
• Promotion of Professional Organizations: Encouraging the development and professionalism of insurance companies and their associations.
• Financial Security: IRDAI aims to maintain the insurance sector’s financial health through various measures, including setting standards for premiums and investments of policyholder funds.
• Solvency Margins: Regulating the solvency margins of insurance companies to ensure they have enough capital to meet their obligations.
• Advisory Role: Advising on changes to the distribution structure, including the incorporation of mobile and technology-driven solutions, to extend insurance coverage to rural and underserved segments of society.

Reinsurance

Reinsurance plays a crucial role in the global insurance industry by allowing direct insurers to manage their risk portfolios more effectively. Through reinsurance, insurers can share their risk exposure with other insurance entities, ensuring financial stability and solvency, especially in the face of large or catastrophic losses.

Benefits of Reinsurance

Financial Protection and Solvency

• Risk Management: Reinsurance provides insurers with a mechanism to manage and mitigate risks associated with large claims, ensuring that they can meet their financial obligations to policyholders.
• Solvency Support: By transferring parts of their risk, insurers can maintain their solvency, especially after significant events that could lead to substantial claims.

Operational Advantages

• Capacity Expansion: Insurers can underwrite more policies and cover larger or riskier projects without proportionally increasing their risk exposure, thanks to the backing of reinsurers.
• Liquidity Enhancement: In the event of major claims, reinsurance agreements provide insurers with the necessary funds, ensuring that they have sufficient liquidity to cover losses.

Types of Reinsurance

Facultative Coverage

• Selective Coverage: This type of reinsurance is negotiated on a per-risk or per-contract basis, with the reinsurer having the option to accept or reject individual risks.
• Flexibility: Offers insurers the flexibility to seek reinsurance for particularly large or unusual risks.

Treaty Reinsurance

• Broad Agreement: Contrary to facultative reinsurance, treaty reinsurance covers a range of policies under a single agreement for a specified period.
• Automatic Coverage: Once the treaty is in place, the reinsurer agrees to cover the agreed portion of risk without the need for individual negotiations.

Proportional Reinsurance

• Shared Premiums and Losses: In this arrangement, the reinsurer receives a proportionate share of the premiums and, in return, covers a corresponding share of losses.
• Ceding Commission: The direct insurer receives a ceding commission to cover costs associated with underwriting and acquiring the insured risks.

Non-Proportional Reinsurance

• Excess Loss Coverage: The reinsurer only pays out if the insurer’s losses exceed a predetermined threshold, allowing insurers to protect against high-severity events.
• Risk Management: This type helps insurers manage their exposure to large losses without the need to share a portion of the premiums.

Recent Developments in India

• Reduced Cession Rate: The Insurance Regulatory and Development Authority of India (IRDAI) reduced the obligatory cession rate for domestic insurers to GIC Re, India’s national reinsurer, from 5% to 4%, effective April 1, 2022. This move aims to liberalize the reinsurance market in India, offering more business opportunities to foreign reinsurers.
• Market Growth Challenges: The Indian general insurance market, valued at over INR 2 lakh crore, has faced growth challenges due to the Covid-19 pandemic. However, it continues to expand, albeit at a slower rate in the last two years.
• Reinsurance Sector Value: The reinsurance market in India was estimated to be worth approximately INR 55,000 crore in the fiscal year 2020-21, highlighting its significant role in the broader insurance ecosystem.

The strategic use of reinsurance allows insurance companies to manage their risks more effectively, supporting their financial stability and capacity to cover a wide range of risks. The evolving regulatory landscape in India, including the adjustment of obligatory cession rates, indicates a move towards a more competitive and dynamic reinsurance market, benefiting both insurers and policyholders.

Micro-Insurance

Microinsurance is designed to provide protection to low-income individuals against specific risks, in exchange for premiums that are affordable and proportional to the risk and costs involved. This insurance form aims to bring financial security to those who might otherwise be unable to access traditional insurance products due to their economic situation.

Key Dimensions of Micro-Insurance

Regulatory Framework

• The Insurance Regulatory and Development Authority of India (IRDAI) has been pivotal in fostering the growth of micro-insurance to enhance coverage among economically vulnerable segments of society. The IRDA Micro-insurance Regulations, 2005, define and regulate the framework for micro-insurance policies, which are typically characterized by an insured amount of less than ₹50,000.

Types of Micro-Insurance

• General Micro-Insurance: Covers contracts for health, personal property (such as huts, livestock, instruments/tools), and personal injury, available either individually or in groups.
• Life Micro-Insurance: Includes term policies (with or without premium refund), endowment contracts, and health insurance, which may also include accident benefit riders, available both individually or in groups.

Microinsurance Delivery Methods

The delivery of microinsurance is complex, requiring innovative approaches to reach and serve low-income populations effectively. The models include:

• Partner-Agent Model: A collaboration between a microinsurance scheme and an agent, sometimes involving third-party healthcare providers.
• Full-Service Model: The microinsurance scheme manages all aspects, from product development to delivery, in collaboration with external healthcare providers.
• Provider-Based Model: Healthcare providers operate as the microinsurance plan, handling operations, delivery, design, and service.
• Community/Mutual Aid Model: Policyholders or clients manage the scheme, working with external healthcare providers to offer services.

Recent Developments in Micro-Insurance

Formation of Committees by IRDAI

• In February 2020, the IRDAI established a committee to create a concept paper on freestanding micro-insurance companies. The focus is on offering coverage to low-income populations for lower-value assets, examining the feasibility and regulatory framework for such entities, and defining the maximum sum insured per person.
• The Suresh Mathur Committee, formed in April 2019, aims to assess the microinsurance regulatory framework and propose measures to boost the demand for micro-insurance products. Led by IRDAI Executive Director Suresh Mathur, this committee focuses on developing customer-friendly product designs and underwriting processes.

The concept of insurance penetration and density, along with the various challenges and reforms in the insurance sector, offers a comprehensive view of the industry’s dynamics and its critical role in economic development.

Insurance Penetration and Density
Insurance Penetration

• Definition: Insurance penetration is defined as the ratio of a country’s total insurance premiums to its Gross Domestic Product (GDP). It is a key indicator of the insurance sector’s growth and its integration into the broader economy.
• Significance: High insurance penetration suggests a well-developed insurance sector, indicating a society’s advanced risk management practices.

Insurance Density

• Definition: Insurance density is the ratio of total insurance premiums to the population, representing the average premium amount paid per capita.
• Significance: This metric reflects the average financial commitment of individuals towards insurance, providing insight into the insurance coverage level across the population.

Reasons for Poor Insurance Penetration and Density

• Financial instability of public-sector insurance entities.
• Lack of awareness about insurance policies.
• Complex and lengthy claim settlement processes.
• Low income and educational levels among the population, particularly in rural areas.
• Cultural and social perceptions towards insurance.
• Regulatory and market-entry barriers that limit competition and innovation.

Need and Importance of the Insurance Sector

The insurance sector plays a crucial role in economic and social development by:

• Encouraging savings and financial planning through life insurance policies.
• Mobilizing domestic savings and directing them into productive investments, thus fueling economic growth.
• Providing financial security and reducing uncertainty in business and personal life.
• Acting as a source of emergency funds during medical crises, natural disasters, or other unforeseen events.
• Reducing the social burden by minimizing the impact of accidents and calamities on the affected individuals and communities.

Challenges to the Insurance Sector

The sector faces several challenges, such as:

• Capital inadequacy, particularly among public-sector insurers.
• Fragmentation of the risk pool due to overlapping government insurance schemes.
• Insufficient coverage for the “missing middle” – those too poor for private insurance but not eligible for subsidized schemes.
• The rural-urban divide, with low penetration in rural areas.
• Predominance of life insurance over non-life insurance sectors, indicating imbalance.

Way Forward and Insurance Sector Reforms

Sector Growth

• Emphasis on microinsurance and financial inclusion.
• Increased demand for health and automobile insurance.
• Digital innovation facilitating direct customer engagement and product distribution.

Regulatory and Policy Reforms

• The Insurance Laws (Amendment) Act, 2015, aimed at enhancing the sector’s legal framework, increasing foreign direct investment (FDI) limits, and strengthening the Insurance Regulatory and Development Authority of India (IRDAI).
• Initiatives to promote the reinsurance industry and health insurance as a distinct sector.
• Encouraging foreign investment to ensure more extensive coverage and innovative product offerings.

Favourable Policy Measures to Promote the Insurance Sector

The information outlines various policy measures and reforms introduced to promote and revitalize the insurance sector in India. These measures range from legislative amendments to the introduction of new insurance schemes and the establishment of a regulatory framework for the sector’s growth and stability.

Foreign Exchange Management Act (FEMA) Amendment

• Overview: In August 2021, the Indian government revised the Foreign Exchange Management (non-debt instruments) Rules, 2019, allowing for an increase in the foreign direct investment (FDI) ceiling in the insurance industry to 74%.
• Impact: This amendment aims to attract more foreign investment into the Indian insurance sector, thereby increasing its capital base and enhancing its global competitiveness.

Ayushman Bharat PMJAY SEHAT

• Introduction: Launched in December 2020, this scheme aims to provide health insurance coverage to all citizens of Jammu and Kashmir.
• Objective: It is part of the broader Ayushman Bharat initiative, extending health insurance to underprivileged sections, thereby improving healthcare accessibility and affordability in the region.

COVID-19 Insurance Policy

• Initiative: The government extended an insurance coverage plan of ₹50 lakh for healthcare professionals till June 2021. Additionally, Uttarakhand announced a ‘COVID-19 Insurance Policy’ for international visitors in December 2020.
• Purpose: These measures were taken to provide financial protection to healthcare workers and tourists against the pandemic, ensuring support for frontline workers and encouraging tourism safely.

National Export Insurance Account (NEIA) Scheme

• Authorization: In September 2021, the government authorized the continuation of the NEIA scheme with a grant-in-aid payment of ₹1,650 crores for the next five years.
• Goal: The NEIA scheme aims to support Indian exporters by providing export credit insurance services, thus mitigating risks associated with exporting goods and services.

Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)

• Launch: Announced by India Post Payments Bank (IPPB) in November 2020 in conjunction with PNB MetLife India Insurance Company.
• Aim: The scheme offers life insurance coverage for the general population at an affordable premium, promoting financial security among the masses.

Union Budget Allocations

• Budget Provisions: The Union Budget 2021 earmarked ₹16,000 crores for crop insurance schemes. Additionally, there was an increase in health insurance coverage, with significant growth observed in Bihar, Assam, and Sikkim.
• Significance: These allocations reflect the government’s commitment to strengthening the agricultural and healthcare sectors through insurance coverage, enhancing protection against risks.

Committees to Revamp and Reform the Insurance Sector

Malhotra Committee

• Formation: Established in 1993 under the leadership of R.N. Malhotra, the committee was tasked with assessing the Indian insurance market and recommending future directions.
• Objectives: To complement banking industry reforms and create a more efficient, competitive financial system, recognizing the need for similar improvements in the insurance sector.
• Key Recommendations:
  • Regulatory Body: Establishment of an independent regulatory authority for insurance.
  • Structure: Reduction of government stake in insurance companies to 50%, and operational independence for GIC and its subsidiaries.
  • Competition: Entry of private companies with a minimum paid-up capital and limited foreign company participation.
  • Customer Support: Enhanced focus on customer service, promotion of unit-linked pension plans, and technology upgrades in the sector.
  • Mandatory Investments: Reduction in mandatory investment in government securities by the Life Fund and restrictions on GIC holdings in companies.

These policy measures and reforms reflect a comprehensive approach to bolstering the insurance sector in India, focusing on increased investment, improved coverage, customer service, and regulatory frameworks. The aim is to make insurance more accessible, competitive, and capable of meeting the evolving needs of the Indian economy.

UPSC PREVIOUS YEAR QUESTIONS

1.  Consider the following: (2012)

1.  Hotels and restaurants
2.  Motor transport undertakings
3.  Newspaper establishments
4.  Private medical institutions

The employees of which of the above can have the ‘Social Security’ coverage under Employees’ State Insurance Scheme?

a)  1, 2 and 3 only
b)  4 only
c)  1, 3 and 4 only
d)  1, 2, 3 and 4

2.  Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under microfinance is/are: (2011)

1.  Credit facilities
2.  Savings facilities
3.  Insurance facilities
4.  Fund Transfer facilities

Select the correct answer using the codes given below the lists:

a)  1 only
b)  1 and 4 only
c)  2 and 3 only
d)  1, 2, 3 and 4

3.  Microfinance is the provision of financial services to people of low-income groups. This includes both the consumers and the self-employed. The service/services rendered under microfinance is/are: (2011)

1.  Credit facilities
2.  Savings facilities
3.  Insurance facilities
4.  Fund Transfer facilities

Select the correct answer using the codes given below the lists:

a)  1 only
b)  1 and 4 only
c)  2 and 3 only
d)  1, 2, 3 and 4

4.  Consider the following: (2012)

1.  Hotels and restaurants
2.  Motor transport undertakings
3.  Newspaper establishments
4.  Private medical institutions

The employees of which of the above can have the ‘Social Security’ coverage under Employees’ State Insurance Scheme?

a)  1, 2 and 3 only
b)  4 only
c)  1, 3 and 4 only
d)  1, 2, 3 and 4