25 Years Of The INSURANCE Industry: Hits And Misses -- Part I

Breaking years of stagnation, the Indian insurance industry recently welcomed six new entrants. In the general and health insurance sectors, the latest addition comes after a five-year gap. In the life insurance industry, the gap is longer – 12 years.

The Insurance Regulatory and Development Authority of India (IRDAI) has turned 25 this year. How does the industry plan to celebrate the silver jubilee?

Let’s start by rewinding to the pre-IRDAI era.

An ordinance was issued on January 19, 1956 nationalising the life insurance sector. That year, the Life Insurance Corporation of India (LIC) came into being, absorbing 154 Indian and 16 foreign insurers, along with 75 provident societies. Provident societies are associations of people who pay regular dues or other sums in return for old-age pensions, sickness benefits, etc. where members contribute regularly in exchange for benefits like old-age pensions and sickness coverage.

Fast-forward to 1972: the General Insurance Business (Nationalisation) Act was passed, paving the way for the nationalisation of the general insurance sector in January 1973. At that time, 107 insurers were amalgamated into four companies: National Insurance Company Ltd, New India Assurance Company Ltd, Oriental Insurance Company Ltd, and United India Insurance Company Ltd. The General Insurance Corporation of India was incorporated as a company in 1971; it began operations in January 1973.

The process of reversal started in the early 1990s after India embraced economic liberalisation. In 1993, the government set up a committee under the chairmanship of then Reserve Bank of India (RBI) governor, RN Malhotra, for reforms in the insurance sector. In 1994, the committee recommended allowing the private sector into the insurance industry. The Malhotra report also envisaged the presence of foreign companies in India – through joint ventures with local partners. Finally, it introduced the idea of setting up a regulator for the industry.

In 2000, IRDAI was born to regulate and develop the industry. Incidentally, none of the financial sector regulators in India has “development” as a mandate – a mission the current IRDAI chairman has taken seriously. (Of course, that doesn’t mean others don’t have development on their agenda.)

In its early days, the insurance regulator’s objectives were to promote competition to improve customer satisfaction. The strategy? As Sherlock Holmes would say: “Elementary, my dear Watson. Give the consumer more choices and lower the premiums."

In August 2000, it opened up the market, inviting applications for registrations, and allowing foreign entities up to 26 per cent stake. In the very first year, 17 regulations were introduced, including the registration of insurance companies, licensing of agents and introduction of third-party administrators. By 2001, ICICI Prudential Life Insurance Company Ltd and HDFC Standard Life Insurance Company Ltd led the market.

In the initial days, IRDAI’s primary concerns were orderly growth and the protection of policyholders' interests. Product diversification followed. Health insurance, pension plans and unit-linked insurance plans (ULIPs), which combine insurance cover and investments, appeared quickly on the scene.

New distribution channels, such as brokers and the bancassurance channel, were introduced next year, improving accessibility and transparency. When banks sell insurance products by forging partnerships with insurance companies, it’s called bancassurance.

By 2004, micro-insurance made its appearance, offering affordable coverage to the underserved. Introduction of digital payments for premiums and onsite supervision played a critical role in strengthening the sector, paving the way for expansion.

Indeed, the following three years – 2005, 2006 and 2007 – witnessed significant expansion in the reach and scope of insurance services across India. While bancassurance became a key distribution channel, thanks to the banking industry’s reach, the use of technology improved customer service and operations. For the first time, online policy purchases and premium payments started gaining popularity.

In January 2007, general insurance pricing was de-tariffed, except for motor third-party insurance. It served as a booster shot to efficiency; for the first time, the market started dictating the pricing. Efforts were also made to standardise concepts and simplify policy documents.

These developments laid the groundwork for growth and innovation, and helped the Indian insurers weather the storm of the 2008 global financial crisis by diversifying their investment portfolios and ring-fencing them with risk management protocols.

The crisis underscored the critical role of insurance in mitigating financial risks and safeguarding public health. Insurers pivoted swiftly, launching specialised products and enhancing digital platforms to meet evolving customer needs.

It highlighted the importance of prudential regulations and customer trust, prompting tighter oversight on certain products such as ULIPs, the mis-selling of which was rampant. More room was created for investments in the infrastructure sector. IRDAI also introduced public disclosure guidelines to ensure that adequate information was provided to the buyers of insurance products, and formalised the corporate governance framework.

In the last decade, IRDAI, by now a teenager, started pushing for digitisation. The insurance repository system for issuing and maintaining e-policies, and the Electronic Transaction Administration and Settlement System for settling co-insurance transactions between insurers, were introduced.

Around the same time, regulations on linked, non-linked, and health insurance products, and guidelines on health insurance standardisation were put in place with three objectives – transparency, fairness and consumer confidence. Also, “portability” was introduced in health insurance, allowing policyholders to switch insurers without losing existing benefits.

After de-tariffing, portability was another milestone in the evolution of India’s insurance industry.

Collectively,  these initiatives improved the operational efficiency of the companies as well as customer experience, and set the stage for a more agile and responsive industry.

In 2015, the landmark amendment to Insurance Act changed the landscape forever – both in dynamism and growth. A major highlight was recognising health insurance as an independent line of business. Until then, it was part of the general insurance business.

The rise in foreign direct investment (FDI) limits to 49 per cent attracted dollops of investments, stimulating competition and catalysing technological advancements. It also set the ground for the entry of foreign reinsurers in India through their branches, something the banking sector does. Currently, 11 foreign insurers are operating in India through their branches; among them is the London-based reinsurance giant, Lloyds.

Apart from the amendment to the Act, a string of other government initiatives expanded the insurance coverage to marginalised sections, reinforcing its commitment to financial inclusion.

Such initiatives include the Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY), Pradhan Mantri Suraksha Bima Yojana (PMSBY), Pradhan Mantri Fasal Bima Yojana (PMFBY) and Pradhan Mantri Jan Arogya Upgama (PMJAY).

PMJJBY offers one-year term life cover of Rs 2 lakh to all subscribers in the age group of 18-50; PMSBY is a personal accident insurance scheme, offering one-year cover for death or disability due to accident; PMFBY is an insurance cover for farmers for their yields; and PMJAY is a health insurance scheme offering a cover of Rs 5 lakh per family.

What’s more, a new intermediation channel – insurance marketing firms – made its appearance to expand distribution and encourage young entrepreneurship in the insurance space. The corporate governance guidelines were also strengthened in the wake of the notification of the Companies Act 2013.

The second half of the last decade saw how IRDAI responded to emerging challenges, including the Covid-19 pandemic. The insurers responded swiftly, coming up with specific health insurance products such as Corona Kavach and Corona Rakshak for Covid-related treatments. A string of other products was also launched to insure life, health, property and pensions.

The regulatory sandbox encouraged insurers to test new products, services, and business models in a controlled environment. Besides this, there were new regulations to protect policyholders’ interests.

 Eventually, in 2021, the FDI limit was raised from 49 per cent to 74 per cent for insurers and 100 per cent for intermediaries.

This is history. But there is much more.

(To be continued next week)

This column first appeared in Business Standard. The writer, a Consulting Editor of Business Standard, is a Senior Advisor of Jana Small Finance Bank.

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