Insurance In India Growing But Policyholders Need More Protection

India’s insurance sector is growing at a reasonable scale, but life, health and general insurance premiums are rising every year as well. Foreign investments are also increasing but behind impressive numbers, there’s a catch: policyholders still face delays and confusing terms. At the same time, there’s also a need for a more efficient grievance redressal system.

These are some observations based on a recent report released by the International Monetary Fund on India’s Financial Sector Assessment including the trends and areas of development in the Insurance sector.

A Look At India’s Insurance Boom

The report finds that the country’s insurance market development is on par with that of its peers.

India’s Insurance penetration (4 per cent to GDP in premiums) is comparable to Brazil, China, Malaysia, and Thailand but is lower than South Africa (11 per cent).

Among the sub-sectors, life insurance accounts for three-quarters of the insurance premiums, with around 60 per cent going to the largest state-owned life insurer. In contrast, the private sector dominates the general insurance market.

The sector as a whole has been expanding at a steady pace, contributing 22 per cent to the country’s total financial sector assets as of March 2023.

The report notes that with both life and general insurance premiums growing faster than the GDP in recent years, the sector is on an upward trajectory.

However, the IMF assessment has also underlined that this growth story comes with caution signs, one that concerns protecting policyholders and ensuring that insurers are financially sustainable.

Irdai Taking Significant Leaps

The Insurance Regulatory and Development Authority of India (Irdai) has made commendable progress, the assessment notes. Irdai has taken various positive policy measures when it comes to licensing norms, fraud control, and regulatory enforcement.

The report notes:

Since India’s independence in 1947, there have been no instances where insurers failed to meet their policyholder obligations. The Irdai had a few instances where regulatory action was taken against insurers due to financial distress or governance issues. These were dealt with by either requiring a portfolio transfer to another insurer or by prohibiting the insurer from engaging in new business.

The IMF’s Financial Sector Assessment Program (FSAP), conducted with India in 2024, points to a few foundational issues that should not be overlooked.

Are customers getting the best deal?

The report states that where life insurance makes up 75 per cent of the country's insurance market, the state-owned Life Insurance Corporation (LIC) has a markup of over 60 per cent (in terms of premiums written).

While LIC is financially stable, its dominance could mean fewer choices for customers. Private insurers are growing, but many still push expensive, commission-heavy policies that may not always suit customers’ needs.

As per the report, approximately 63 per cent of the life sector total is made up of participating and non-participating life insurance products. Unit-linked life insurance products (ULIPs) make up around 13 per cent of the market. Other components of the life sector include pension products provided by life insurers (19 per cent of the sector total), and annuity products (around 4 per cent of the sector total).

All other products constitute less than 1 per cent of premiums written. In 2023, the five largest life insurers accounted for 85 per cent of premiums written.

In 2023, Bancassurance accounted for almost 33 per cent of individual life premiums and almost 8 per cent of group life premiums.

A big concern? Policyholders often do not understand what they’re signing up for. Agents sometimes mis-sell complex products like ULIPs as "guaranteed return" schemes, leaving customers shocked when returns fall short.

However, Irdai has tightened rules to curb such mis-selling. The work is needed in better enforcement of preventive and grievance redressal mechanisms.

Higher Solvency Ratio Needed

Health insurance is India’s fastest-growing segment in the non-life sector. But the report finds that some public health insurers are running weak in terms of solvency ratios - meaning they don’t have enough reserves to pay claims if a crisis hits. “Three of the state-owned non-life insurers, accounting for approximately 19 per cent of premiums written, are operating below the minimum solvency ratio,” IMF states.

If these insurers were to go downwards, policyholders would face long delays in settlements.

“Although the government has injected capital in the past and is expected to do so in future, allowing these insurers to operate in a financially unsound position can have unintended

consequences such as underpricing of policies and a decay of confidence in the market.”

However, on average, the assessment finds that the insurance sector (including the sub-sectors) is well-capitalised and exceeds the minimum solvency ratio. The reinsurers, on average, maintain a higher solvency ratio than the direct life and non-life insurers.

In India motor insurance is mandatory, but claim settlements are slow. Until recently, premiums were government-fixed, leading to losses for insurers. Now, the regulator has allowed risk-based pricing, which calls for better services for the customers as premiums could rise.

All in all, India’s insurance sector is no longer a fledgling industry and it’s one of the largest among emerging economies. The assessment points out that the sector is growing, but its governance, supervision and customer protection frameworks also need to evolve just as quickly. 

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