Insurance Sector in India

Insurance refers to the act of indemnifying an individual or company against financial losses in case of unexpected loss. With the insured entities having an insurable interest, the Insurance sector provides the much-needed loss mitigation safeguard in case of any eventuality, while following utmost good faith. The insurance sector in India consists of life insurers, general insurers as well as re-insurers, under the aegis of the Insurance regulator, IRDAI. In the recent past, foreign investment in the form of FDI has transformed the insurance sector, with new sophisticated arrangements and products coming to the fore. While the effects are encouraging, there happens to be numerous factors, which need to be overcome for the insurance sector to achieve the desired potential.

Roots of Insurance sector in India

The roots of insurance in India can be found in the stories of early travellers and maritime traders, where the primary source of risk mitigation was pooling of resources to be used in times of calamity. The Modern Insurance sector, however, can be traced back to the advent of Oriental Insurance company in 1818 as the first life insurer. In the Life Insurance Act of 1912, the country saw the first statutory effort to regulate the insurance sector. The Indian Insurance Companies Act of 1928 and the Insurance Act of 1938 provided the comprehensive provisions for regulating the insurance sector in India. A major milestone came in 1956, when LIC was formed by encompassing 245 Indian and foreign insurance companies, which in turn held monopoly till early 1990s. General Insurance has its legacy in the Triton Insurance company formed in 1850 and the Indian mercantile Insurance ltd, set up in 1907. General Insurance Corporation of India was set up in 1971.The General Insurance Business Act of 1972 nationalised the General insurance sector and clubbed the erstwhile companies in to four companies namely, the United India Insurance Company Ltd, the Oriental Insurance Company Ltd, the New India Assurance Company Ltd, and National Insurance Company Ltd.

Importance of Insurance sector in India

Insurance companies play a pivotal role in the economy of the country. While they provide the much-needed protection to companies and individuals from their financial losses, they act as a precursor to various risky projects and undertakings. The insurance sector generates a huge amount of revenue and job requirements every year. The insurance sector in India along with the banking sector turn up for around 7% of the country’s GDP, with an annual CAGR of around 15-20%. Notwithstanding the role played by the Insurance sector in public capital conservation, it provides the much-needed long term capital for growth of infrastructure and development of the country. 

• Insurance sector in India has gained much from the sovereign backing. 
• Whether it is the introduction of Government sponsored Insurance schemes such as PMSBY, PMJJBY etc, or the enforcement of compulsory insurance for vehicles and accident-prone establishments, there has been concerted efforts to popularize the insurance sector. 
• With a growing scale, the insurance industry has itself plunged into rapid advertisement and promotional activities, all resulting in increasing growth of the sector in India. 

Impact of Globalisation 

Globalisation had its impact on the Insurance sector in India, with increased privatization and role of foreign players. The R. N. Malhotra committee set up by RBI in the year 1993, submitted its report in 1994 on the reforms of the insurance sector in India with an objective to make the sector financially stable and independent. As a major recommendation, it advocated for private companies to enter the Insurance sector in India. It also recommended the opening up of the sector to foreign players, who could participate in the Indian insurance sector preferably through joint ventures. As per the recommendations, Insurance Regulatory and Development Authority of India (IRDAI) was set up in 2000. Currently, there are 24 Life and 28 General Insurance companies operational in India. However, LIC, being the largest life insurer, is still sovereign owned. 

• As its first major reform, IRDAI had allowed for foreign investment (FDI) of up to 26% in Indian Insurance companies. 
• In 2014, 49% FDI was allowed by the regulator in insurance companies. 
• The Union budget of 2021-22 has further allowed FDI of 74% in the insurance sector. 
• The insurance penetration in India is around 4% while the average world over is around 7%. 
• As India lacks the required penetration, it provides a major scope for the insurance sector to utilize the FDI inflows to grow further. 
• Higher foreign direct investment would result in the insurance sector to scale newer areas and geographies and provide innovative and sophisticated products for the newer generation. 
• The FDI would enable the insurance companies to generate more jobs which in turn will have a trickle-down effect through the economy. 
• On the consumer side, there is bound to be better choices and better offerings by the insurance sector as a whole. 
• Foreign players would bring in better management capabilities, which would in turn help their Indian counterparts. As such the increased availability of foreign investment is expected to bring about true financial inclusion. 

Conclusion

As FDIs pour in, the insurance sector can explore newer and undervalued areas for its further growth. Term insurance accounts for less than 2% of the total policies, which could be explored. Considering the higher expenditure on health in India and increasing life expectancy, health insurance and pension policies could gain high popularity in the coming years. With FDI in the insurance sector, General Insurance companies could restructure and realign with global practices and thus, could grow further. As the sector grows, India could be immensely helped by its long-term funds for its capital growth. Truly, as India shapes up to take a major role in the global village, the insurance sector is all set to take centre stage in the further growth of the services industry in India.