Clipped from: https://www.thehindubusinessline.com/opinion/reprioritising-issues-in-insurance-sector/article69554205.ece
There is need for a comprehensive pricing review for all insurance segments
Insurers should publish detailed expense management schedules and cash flow metrics along with current disclosures to promote transparency | Photo Credit: Dilok Klaisataporn
The government plans to permit 100 per cent FDI in the insurance sector. Legislative intent since 1993 has been to boost competition, expand rural coverage, and fund infrastructure.
The number of insurers has grown significantly: from four to 34 in non-life/health 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, and life from ₹56,000 crore to ₹9 lakh crore. Assets under management reached ₹67 lakh crore in 2024. However, insurance penetration remains low at 4 per cent of GDP versus the global average of 6.4 per cent. Coverage gaps persist, including high out-of-pocket medical costs and low disaster protection, indicating need for further reforms.
Proposed Reforms
Capital requirements and FDI: When private insurance was reintroduced in 2000, capital requirements were set at ₹100 crore to ensure only serious, financially strong players entered the market. Adjusted for inflation, this figure would be ₹363 crore in FY 2024-25. FDI limits have gradually increased from 26 per cent in 2000 to 74 per cent by 2021.
Yet, actual FDI utilisation remains modest: 20.29 per cent in non-life, 35.23 per cent in life insurance and 34.68 per cent in standalone health as per the IRDAI Report 2023-24. Notably, only four life insurers have utilised the 74 per cent limit with none from non-life.
These figures suggest that while regulatory openness has increased, market interest has been selective. MNC insurers may also have seen the benefit of a local player to deal with distribution and regulatory management.
Permitting 100 per cent FDI could attract new players and present India as a fully liberalised insurance market on the global stage. However, it is not a definite route to insurance for all by 2047.
Composite licenses: Historically, insurers have not been encouraged to operate in both life and non-life segments under the same licence, to preserve solvency and maintain regulatory clarity. The proposed shift to composite licenses — allowing one company to offer both products — raises concerns.
Life and non-life products differ fundamentally in terms of contract length, risk profile, and asset-liability management. The risks far outweigh the perceived benefits for distribution typically for bank led insurers.
Separate legal entities under a group structure are preferred so that there is clear ring fencing of assets for the upcoming risk-based supervision. Hence this proposal has to be reviewed.
Operational efficiencies can still be achieved via shared services in technology, HR, and infrastructure without merging business lines.
Lower capital thresholds: Introducing a limited number of licenses with reduced capital requirements on a case-to-case basis could improve insurance access in rural or social sectors. However, the policy must avoid indiscriminate licensing that could lead to fragmentation and systemic risk due to undercapitalised firms.
Strategic Agenda: 2025-2030
The IRDAI is taking steps towards a risk-based capital approach along with a risk-based supervision framework. Ease of doing business, operational flexibility, improving distribution efficiency and focus on tech led innovation have been regulatory priorities. However, following key issues remain.
Persistent losses, inadequate pricing and inefficiencies: The combined ratio (claims + expenses as a proportion of premium) across the industry remains over 100 per cent, indicating widespread underwriting losses and the need for better cost control. In FY 2023-24 the gross expenses of management of the non-life industry was ₹78,254 crore (26.65 per cent) and in life ₹1,40,567 crore (16.94 per cent) showing a potential for efficiencies.
Public Sector Undertakings (PSUs) in non-life insurance have been losing approximately ₹15 crore per day since FY2020 considering the ₹17,250 crore in capital infusions. Over 90 per cent of capital erosion in the three PSU non-life insurers stems from underpriced group health policies.
Correcting this trend is essential, as also instituting a comprehensive pricing review for all insurance segments.
Retail investor trust and valuation concerns: Accessing public markets for capital is important for the industry.
Currently, per IRDAI’s disclaimer they do not certify prospectus data accuracy in public issues and this does reduce retail investor confidence. Restated accounts just prior to public issue, and valuation asymmetries — particularly in IPOs and private placements-pose risks to retail investors.
Addressing conflicts of interest, particularly in listing insurers’ placements with intermediaries or their relatives, and vice versa, is vital to retaining retail investor trust. Misleading omissions are addressed only under Section 34 of the Companies Act.
Regulatory and interdepartmental coordination: Coordination among regulators is crucial. For instance, the RBI can monitor all payments to banks, NBFCs and associates from insurers.
The Ministry of Road Transport and Highways (MoRTH) which sets the price for third party (TP) motor premium should know how much of this premium is retained by insurers after direct and indirect payments to motor insurance service providers and other intermediaries. SEBI can ensure that IPOs and PE rounds clearly disclose valuation bases and capital burn strategies.
Improved public disclosure: Insurers should publish detailed expense management schedules and cash flow metrics along with current disclosures to promote transparency. Additionally, transforming institutions like the Insurance Information Bureau into formal data utilities could improve stakeholder access to comprehensive insurance data.
Avoiding concentration of insurance power: Concentration of market power among private insurers and intermediaries is an emerging trend. Analysing business relationship, accounting and GST data can uncover any unhealthy dominance patterns, similar to what was revealed in the 2004 Eliot Spitzer investigation in the US.
Encouraging market entry: Given that India had 107 non-life insurers in 1971 and 243 life insurers in 1956, there is precedent and arguably a need-for more insurer licences today. A diversified ecosystem encourages competition, innovation, and resilience.
Data-driven long-term planning: A comprehensive five-year insurance sector roadmap with clearly defined deliverables should be developed and monitored. This should be complemented by a long-term strategy extending to up to 2047.
The writer is a senior insurance professional
Published on May 8, 2025
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