Syllabus: GS3/Economy
Context
- The Union Finance Ministry released a consultation paper proposing to raise the Foreign Direct Investment (FDI) limit in the insurance sector from 74% to 100%.
About
- The FDI limit in the insurance sector was previously increased from 49% to 74% in February 2021.
- A comprehensive review of the legislative framework of the sector has been conducted in consultation with the Insurance Regulatory and Development Authority (IRDAI) and the industry.
| Foreign Direct Investment (FDI) – It refers to investments made by a company or individual from one country in assets, businesses, or production activities in another country. Significance – It boosts the economy by bringing in capital, technology, and management expertise, which enhances productivity and innovation in the host country. – It generates employment opportunities, especially in sectors like manufacturing, services, and infrastructure. – It facilitates the exchange of skills and technology, enhancing the competitiveness of domestic firms. |
Proposed Amendment to Insurance Laws:
- It aims to ensure accessibility and affordability of insurance for citizens, foster the expansion and development of the insurance industry, and streamline business processes.
- Net Owned Funds for foreign reinsurers is also proposed to be reduced from Rs 5,000 crore to Rs 1,000 crore.
- IRDAI is being empowered to specify lower entry capital (not less than Rs 50 crore) for underserved or unserved segments on a special-case basis.
- Open architecture for insurance agents that will allow them to tie up with more than one life, general and health insurance player.
- Currently, the insurance agents are allowed to tie-up with only one life, general and health insurance company.
Need for the Amendments
- The sector regulator is making efforts to attract more capital to the capital-intensive industry.
- The insurance sector needs to infuse approximately ₹50,000 crore annually to double insurance penetration in the country.
- Insurance penetration refers to the ratio of insurance premiums written in a particular year to the gross domestic product (GDP).
- India could save up to USD 10 billion annually by expanding insurance coverage to currently uninsured individuals and assets.
- With a large portion of India’s population still without insurance, the country faces significant risks, including high out-of-pocket expenses.
- IRDA is determined to achieve its mission of ‘Insurance for all by 2047’, with aggressive plans to address the industry’s challenges.
Insurance Sector in India
- India is the fifth largest life insurance market in the world’s emerging insurance markets, growing at a rate of 32-34% each year.
- Insurance Penetration: As per the Economic Survey 2023-24, overall insurance penetration in the country moderated slightly to 4% in FY23, from 4.2% in FY22.
- During the same period, insurance penetration in the life insurance segment declined from 3.2% in FY22 to 3% in FY23, while it remained flat at 1% for the non-life insurance segment.
- Insurance Companies: At present, there are 25 life insurance companies, and 34 general insurers in the country.
- Among the life insurers, Life Insurance Corporation (LIC) is the sole public sector company.
- In addition to these, there is a sole national re-insurer, namely General Insurance Corporation of India (GIC Re).
Challenges faced by the Sector
- Low Penetration: Insurance penetration remains low, with limited awareness among the population about the benefits and types of insurance.
- Claims Settlement Issues: Delays, rejections, and lack of transparency in the claims process create customer dissatisfaction.
- Distribution Limitations: There is limited reach in rural areas, and insurance distribution remains urban-centric, relying heavily on agents.
- Affordability: High premiums and the underpricing of certain products affect accessibility for low-income groups.
- Fraud and Mis-selling: Fraudulent claims and mis-selling by agents are common problems, damaging customer trust.
- Health Insurance Gaps: Limited coverage and high medical costs make health insurance inadequate.
- Rising Costs: Increasing medical and claims costs impact affordability and profitability for insurers.
Way Ahead
- Increase Financial Literacy: Conduct educational programs to enhance understanding of insurance products among the population.
- Simplify Regulations: Streamline regulatory processes to make product approvals faster and less complex, while ensuring consumer protection.
- Improve Claims Settlement: Ensure faster, transparent, and more efficient claims processing to build trust and reduce disputes.
- Expand Distribution Networks: Leverage digital platforms and mobile technology to reach underserved rural and semi-urban areas.
- Enhance Health Coverage: Expand coverage to include critical illnesses, hospitalization, and post-treatment care.
Source: IE
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