Why in the News?

The Standing Committee on Finance recently tabled an action taken report in the Parliament on observations and recommendations on the subject 'Performance Review and Regulation of Insurance Sector.

Key Observations by the Committee 

• Government policies on insurance: Imposition of 18% GST and Tax Deducted at Source acts as a deterrent to improving insurance penetration. 
  • IRDAI has recommended exemption from taxation in line with developed countries like Canada and European Union.
• Public Sector Insurance Companies: They face challenges of inadequate capital, lack of level playing field with private companies, overexposure to health insurance and lagging insolvency ratios (~₹ 26,000 crore financial losses).
  • E.g., Public Companies are mandated to deduct TDS on commissions, claims or bonuses paid to insurance agents and policyholders while private companies are exempted.

• Increased private sector participation: The market share of private companies in the general and health insurance market increased from 48.03% in FY20 to 62.5% in FY23.
  • India allowed private companies in insurance sector in 2000, setting a limit on FDI to 26%, which was increased to 49% in 2014 and further increased to 74% in 2021.
• Missing Middle in Health Insurance: A significant portion of the population lacks adequate health insurance coverage. (See infographic)
• Microinsurance: Challenges such as high transaction costs, lack of awareness, and the absence of a viable business model for intermediaries hinders growth of microinsurance.
• Rising need for disaster coverage: India ranks 3^rd, after the US and China, in the frequency of natural disasters since 1900 causing significant infrastructure and economic damage. 
• Repudiation/delay of large claims: Due to the competition, some private companies offer heavy discounts on premiums leading to inadequate fund for claim settlement. This leads to insurance companies deliberately avoiding claims settlement.

Key Recommendations of the Committee 

• Promote Microinsurance: Developing new products and reducing the capital requirement for smaller insurance companies to promote financial inclusion.
  • It proposes to amend the Insurance Act, 1938, to remove the fixed capital requirement of Rs. 100 crore and enable IRDAI to set capital requirements through regulations.
• Composite Licensing: Allow composite licensing for insurers to offer both life and non-life insurance products under one entity to reduce costs and improve customer choice.
• Parametric Insurance in disaster-prone areas: The government may provide insurance for homes and properties, particularly in vulnerable areas and among economically weaker sections. 
  • E.g., incentivize insurance programme with subsidized premiums for disaster-prone areas like in Florida (USA)

• Filling the Health Insurance gap: Constituting a multi-stakeholder Inter-Ministerial Working Group for long-term planning, developing simple and standardized products, sharing government data and infrastructure, ensuring the quality of services, and partial financing of health insurance should be initiated to increase health insurance coverage.
• Reduce GST for health insurance and microinsurance products: GST rates applicable to health insurance products, particularly retail policies for senior citizens and microinsurance policies (up to limits prescribed under PMJAY, presently Rs. 5 lakh), and term policies may be reduced.
• Level Playing Field for Public Sector Companies: Policy Roadmap White Paper be prepared with comprehensive stakeholder consultation for designing equitable insurance products.
• Unclaimed Policies: Central Portal for unclaimed policies in line with UDGAM (Unclaimed Deposits: Gateway to Access information) of RBI to improve processing of a significant number of unclaimed policies that are currently being transferred to the Senior Citizen Fund.
• Capital availability: The RBI on behalf of the Government may issue 'on-tap' bonds of various maturities up to 50 years as against the current maximum tenure of 40 years for investment by insurance companies.