Unit 3: Insurance industry and regulation in India

Insurance is a contract whereby one party (the insurer) undertakes, in return for a premium, to compensate the other (the insured) for loss from a specified event, or to pay a sum on the happening of an event (death, maturity). It works on pooling of risk — the losses of a few are shared by many.

• Micro insurance: low-premium, low-cover products for low-income people — governed by IRDAI micro insurance regulations; distributed by NGOs, SHGs, MFIs; examples — PMJJBY (₹2 lakh life cover, ₹436 a year), PMSBY (₹2 lakh accident cover, ₹20 a year), Ayushman Bharat PM-JAY (₹5 lakh hospital cover per family).

• Life vs general: life insurance is a contract of assurance (event certain); general insurance is a contract of indemnity.

• Benefits: indemnification and stability for families and businesses, less worry, source of long-term investment funds, loss prevention, credit enhancement, employment.
• Costs: cost of doing business (expenses, commissions — loadings), fraudulent and inflated claims, moral hazard (carelessness, over-utilisation in health insurance).

• Constituted in 1993 under R.N. Malhotra (former RBI Governor) to recommend reforms in insurance.
• Key recommendations: open the sector to private insurers (minimum capital ₹100 crore), allow foreign insurers in joint ventures with Indian partners, reduce government stake in LIC and GIC to 50%, set up an independent regulatory authority, delink GIC subsidiaries, allow insurers to invest more freely within prudential norms, improve customer service, computerisation, promote rural insurance, appoint an actuarial body.
• Outcome: IRDA Act, 1999 and entry of private players from 2000.

Rationale for privatisation (Malhotra Committee, 1994)

• Low penetration and poor coverage under public monopoly.
• Need for competition, product innovation and better customer service.
• Mobilise long-term funds for infrastructure.
• Bring technology and global expertise (foreign partners).
• Improve efficiency and claim settlement.
• Outcome: private players, FDI (49% → 74% → 100% proposed), bancassurance, digital distribution, growth in penetration.

Credit and deposit insurance

• Deposit Insurance and Credit Guarantee Corporation (DICGC): a wholly owned subsidiary of RBI (1978 merger of DIC 1962 and CGCI); insures bank deposits up to ₹5 lakh per depositor per bank (raised from ₹1 lakh in 2020); covers commercial, RRB, co-operative and small finance banks; payment within 90 days of a moratorium under the 2021 amendment.
• Credit insurance: protects lenders/sellers against default — ECGC Ltd (export credit insurance), trade credit insurance by general insurers, CGTMSE credit guarantees for MSME loans, Credit Guarantee Fund for Start-ups.

• Enacted on the recommendation of the Malhotra Committee (1994); IRDA constituted in April 2000; headquarters Hyderabad.
• Composition (Section 4): Chairperson, not more than five whole-time members and not more than four part-time members, appointed by the Central Government from persons with ability, integrity and standing in life insurance, general insurance, actuarial science, finance, economics, law, accountancy or administration. Term — 5 years (age limits 65 for chairperson, 62 for members).
• Duty (Section 14): regulate, promote and ensure orderly growth of insurance and reinsurance business.