Insurance Sector – IRDAI & Reforms
🟠 Topic 54: Insurance Sector – IRDAI & Reforms
📌 Introduction
The insurance sector plays a pivotal role in risk management, financial security, and long-term savings mobilisation in the Indian economy. With rising income levels, increasing awareness, and regulatory reforms, the sector has expanded to cover life, health, crop, and general insurance products. The Insurance Regulatory and Development Authority of India (IRDAI) ensures efficient functioning and protects policyholder interests.
🔹 What is Insurance?
📖 Definition
Insurance is a contract between a policyholder and an insurance company where the policyholder pays a premium in exchange for financial compensation against specified risks.
Types of Insurance
| Type | Examples |
|---|---|
| Life Insurance | Term plans, endowment plans, ULIPs |
| Health Insurance | Individual health plans, group health plans |
| General Insurance | Motor insurance, home insurance, travel insurance |
| Social Insurance | PMJJBY, PMSBY, PMFBY (crop insurance) |
🔹 Importance of Insurance Sector
1️⃣ Risk Mitigation
- Protects individuals and businesses from unforeseen financial losses.
2️⃣ Financial Inclusion
- Promotes coverage for low-income households, farmers, and informal workers.
3️⃣ Long-Term Savings
- Life insurance combines risk cover with wealth accumulation.
4️⃣ Capital Formation
- Insurance companies invest in infrastructure, government securities, and corporate bonds.
5️⃣ Economic Stability
- Provides financial safety nets during health crises, accidents, or natural disasters.
🔹 Evolution of Insurance Sector in India
| Phase | Key Event |
|---|---|
| Pre-1956 | Private insurance companies dominated |
| 1956 | Life Insurance nationalised – LIC formed |
| 1972 | General Insurance nationalised – GIC formed |
| 1999 | IRDA Act passed – private players allowed |
| 2015 | FDI limit raised to 49% |
| 2021 | FDI limit increased to 74% |
🔹 What is IRDAI?
📖 Definition
The Insurance Regulatory and Development Authority of India (IRDAI) is the statutory body tasked with regulating, promoting, and ensuring orderly growth of the insurance industry in India.
Established
- Year: 1999 under the IRDA Act.
- Headquarters: Hyderabad.
🔹 Objectives of IRDAI
✔️ Protect the interests of policyholders.
✔️ Promote competition to enhance customer choice.
✔️ Ensure financial soundness of insurance companies.
✔️ Ensure compliance with prudential norms.
✔️ Foster growth of insurance penetration.
🔹 Structure of IRDAI
| Position | Role |
|---|---|
| Chairperson | Head of IRDAI |
| Whole-Time Members | Max 5 |
| Part-Time Members | Max 4 (Govt. nominees) |
🔹 Key Functions of IRDAI
1️⃣ Licensing & Regulation
✔️ Issues licenses to insurers, intermediaries (agents, brokers).
✔️ Prescribes capital adequacy norms.
✔️ Ensures solvency requirements are met.
✔️ Regulates pricing of products in select segments (third-party motor, health).
2️⃣ Consumer Protection
✔️ Monitors grievance redressal through IGMS (Integrated Grievance Management System).
✔️ Mandates transparent product disclosures.
✔️ Ensures fair claim settlement practices.
3️⃣ Promoting Innovation & Competition
✔️ Approves new products quickly through use-and-file mechanism.
✔️ Encourages micro-insurance and weather-indexed products.
✔️ Promotes InsurTech startups for digital innovation.
4️⃣ Market Development
✔️ Expands insurance penetration through rural and social sector mandates.
✔️ Promotes insurance literacy campaigns.
✔️ Monitors reinsurance players (like GIC Re).
🔹 Key Regulations Administered by IRDAI
1️⃣ IRDAI (Protection of Policyholders’ Interests) Regulations
- Ensures fair treatment of customers.
- Mandates disclosure of benefits, exclusions, surrender charges.
2️⃣ IRDAI (Rural & Social Sector Obligation) Regulations
- Mandates insurers to cover a minimum number of rural lives and weaker sections.
3️⃣ IRDAI (Health Insurance) Regulations
- Standardises terms and exclusions for health policies.
- Promotes portability across insurers.
4️⃣ IRDAI (Microinsurance) Regulations
- Simplifies products for low-income segments.
- Encourages bundled products (life + health + asset).
🔹 Insurance Penetration in India
| Parameter | Value (2023) |
|---|---|
| Insurance Penetration (Premium/GDP) | ~4.2% |
| Life Insurance Penetration | ~3.2% |
| Non-Life Insurance Penetration | ~1.0% |
| Global Average | ~7% |
🔔 Insurance density (Premium per capita) – ~$95 (Global avg: ~$900)
🔹 Government Insurance Schemes
| Scheme | Coverage |
|---|---|
| PMJJBY | ₹2 lakh life cover for ₹436/year |
| PMSBY | ₹2 lakh accidental cover for ₹20/year |
| PMFBY | Crop insurance for farmers |
| Ayushman Bharat | ₹5 lakh health cover for poor families |
Case Study – PMFBY
- Covers crop loss due to natural calamities.
- Premium:
✔️ Kharif – 2%
✔️ Rabi – 1.5%
✔️ Commercial Crops – 5% - Government shares premium subsidy.
🔹 Challenges in Insurance Sector
1️⃣ Low Penetration
- Vast sections of rural population remain uninsured.
- Lack of awareness and affordability issues.
2️⃣ Product Complexity
- Insurance products often difficult to understand.
- Hidden charges, exclusions deter buyers.
3️⃣ Mis-selling
- Unethical practices by agents selling unsuitable products.
- Focus on commissions over customer needs.
4️⃣ Claim Settlement Delays
- Complaints of unjustified rejections and procedural delays.
- Health insurance claims often stuck due to documentation disputes.
5️⃣ Climate Risks
- Increasing exposure to climate-induced disasters raises risk for insurers.
- Need for climate-resilient insurance products.
🔹 Reforms & Innovations by IRDAI
| Reform | Focus |
|---|---|
| Sandbox Regulations | Testing innovative products |
| Use-and-File Framework | Faster product launch |
| Digital-Only Insurers | Encouraging InsurTech |
| Standard Health Products | Arogya Sanjeevani – uniform health policy |
| Ease of Doing Business | Simplified reporting, faster approvals |
📚 Practice MCQ
1️⃣ Consider the following statements regarding IRDAI:
- It regulates both life and general insurance sectors.
- It promotes microinsurance products for low-income groups.
- It directly manages crop insurance schemes.
Which of the above statements are correct?
✅ Options:
(a) 1 and 2 only
(b) 1 and 3 only
(c) 2 and 3 only
(d) 1, 2, and 3
2️⃣ Which of the following schemes offers accidental insurance for ₹20 per year?
✅ Options:
(a) PMJJBY
(b) PMSBY
(c) Ayushman Bharat
(d) Atal Pension Yojana
