Evolution of Indian Life Insurance Industry

Prior to insurance sector liberalisation, state-owned life insurer held a monopoly in the Indian market as the sole provider of life insurance products in the country. The company's primary focus was on selling traditional policies like endowment, money back, and whole-life insurance. Before the insurance industry was made more open, India had a low rate of people with life insurance compared to the top ten countries with the most people with life insurance. According to the World Bank, India's life insurance penetration rate was only 1.7% of the country's GDP in 1998. (GDP). This was largely due to a lack of understanding about the importance of insurance and the lack of a competitive market capable of offering affordable and appealing products. Coverage was also concentrated primarily in urban and semi-urban areas, with rural areas having much lower penetration.

Term life insurance products were not popular in India prior to 1999, as traditional life insurance dominated the market. The primary reason for the lack of popularity of term life insurance products in India prior to 1999 was a lack of consumer awareness of the importance of pure life insurance coverage. There was also a lack of competition in the insurance industry, which meant that consumers had few options when it came to selecting insurance products. Also, there was no concept of social sector or micro life insurance, or any form of individual credit life insurance in India. Credit life insurance was primarily provided by the state-owned Life Insurer as part of its group insurance policies for various financial institution borrowers. These policies covered a group of borrowers rather than individual borrowers, and the premiums were frequently paid by the lending institutions.

The liberalisation of the Indian insurance industry in 2000 marked a watershed moment in India's life insurance market. The following is an overview of how the Indian life insurance market changed following liberalization:

Private sector players were allowed to enter the Indian insurance market following liberalisation. Several multinational insurance companies have entered the Indian market via joint ventures with Indian partners. The entry of private players increased market competition, resulting in the introduction of new products and improved services. Due to the entry of private players, new products such as unit-linked insurance plans (ULIPs), pension plans, and add-on health insurance in the form of critical illness coverage were introduced. These products were created to meet the changing needs of customers and to cater to various demographics. Because of the potential for higher returns and tax benefits, ULIPs quickly gained popularity.

Private insurers introduced new distribution channels, such as bancassurance, corporate agency, insurance brokers and online sales, which aided in expanding the reach of insurance products to customers in remote locations and those who preferred to purchase insurance online.

Customer Service Priority: Private players concentrated on providing better customer service, faster claim settlements, and greater transparency, resulting in higher levels of customer satisfaction. As a result, the overall image of the life insurance industry in India has improved.

Micro-Insurance is being introduced: Micro-insurance products were introduced by private players to meet the insurance needs of the low-income and rural segments of the population. These products were less expensive and provided less coverage, making them more accessible to a larger segment of the population.

Overall, the liberalisation of the life insurance industry led to a lot of good changes in the Indian life insurance market, such as more competition, better customer service, and new products. These changes have aided the industry's growth and maturation, allowing it to become an important contributor to the Indian economy, creating a large number of direct and indirect jobs and contributing to the growth of other industries such as banking and finance. The industry has expanded rapidly, with both state-owned insurers and private players experiencing steady growth in their customer bases. Increased competition has resulted in lower premium rates, making insurance more affordable to customers.

The increase in insurance penetration has been especially noticeable in rural areas. According to an Insurance Regulatory and Development Authority of India (IRDAI) report, the share of rural life insurance policies issued in total policies issued increased from 2.28% in 2000-01 to 18.88% in 2018-19. This suggests that increased insurance reach in rural areas has had a significant impact on improving insurance penetration in India. The Indian life insurance industry was opened up in order to reach a number of goals, such as increasing the number of people with insurance, expanding coverage, encouraging innovation, and improving customer service. There have been significant changes in the industry in the last 20 years since liberalisation.

However, there are still some issues that must be addressed. For example, there is a need to raise individual life insurance as well as credit life insurance awareness among the Indian population, particularly in rural part of the country. The insurance industry must also address mis-selling issues and improve customer protection.

The penetration of credit life insurance for home loans in India was around 10-15% at the end of 2020. This means that only a small proportion of home loan borrowers in India have chosen credit life insurance to cover their outstanding loan amount in the event of their untimely death. The penetration of credit life insurance for auto loans in India was around 20-30% at the end of 2020. This means that a sizeable number of people in India who have taken out car loans have chosen credit life insurance to cover the amount of their loan if they die before paying it off. Several factors contribute to the better coverage of auto loans comparatively home loan coverage. First, because vehicles are typically more expensive than personal or consumer loans, the outstanding loan amount is typically higher. This increases the appeal of credit life insurance coverage to borrowers who want to ensure that their loved ones are not burdened with loan repayment in the event of their death. Second, many lenders who offer auto loans require borrowers to purchase credit life insurance as part of the loan agreement. This has aided in increasing the penetration of credit life insurance for vehicle loans in India, as borrowers frequently have little choice but to opt for coverage if the loan is to be secured. Even though auto loan coverage is still low, but slightly better than home loan coverage.

However, demand for credit life insurance has gradually increased in recent years, owing to a growing awareness among borrowers about the benefits of such coverage. Banks and other financial institutions that offer home loans, auto loans, personal loans and educational loans have been actively promoting credit life insurance to their customers, as it provides an additional layer of protection and lowers the risk of default. The covid-19 pandemic has also highlighted the importance of having adequate insurance coverage, including credit life insurance, to protect one's financial interests during difficult times. As a result, credit life insurance has started getting some attention in the last year or so. While credit life insurance for home loans is still relatively low in India, it is expected to grow in the coming years as more borrowers become aware of its benefits and banks and other financial institutions increasingly incorporate it into their lending processes.

According to data from Swiss Re's Sigma report, here is a comparison of life insurance penetration in India before and after the liberalization of the life insurance industry in 2000, as well as the current penetration rates of the top ten countries with high life insurance penetration rates as of 2020:

Country Life Insurance Penetration

1999 2020

1. Taiwan 15.60% 18.90%
2. Hong Kong. 11.60% 16.70%
3. South Korea 6.80% 12.10%
4. Switzerland. 5.80% 9.90%
5. Japan. 8.30% 9.80%
6. Netherlands. 5.50%. 7.40%
7. France. 5.90%. 6.80%
8. UnitedKingdom. 6.40%. 6.70%
9. Australia. 5.50%. 6.50%
10. Singapore. 4.40%. 6.30%
11. India  2.71. 3.76%

As shown in the table, prior to the liberalisation of the life insurance industry in 2000, India's life insurance penetration rate was relatively low when compared to the top ten countries with high life insurance penetration rates. However, over the years, India has made progress in increasing its life insurance penetration rate, which was 3.76% at the end of 2020. Even though India's life insurance penetration rate remains low when compared to the top ten countries, it is worth noting that India has a large population and significant potential for growth in the life insurance market. However, following the industry's liberalization in 2000, the market size began to rapidly expand, with the entry of private players and the introduction of new and innovative products. As a result, the total premium income of the life insurance industry increased from INR 45,000 crores in 1999-2000 to INR 6.64 lakh crores (approximately USD 91 billion) in 2020-21, representing a compound annual growth rate of more than 15%.

The Insurance Regulatory and Development Authority of India (IRDAI) has played a critical role in regulating the sector and ensuring that insurers follow the guidelines and regulations since the liberalisation of the life insurance industry in India in 2000. Several measures have been implemented by IRDAI over the last 20 years to tighten the standards for life insurers. Among the key measures are:

1. Increase in minimum capital requirements: To ensure that life insurers have adequate financial resources to meet their obligations, the IRDAI has steadily increased the minimum capital requirements.

2. New regulations: The IRDAI has issued several new regulations to govern various aspects of the life insurance industry, including product design, distribution, claims settlement, and customer service. The Insurance Regulatory and Development Authority of India (IRDAI) issued regulations in 2013 to improve insurance sector governance and financial stability.

3. Mandatory disclosure requirements: IRDAI has mandated life insurers to disclose detailed information about their products, including the features, benefits, costs, and risks. Financial statements and other key performance indicators must also be disclosed by insurers.

4. Strict compliance requirements: The IRDAI has put in place a robust system to monitor and ensure life insurers' compliance. To ensure that they follow the regulatory requirements, insurers must submit periodic reports and undergo regular audits.

5. Consumer protection: The IRDAI has been proactive in protecting policyholders' interests by implementing several measures to improve customer service, complaint handling, and grievance redressal.

Overall, IRDAI's efforts to tighten the norms for life insurers have helped to improve the sector's credibility and reliability, as well as customer trust.

Following the liberalisation of the insurance industry in India, the availability and accessibility of insurance products for the social sector and micro-insurance segments of the population have increased significantly. Several measures have been implemented by the government and IRDAI to encourage insurance companies to provide insurance products to these underserved segments of the population. The IRDAI introduced regulations in 2005 requiring all insurance companies to set aside a portion of their life insurance business for the social sector and rural segments. Insurers were also told to create and market low-cost insurance products, particularly for the poor. Micro-insurance products have also gained prominence in the post-liberalization era, with insurance companies designing products tailored to the needs of low-income households. These products are available at low premiums and cover risks such as health, accidents, and crop failure. The introduction of technology-driven distribution channels has also helped insurance companies reach out to remote and underserved areas, allowing them to offer affordable products to the rural population.

These policies have aided in increasing insurance coverage in the social and microinsurance sectors of the population. However, insurers and the IRDAI must take additional steps to expand the reach of insurance products and raise awareness among underserved segments of the population. The government and IRDAI could think about offering incentives to insurers for creating innovative and affordable products, as well as promoting financial literacy among the underserved population to help them understand the benefits of insurance.

While the actions of insurers and the IRDAI have certainly helped to expand the reach of microinsurance and social sector life insurance, more can be done to improve the situation. One of the most significant challenges that microinsurance faces are a lack of awareness and understanding among the target population. As a result, insurers and IRDAI can concentrate on developing more awareness campaigns and education programmes to raise public awareness of the benefits of microinsurance and social sector life insurance. Another challenge for microinsurance is the cost of distribution, which can be high due to the target population's remote location. Insurers and IRDAI can collaborate to create more cost-effective distribution models, such as digital channels and partnerships with non-governmental organizations and community organizations.

IRDAI can also take a more active role in promoting microinsurance and social sector life insurance by offering more incentives and subsidies to insurers who specialize in these markets. They can also encourage more collaboration between insurers and other stakeholders, such as microfinance institutions, non-governmental organizations, and cooperatives, to improve the distribution and accessibility of microinsurance.

As of now, the goal of liberalizing the insurance industry in India has been partially met. While the industry has seen significant growth and development since its liberalization, a sizable portion of the population remains uninsured or underinsured.

In conclusion, while the industry has undergone significant changes since its liberalization, there is still room for improvement and more work remains to be done to ensure that the industry is truly inclusive and accessible to all. To address the challenges and ensure that the liberalization objectives are fully realized, the government, regulatory body and industry must collaborate.