Introduction
The relevance of the insurance sector in the macroeconomic development of an economy is well acknowledged. The role of insurance activities in macroeconomic development finds one of its earliest recognitions in the proceedings of the United Nations Conference on Trade and Development (UNCTAD): “[A] sound national insurance and reinsurance market is an essential characteristic of economic growth” (UNCTAD, 1964).
The insurance sector is a colossal one and is growing at a steady rate of 15-20% annually. Together with banking, insurance services add about 7% to the country’s GDP. A well-developed and evolved insurance sector is a boon for economic development as it provides long- term funds for infrastructure development at the same time strengthening the risk-taking ability of the country.
Indian Insurance Market
Life Insurance
Life insurance industry recorded a premium income of Rs. 6.93 lakh crore during 2021-22 as against Rs. 6.29 lakh crore in the previous financial year, registering growth of 10.16 per cent. While private sector insurers posted 17.36 per cent growth in premium, LIC recorded 6.13 per cent growth. The market share of LIC decreased by 2.34 per cent to 61.80 per cent in 2021-22 while market share of private insurers has increased to 38.20 per cent.
Out of the 24 life insurers in operation during 2021-22, 15 companies reported profits.
General Insurance
The general insurance industry underwrote total direct premium of Rs. 2.21 lakh Crore The health business reported a growth of 26.27 per cent in 2021-22 making it the largest general insurance segment in India with a market share of about 36 per cent. The market share of motor segment decreased to about 32 per cent but reported a positive growth of 3.90 per cent compared to negative growth reported in the previous year. After COVID led interruptions in 2020-21, marine segment reported a growth of 19.48 per cent in 2021-22. Fire and other segments also recorded positive growth of 7.15 per cent and 1.10 per cent respectively in 2021-22.
During the year 2021-22, the net loss of general and health insurance industry was Rs. 2,857 crore as against the net profit of Rs. 3,853 crore in 2020-21. Out of the four public sector insurers, one has reported PAT and three have reported loss after tax during the year 2021-22. New India reported a PAT of Rs. 164 crore during the year 2021-22 against a PAT of Rs. 1,605 crore in 2020-21. National, Oriental and United reported loss of Rs. 1,675 crore, Rs. 3,115 crore and Rs. 2,136 crore respectively.
Among the 20 private general insurers, while 13 companies reported PAT, the remaining seven companies incurred losses during the year 2021-22. Out of the five stand-alone health insurers, only one has reported PAT and the remaining four companies have incurred losses during the year 2021-22. Both the specialized insurers viz. Agriculture Insurance Company of India Ltd. And ECGC Limited have reported PAT of Rs. 738 crore and Rs. 875 crore respectively during the year 2021-22 as compared at Rs. 490 crore and Rs. 460 crore respectively during the year 2020-21.
At the end of March 2022, there are 67 insurers operating in India of which 24 are life insurers, 26 are general insurers, five are stand-alone health insurers and 12 are re-insurers including foreign reinsurers’ branches and Lloyd’s India. Of the 67 insurers presently in operation, eight are in the public sector and the remaining 59 are in the private sector. Two specialized insurers, namely ECGC and AIC, one life insurer namely LIC of India (LIC), four in general insurance and one in reinsurance namely GIC Re are in public sector. In private sector, there are 23 life insurers, 20 general insurers, five stand-alone health insurers and 11 reinsurers including foreign reinsurers’ branches and Lloyd’s India.
Globally, the share of life insurance business in total premium was 43.69 per cent and the share of non-life insurance premium was 56.31 per cent during 2021. However, the share of life insurance business for India was high at 76.14 per cent while the share of non-life insurance business was at 23.86 per cent.
Comparison of insurance penetration levels in India
| Year | Life | Non-Life | Total |
| 2000-01 | 2.15 | 0.56 | 2.71 |
| 2021-22 | 3.2 | 1 | 4.2 |
Source: Swiss Re, Sigma, Various Issues.
Key Challenges and Outlook
1 Low penetration and density rates
Low levels of penetration and density of insurance in India clearly imply that a large section of the population is still uninsured.
| Penetration (premium as percentage of GDP) in 2021 | World | India |
| Life | 3 | 3.2 |
| Non-Life | 3.9 | 1.0 |
| Overall | 7 | 4.2 |
Source: Swiss Re, Sigma Volumes 3/2021 and 4/2022
2 Deficient rural participation and life insurers’ skewed focus on urban areas
In terms of rural penetration, the share of rural business in total volume of insurance business is still low in India. Although it was expected that along with the growth in insurance penetration and density, liberalisation will spread insurance to rural areas and social sectors via micro insurance, this has not happened since even after liberalisation, insurance companies in India have been ignoring rural markets.
Insurance companies in India will have to show long-term commitment to the rural sector as well, and will have to design products which are suitable for rural people. Insurance companies need to think about their distribution mechanism to work effectively in rural markets.
3. Less investment by households in insurance products
An average Indian household holds 77 per cent of its total assets in real estate, 7 per cent in other durable goods, 11 per cent in gold, and the residual 5 per cent in financial assets (such as deposits and savings accounts, publicly traded shares, mutual funds, life insurance, and retirement accounts) (Household Finance Committee, 2017). Counterparts in the advanced economies hold relatively more financial assets. This meagre investment by households in insurance is substituted by non-institutional debt, as it serves “as a high-cost, imperfect form of insurance” (Household Finance Committee, 2017).
A striking finding in the Indian case is that there exists a strong negative correlation between insurance activities and incidence of non-institutional source of debt, which is indicative of the fact that households are mitigating risks via ex-post high-cost borrowing as opposed to ex-ante insurance against those risks (Household Finance Committee, 2017). This feeds into keeping the penetration rates subdued and is itself driven by the low uptake of insurance.
4. Inadequate access to insurance products
In order to increase the penetration rates and density, uninsured rural areas and the urban poor must be brought under the ambit of insurance coverage. Improving accessibility of insurance products will be of prime importance in this regard. Accessibility of insurance products is related to affordability and comprehension of the product. The focus of the insurance sector is steadily shifting towards making accessible low-cost simple insurance products, including those that can be sold through online channels (IMF, 2018). Simultaneously, a complementary thrust will have to be put in by the authorities to build trust and spread awareness and improve financial literacy. In this context, government insurance schemes such as Pradhan Mantri Jan Arogya Yojana, Pradhan Mantri Fasal Bima Yojana, Pradhan Mantri Suraksha Bima Yojana, and Pradhan Mantri Jeevan Jyoti Bima Yojana are notable contributors in pushing the insurance coverage to better levels.
Pradhan Mantri Jeevan Jyoti Bima Yojana saw 5.67 crore enrolments and disbursement of Rs 2488.44 crore up to 31st December 2018 (PIB, 2019). In 2017-18, more than 47.9 million farmers have benefitted under Pradhan Mantri Fasal Bima Yojana (IBEF, 2019). The risk coverage of the scheme was increased to include protection against hailstorms, crop fires, damage from animals, landslides, and rainstorms (IBEF, 2019). These schemes also prove to be a helping hand in spreading awareness of insurance products to otherwise isolated segments of the population. The central government’s move to extend the Ayushman Bharat Pradhan Mantri Jan Arogya Yojana (PMJAY) to migrant workers amidst India’s battle with the COVID-19 pandemic is likely to enhance the non-life insurance penetration in India and also improve awareness and perception of insurance products among the uninsured and isolated segments of the population.
Besides the demand side issue of low take-up of insurance products, slow moving insurance penetration and density in the Indian case can in part be attributed to the insufficient capital with the insurers that makes it difficult for them to progress further. Additionally, the question is whether liberalisation (increase in FDI cap) of the insurance sector influences the relationship between equity share capital and insurance penetration.
5. Non-life insurers’ product pricing and overcrowding in some segments
According to the IRDAI’s Annual Report 2019, India’s general insurance industry experienced a reduction in profit by more than 90 per cent to Rs 683 crore during 2018-19, compared to a profit after tax of Rs 6,909 crore in FY18. To maintain profitability, insurance companies are becoming increasingly dependent on their investment portfolio, which is a short-sighted measure and does not conform to global norms (The Hindu, 2020).
Another negative offshoot of the competition for profitability is concentration of insurers in a few selected sectors, populations, and geographic locations, which defeats the initial motivation behind the denationalisation of the insurance sector.
Regulation and supervision
Ensuring that the Indian insurance industry is well-capitalised and synchronised with the prevailing global standards of capital forms an important aspect of regulating the sector. While the issue of low capital levels throughout the insurance sector in India needs to be addressed, a related aspect is that of a risk-based capital framework. The risk-based capital (RBC) framework is harmonised with global standards of insurance capital and is more responsive to risks. To upgrade its solvency structure, the IRDAI in 2017 launched a report on the RBC approach and market consistent valuation of liabilities.
Another area that necessitates regulatory scrutiny is that of application of technology in insurance. According to the OECD (2017), “The insurance sector is no exception to such developments, with possibilities of new methods of service provision as well as greater opportunities for data collection and fraud detection that can lead to better risk identification and mitigation measures, which are being referred to as “InsurTech”.” The benefits of these technological advancements are numerous. By making the claim process simpler and more comprehensible, and tailor-making insurance products, the safety net of insurance can be widened (OECD, 2017). These innovations are creatively disrupting the traditional insurance industry. However, it is imperative to supervise such innovations.
For bolstering innovation in the insurance sector in India, the IRDAI put out a regulatory sandbox. In the context of a regulatory sandbox, OECD (2017) points out that it is important to identify and comprehend when the technology will be considered lucrative and eligible for progressing to a scalable level, and how to advance from the special regulatory environment to the standard one (OECD, 2017). Due to the feeble distribution network of insurance in emerging markets, technology and innovation are anticipated to have the maximum impact (OECD, 2017). In this context, the Indian insurance market can gain massively from the right use of technology and innovation, given the predominance of traditional distributional channels. However, a comprehensive framework will have to be created for the Indian insurance sector in keeping with the upcoming challenges.
Issues pertaining to crop insurance
Although declining in importance, agriculture is still the primary sector of the Indian economy and agricultural production is heavily dependent on external factors such as climate. Given the special nature of the sector, any kind of agriculture insurance does not just support the farming community against weather and climate related risks; it also protects the national economy through forward and backward linkages. Indian agriculture is subject to weather conditions and natural disasters. In India, the government supports public sector insurance companies by: a) bearing fully or partly the cost of administration; b) sharing a part of the indemnity, or paying a part of the premium to enable the farmers to buy insurance. There are doubts among experts regarding the co-existence of state-supported public insurers and private agriculture insurance. Given the high level of subsidies and the state-monopolised administrative machinery, some fear that the private sector will be unable to compete with government insurance. Another view is that private insurance companies will be more effective than their public counterparts, with better and updated design, superior services, and a market-linked pricing framework, which will bring down the huge burden of subsidy in Indian agriculture. For a well-regulated and efficiently run insurance sector, co-existence of public and private agencies is necessary. The Planning Commission (2007) suggested following the US model of agriculture insurance model for such a framework, whereby premium rates are worked out through an exclusive technical agency. Private insurers can implement the product, supported by the same level of subsidy from the government. The government will regulate the allocation of specific crops and areas among the competing private insurers.
MICRO INSURANCE
Microinsurance is to reach out to the lower economic spectrum of the population through affordable insurance products and solutions. IRDAI through micro insurance regulations in 2005 has created a platform to distribute insurance products, which are affordable to the rural and urban poor thus enabling financial inclusion of the masses. The distribution is primarily through Non-Government Organizations (NGOs) and Self-Help Groups (SHGs).
Micro Insurance – General Insurance Sector
The major General Micro Insurance products are health insurance, cover for belongings, such as, hut, livestock or tools or instruments, personal accident, etc.Types of Micro Insurance Product offered by general insurers are Cattle Insurance Policy, Agriculture Pumpset Insurance Policy, Janata Personal Accident Policy, Silkworm Sukshma Policy, Sheep & Goat Micro Insurance Policy, householders Policy etc.).
Other challenges
1. Low investment by insurers in bonds and mortgage-backed securities –
One of the channels via which insurers stimulate growth is investments. They invest in government and corporate bonds through which they become an important source of finance to both these entities. The investment in corporate bonds by insurance companies and mutual funds in India is constrained by the prudential norms of investment, which stipulate that a maximum of 25 per cent of their portfolio is to be invested in bonds that are rated less than ‘AA’. A large part of the investments of life insurers, general insurers, health insurers, and reinsurers in India is directed towards central and state government securities.
Another investment avenue for the insurers is mortgage-backed securities. This avenue allows these institutional investors with longer maturity liabilities to invest in mortgage loans. Partaking of other capital pools, such as mutual funds, insurance, pension funds, and individuals, is very insignificant in securitisation, especially mortgage-backed securitisation, wherein there is effectively no participation from the non-bank capital pools (RBI, 2019).
Mortgage-backed securities are a component of secondary mortgage markets in particular and mortgage markets in general. Mortgage loans account for a low share of Indian households’ total liabilities, whereas they are the largest liability of households in China, the US, the UK, and Australia (Household Finance Committee, 2017). Moreover, mortgage penetration in Indian households is found to increase in tandem with the households’ age, being very low in initial life even with high real estate holdings (Household Finance Committee, 2017).
2 Prevalence of traditional distribution channels
Diversity in distribution is seen of late, but the traditional distribution channels continue to prevail. New channels, including online and point of sales, are being developed with the support of regulations and guidelines introduced by the IRDAI; their market share is, however, insignificant (IMF, 2018). Enhancing distribution channels holds the key to unlocking growth in penetration and density rates in the Indian insurance sector.
India’s insurance sector has the potential to grow further due to the underpenetrated nature of the market and low density. Demographic factors, coupled with increasing awareness and financial literacy, are likely to catalyse the growth of the sector. An enhanced regulatory regime that focuses on increasing insurance coverage will also help. In order to assist the development of the insurance sector in a more sustainable manner, an increasingly market-based environment will help in the medium term (IMF, 2017). The IRDAI should also review parts of its cross-border supervision, including its approach to Indian insurers with significant foreign operations (IMF, 2018).
The market for speciality risks such as natural catastrophes and cyber-related risks is largely underdeveloped. Though there is interest in underwriting cyber-related risks, the business is narrow as of now (IMF, 2018). Flood risk in India is quite pronounced and the frequency of weather events is increasing (IMF, 2018). The issue of poor drainage, among other things, is aggravating the situation (IMF, 2018). Insurance against catastrophes is very shallow in India. This necessitates an increasing role to be played by Indian insurance companies in adoption of alternate capital and insurance-linked securities such as catastrophe bonds. An area of concern that arises here is the ability of insurers to efficiently price these risks. With the onset of new risks, new risk assessment models will also be need to be thought through, so as to best capitalise upon these opportunities.
Microinsurance in Life Insurance Sector
There are 42 micro insurance products of 20 life insurers were available in the market for sale as at March 31, 2023. Of these 42 products, 16 are Individual products and the remaining 26 are Group products . The performance of micro insurance business in Life Insurance Sector during FY 2022-23 is given inTable
Micro Insurance in General Insurance Sector
General Micro Insurance products are aimed at economically vulnerable segments of the population and cover health insurance, cover for belongings (hut, livestock, tools or instruments), personal accident, on individual or group basis. The IRDAI has permitted Pradhan Mantri Fasal Bima Yojana (PMFBY) covering non loanee farmers, to be solicited and marketed by Micro Insurance Agents. Further, general insurance policies issued to Micro, Small and Medium Enterprises as classified in MSMED Act, 2006 under various lines of general insurance business will also qualify as general Microinsurance business up to premium of _ 10,000 per annum per MSME. The number of micro insurance policies issued by General Insurers during 2022-23 are as follows.
Sustainability of Government Sponsored Health Insurance Scheme
The growth of the Indian economy – GDP, public revenue, etc in the last two decades should have led to major initiatives by the government in initiating reforms in the health sector in terms of developing the health infrastructure and public healthcare delivery system. But unfortunately, that has not happened.
The Rashtriya Bima Yojana (RSBY), or ‘national health insurance scheme’ is one step in that direction. Under this scheme launched in 2008, Below Poverty Line (BPL) families were provided health insurance coverage of Rs. 30,000 for availing healthcare services in the accredited hospitals or health centres of their choice. This was welcomed by the corporate sector and the Wall Street Journal as it opened the opportunity for health insurance industry, one of the fastest growing sectors of the Indian economy.
Subsidized private health insurance under RSBY may bring some relief to selected households by reducing the “out of pocket expenses” whereby the bulk of health care is purchased by cash.
Conclusion
The crucial place occupied by insurance in the macroeconomic development of an economy is undisputed. The insurance sector can influence the macroeconomic development of an economy via a range of channels due to the presence of a myriad of linkages between them. India’s economic growth depends on how shock-absorbent India’s economy is. Both financial and climatic shocks (which are on the rise, given climate change) are important for India and having an efficient and stable insurance market in place will determine India’s growth performance in both the short and long terms.
Besides adding to the economic growth by itself, insurance can work in tandem with the banking and stock market to spur growth. The insurance sector shields the economy from risks – these are risks arising from adverse health conditions, the occurrence of natural calamities and accidents. These occurrences can lead to untoward consequences for individuals which can be a setback the economic development of a nation (Swiss Re, 2017). Low levels of insurance penetration in an economy can lead to a large share of the population falling in the uninsured and underinsured category which renders them vulnerable to detrimental shocks. This can also potentially worsen the prevailing poverty situation of the economy (Swiss Re, 2017). Insurance companies protect against these risks and assist beneficiaries in the expeditious financial recovery in case an unfavourable event takes place. Thus, insurers offer ex-ante risk management and ex-post financial protection and recovery (Swiss Re, 2017).
Insurance against risks provides impetus to innovation and entrepreneurship. It also opens the door for capitalizing on high risk, high return investment opportunities. Moreover, insurance functions essentially as a pre-requisite for the smooth operation of trade (both internationally and domestically) and commerce since it protects against associated risks. The increasing specialization of trade and commercial activities call for more financial specialization and flexibility hence sparse insurance activities can work against the growth in trade and commerce. The coverage provided by insurance activities also reduces the financial impact arising from unruly occurrences in the supply chain due to risks arising from rapid advances in technology. Through compensation for losses, it works as a financial cushion in case of a calamitous event hence smoothening out income and finances, thereby reducing volatility and preventing negative spillovers (Swiss Re 2017). Thus, to take the insurance market to the level of maturity, it is necessary to address all these challenges with war footing.
By, Amitava Banik, BE (E& C), PGDM (Insurance Business), FIII , Assistant Vice President – Commercial Underwriting, Reliance General Insurance Co Ltd, Kolkata
