Committee to Review India’s Insurance Sector

Syllabus: GS3/ Economy

Context 

• The Economic Survey 2025 projecting the Insurance sector as the fastest-growing among G20 nations. However, certain challenges necessitate a comprehensive review of the sector.
  • In response, the government has set up a Committee chaired by Dinesh Khara to Review the Insurance Sector, aiming to modernize regulations, enhance consumer protection, and boost investment.

Background: The Evolution of India’s Insurance Sector

• The insurance sector in India has evolved through various policy reforms and regulatory developments.
• Key milestones:
  • 1938: The Insurance Act, 1938, was passed during British India to regulate the insurance sector. It provides the legal framework for the functioning of the insurance industry through IRDAI.
    • The act defines types of insurance policies in India: life, general, and health insurance.
  • 1956: Life Insurance Corporation of India (LIC) was nationalized.
  • 1972: General insurance was nationalized.
  • 1999: The Insurance Regulatory and Development Authority of India (IRDAI) was established, opening up the sector to private players.
  • 2015: FDI limit increased to 49% (later raised to 74% in 2021).
  • 2025 Economic Survey: Highlights the need for further reforms due to increased digitalization, rising risks, and global market trends.

Why Are Insurance Reforms Needed?

• Low Insurance Penetration & Density: Insurance penetration declined from 4% in FY23 to 3.7% in FY24, below the global average.
  • Life insurance penetration dropped from 3% to 2.8%, while non-life insurance remained at 1%.
• Regulatory Gaps & Need for Simplification: Fragmented regulations across life, non-life, and health insurance.
  • Need for faster claim settlements, improved consumer grievance redressal, and enhanced digital security.
• Emerging Risks & Cybersecurity Challenges: Climate change, geopolitical uncertainties, and cyber threats are reshaping risk management.
  • Digital fraud and misselling have emerged as major consumer concerns.
• Boosting Innovation & Investment: Technological advancements (AI, blockchain, and insurtech) require a regulatory framework that fosters innovation.
  • Foreign investments in the sector need further ease of regulations.
• Expanding Rural & MSME Coverage: Government schemes like PMFBY and Ayushman Bharat have expanded coverage, but private sector participation remains limited.
  • Microinsurance for MSMEs, gig workers, and rural communities needs customized policies.

Way Ahead

• Regulatory Modernization: Streamline IRDAI guidelines for uniformity across sectors.
  • Improve consumer protection laws for faster claim settlements.
• Enhancing Insurance Penetration: Encourage new insurance products tailored for rural areas, MSMEs, and gig workers.
  • Strengthen financial literacy programs to increase awareness.
• Strengthening Cybersecurity & Digital Oversight: Establish robust cybersecurity norms for digital insurance.
  • Improve fraud detection using AI-driven solutions.
• Encouraging Insurtech & Innovation: Simplify compliance for tech-driven insurance startups.
  • Promote usage-based and AI-driven insurance models.
• Attracting Investments & Improving Market Competitiveness: Further liberalization of FDI policies to attract global players.
  • Ensure a level playing field between public and private insurers.

Conclusion

• The Committee to Review the Insurance Sector marks a critical step in reforming India’s insurance landscape. By focusing on regulatory simplification, financial inclusion, digital security, and innovation, India can unlock the full potential of its insurance market and ensure sustainable growth in the coming years.

Source: TH